SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1 to
(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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Registrant's common stock, $.001 par value
per share, outstanding as of 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.
1
EXPLANATORY NOTE
RESTATEMENT OF PRIOR FINANCIAL INFORMATION
As described in a press release issued by Whitehall Jewellers, Inc.
(the "Company") on March 5, 2003 (which release was filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 7, 2003), the Company is making certain intra-year
adjustments to its reported results for the first three quarters of fiscal 2002.
The adjustments relate to the timing of the recognition of certain
allowances and discounts pertaining to annual vendor agreements as well as
incentives associated with the advantageous purchase of consigned inventory.
During the first three quarters of 2002 such incentives had been recorded by the
Company as a direct reduction of cost of sales, rather than as a component of
inventory cost. The adjustments also include a cost of sales effect related to
the timing of recording inventory basis adjustments for the gold consignment
arrangement which the Company ended during the third quarter. In addition,
certain minor reclassifications have been made between cost of sales and SG&A.
The filing of this amended Form 10-Q shall not be deemed an admission
that the original filing, when made, included any untrue statement of a material
fact or omitted to state a material fact necessary to make a statement not
misleading.
AMENDED ITEMS
The Company hereby amends the following items, financial statements,
exhibits or other portions of its Quarterly Report on Form 10-Q for the quarter
ended July 31, 2002, as set forth herein:
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
The financial information of the Company is amended to read in its
entirety as set forth herein and is incorporated herein by reference.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information set forth in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations" is amended to read in
its entirety as set forth herein and is incorporated herein by reference.
Item 4. Controls and Procedures
The information set forth in "Item 4. Controls and Procedures" shall
read in its entirety as set forth herein and is incorporated herein by
reference.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The list of exhibits set forth in, and incorporated by reference from,
the Exhibit Index, is amended to include the following additional exhibits,
filed herewith:
99.3 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.4 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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, 2002 July 31, July 31, 2002 July 31,
(Restated) 2001 (Restated) 2001
------------- --------- ------------- ---------
Net sales $ 76,243 $ 74,366 $ 150,831 $ 143,297
Cost of sales (including buying and occupancy
expenses) 49,703 46,464 97,079 89,781
--------- --------- --------- ---------
Gross profit 26,540 27,902 53,752 53,516
Selling, general and administrative expenses 25,251 26,980 50,878 53,462
--------- --------- --------- ---------
Income from operations 1,289 922 2,874 54
Interest expense 1,111 1,956 2,123 3,695
--------- --------- --------- ---------
Income(loss)before income taxes 178 (1,034) 751 (3,641)
Income tax (benefit) expense 64 (391) 268 (1,376)
--------- --------- --------- ---------
Net income (loss) $ 114 $ (643) $ 483 $ (2,265)
========= ========= ========= =========
Basic earnings per share:
Net income (loss) $ 0.01 $ (0.04) $ 0.03 $ (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) $ 0.01 $ (0.04) $ 0.03 $ (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, July 31,
(Restated) 2002 2001
----------------------------- ---------
ASSETS
Current Assets:
Cash $ 2,128 $ 2,741 $ 2,916
Accounts receivable, net 2,042 1,189 2,319
Merchandise inventories 169,380 173,931 178,047
Other current assets 511 973 912
Prepaid income tax 300 --- 1,947
Deferred financing costs 510 511 498
Deferred income taxes, net 2,461 2,704 2,955
----------------------------- ---------
Total current assets 177,332 182,049 189,594
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 $ 246,403 $ 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 32,119 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 125,398 128,852 152,007
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 132,313 138,664 162,301
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 39,354 38,870 26,525
----------------------------- ---------
145,005 142,654 130,083
----------------------------- ---------
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 114,090 113,684 101,106
----------------------------- ---------
Total liabilities and stockholders' equity $ 246,403 $ 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, 2002
(Restated) July 31, 2001
------------- -------------
Cash flows from operating activities:
Net income $ 483 $ (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 4,551 (3,102)
(Increase)decrease in other current assets 462 (224)
(Increase) in prepaid income tax (300) (1,947)
Decrease(increase) in deferred income taxes 99 (343)
(Decrease)increase in customer deposits (308) 145
(Decrease) in accounts payable (20,866) (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 for the three and six months ended July 31, 2002 and 2001
and the Statements of Cash Flows for the 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.
Merchandise Inventories
Merchandise inventories are stated principally at the lower of weighted
average cost or market. Cost is reduced to reflect certain allowances and
discounts received from vendors. The Company also obtains merchandise from
vendors under various consignment agreements. The consigned inventory and
related commitments are not reflected in the Company's financial statements. At
the time of sale of consigned merchandise to customers, the Company records the
purchase liability and the related cost of such merchandise in cost of sales.
6
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.
5. Inventory
As of July 31, 2002, January 31, 2002 and July 31, 2001, merchandising
inventories consisted of (in thousands):
July 31, 2002 January 31, 2002 July 31, 2001
(Restated)
Raw Materials $ 6,846 $ 6,958 $ 6,128
Finished Goods 162,534 166,973 171,919
----------- ----------- ----------
Inventory $ 169,380 $ 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. 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.
7
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.
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).
8
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 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,
2002 July 31, 2002 July 31,
(Restated) 2001 (Restated) 2001
---------- -------- ---------- --------
(in thousands, except per share amounts)
Net income (loss)for $ 114 $ (643) $ 483 $(2,265)
basic and diluted EPS
Weighted average 14,807 14,582 14,719 14,578
shares for basic EPS
Incremental shares upon
conversions:
Stock options 787 --- 757 ---
Weighted average 15,594 14,582 15,476 14,578
shares for diluted EPS
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
9
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 exceeded
the carrying value and, therefore, no impairment of goodwill needed to be
recorded 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 three months and six months ended July 31, 2001.
