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: OCTOBER 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 October 31, 2002 was 14,391,820 and the number of
shares of the Registrant's Class B common stock, $1.00 par value per share,
outstanding as of October 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 October 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.
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 nine months ended October
31, 2002 and 2001 (unaudited)(in thousands,
except for per share data)
<Table>
<Caption>
Three months ended Nine months ended
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
(Restated) (Restated)
----------- ----------- ------------ ------------
Net sales $ 61,831 $ 65,136 $ 212,662 $ 208,433
Cost of sales (including buying and occupancy 42,959 43,029 140,038 132,810
expenses) ----------- ----------- ------------ ------------
Gross profit 18,872 22,107 72,624 75,623
Selling, general and administrative expenses 25,553 25,821 76,431 79,283
----------- ----------- ------------ ------------
Loss from operations (6,681) (3,714) (3,807) (3,660)
Interest expense 1,168 1,900 3,291 5,595
----------- ----------- ------------ ------------
Loss before income taxes (7,849) (5,614) (7,098) (9,255)
Income tax benefit (2,810) (2,122) (2,542) (3,498)
----------- ----------- ------------ ------------
Net loss $ (5,039) $ (3,492) $ (4,556) $ (5,757)
=========== ============ ============= ============
Basic earnings per share:
Net loss $ (0.35) $ (0.24) $ (0.31) $ (0.39)
=========== ============ ============= ============
Weighted average common share and common
share equivalents 14,475 14,588 14,637 14,581
=========== ============ ============= ============
Diluted earnings per share:
Net loss $ (0.35) $ (0.24) $ (0.31) $ (0.39)
=========== ============ ============= ============
Weighted average common share and common
share equivalents 14,475 14,588 14,637 14,581
=========== ============ ============= ============
</Table>
The accompanying notes are an integral part of the financial statements.
3
Whitehall Jewellers, Inc.
Balance Sheets
As of October 31, 2002, January 31,
2002 and October 31, 2001
(unaudited, in thousands)
<Table>
<Caption>
October 31, 2002 January 31, October 31,
(Restated) 2002 2001
------------------ ------------------ ----------------
ASSETS
Current Assets:
Cash $ 1,917 $ 2,741 $ 2,811
Accounts receivable, net 1,596 1,189 1,044
Merchandise inventories 220,342 173,931 183,209
Other current assets 188 973 419
Prepaid income tax 3,690 --- 4,776
Deferred financing costs 510 511 498
Deferred income taxes, net 2,223 2,704 3,556
----------------- ------------------- -----------------
Total current assets 230,466 182,049 196,313
Property and equipment, net 62,686 63,914 65,008
Goodwill 5,662 5,662 5,728
Deferred financing costs 341 723 831
----------------- ------------------- ----------------
Total assets $299,155 $ 252,348 $267,880
================= =================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Revolver loan $ 98,404 $ 35,277 $ 83,343
Term loan, current 6,000 5,250 5,000
Accounts payable 54,410 56,695 44,305
Customer deposits 3,789 3,963 4,465
Accrued payroll 4,099 6,270 4,277
Income taxes ---- 3,226 ---
Other accrued expenses 20,220 18,171 19,091
----------------- ------------------- -----------------
Total current liabilities 186,922 128,852 160,481
Term loan --- 4,500 6,000
Subordinated debt 640 640 640
Deferred income taxes, net 2,191 2,012 565
Other long-term liabilities 3,018 2,660 2,535
----------------- ------------------- -----------------
Total liabilities 192,771 138,664 170,221
Commitments and contingencies
Stockholders' equity:
Common stock 18 17 17
Class B common stock --- --- ---
Additional paid-in capital 105,635 103,767 103,586
Accumulated earnings 34,314 38,870 23,033