Three months ended Six months ended
July 31, July 31,
2002 July 31, 2002 July 31,
(Restated) 2001 (Restated) 2001
---------- ------- ---------- ---------
(in thousands, except per share amounts)
-----------------------------------------------------------
Reported net (loss) income $ 114 $ (643) $ 483 $ (2,265)
Add back: After tax impact of goodwill
amortization --- 41 --- 82
------ ------- ------ ---------
Adjusted net income (loss) $ 114 $ (602) $ 483 $ (2,183)
====== ======= ====== =========
BASIC EARNINGS PER SHARE:
Reported net income (loss) $ 0.01 $ (0.04) $ 0.03 $ (0.16)
Goodwill amortization --- --- --- .01
------ ------- ------ ---------
Adjusted net income (loss) $ 0.01 $ (0.04) $ 0.03 $ (0.15)
====== ======= ====== =========
DILUTED EARNINGS PER SHARE:
Reported net income (loss) $ 0.01 $ (0.04) $ 0.03 $ (0.16)
Goodwill amortization --- --- --- .01
------ ------- ------ ---------
Adjusted net income (loss) $ 0.01 $ (0.04) $ 0.03 $ (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
10
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.
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.
13. Restatement
The accompanying interim financial statements for the three and six
months ended July 31, 2002 have been restated. The adjustments relate to the
timing of the recognition of certain allowances and discounts pertaining to
annual vendor agreements as well as incentives associated with the advantageous
purchase of consigned inventory. During the first three quarters of 2002 such
incentives had been recorded by the Company as a direct reduction of cost of
sales rather than as a component of inventory cost. The adjustments also include
a cost of sales effect related to the timing of recording inventory basis
adjustments for the gold consignment arrangement which the Company ended during
the third quarter. In addition, certain minor reclassifications have been made
between cost of sales and SG&A. A summary of the significant impacts of the
restatement is as follows (amounts in thousands, except earnings (loss) per
share):
11
Three months ended Six months ended
July 31, 2002 July 31, 2002
-----------------------------------------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
-------------------------- --------------------------
Net sales $ 76,243 $ 76,243 $150,831 $150,831
-------- -------- -------- --------
Cost of sales 48,921 49,703 96,494 97,079
Gross profit 27,322 26,540 54,337 53,752
Selling, general and administrative expense 25,322 25,251 50,949 50,878
Income from operations 2,000 1,289 3,388 2,874
Income tax expense 318 64 452 268
Net income 571 114 813 483
Basic EPS 0.04 0.01 0.06 0.03
Diluted EPS 0.04 0.01 0.05 0.03
Prepaid income tax 116 300 116 300
Merchandise inventories 170,637 169,380 170,637 169,380
Total current assets 178,405 177,332 178,405 177,332
Total assets 247,476 246,403 247,476 246,403
Accounts payable 32,862 32,119 32,862 32,119
Total current liabilities 126,141 125,398 126,141 125,398
Total liabilities 133,056 132,313 133,056 132,313
Accumulated earnings 39,684 39,354 39,684 39,354
Total stockholders' equity 114,420 114,090 114,420 114,090
Total liabilities and stockholders' equity 247,476 246,403 247,476 246,403
12
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
As described in Note 13 to the interim financial statements, the Company has
restated certain amounts related to the 2002 period.
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 $1.4
million, or 4.9%, to $26.5 million from $27.9 million in the same period in
fiscal 2001. Gross profit as a percentage of net sales decreased to 34.8% in the
second quarter of fiscal 2002 from 37.5% in the second quarter of fiscal 2001.
The reduction in gross profit margin of 270 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
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 $1.7
million, or 6.4%, 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 33.1% 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
13
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 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 $0.5 million resulting in an expense of $0.1
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 $0.2
million, or 0.4%, to $53.8 million from $53.5 million compared to the same
period in fiscal 2001. Gross profit as a percentage of sales decreased to 35.6%
from 37.3% in the same period of fiscal 2001. The 170 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 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 $2.6
million, or 4.8%, 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 33.7% 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
14
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.
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 $1.6 million resulting in an expense of $0.3
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
15
depreciation and amortization ($5.5 million), decreases in merchandise
inventories ($4.6 million) and decreases in other current assets ($0.5 million)
were offset by decreases in accounts payable ($20.9 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.
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 4. Controls and Procedures
(a) Based on their evaluation within 90 days prior to the date of the
filing of this amended quarterly report on Form 10-Q/A, the chief
executive officer and the chief financial officer of the Company
have concluded that disclosure controls and procedures, as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act"), are effective to
ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's
rules and forms.
(b) There were no significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of the evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
WHITEHALL JEWELLERS, INC.
(Registrant)
Date: March 21, 2003 By: /s/ Jon H. Browne
--------------------------
Jon H. Browne
Executive Vice President;
Chief Financial Officer and
Administrative and Treasurer
(duly authorized officer and
principal financial officer)
17
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/A 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 with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/Hugh M. Patinkin
-------------------
Name: Hugh M. Patinkin
Title: Chief Executive Officer
18
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/A 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 with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
(a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 21, 2003
/s/Jon H. Browne
----------------
Name: Jon H. Browne
Title: Chief Financial Officer
19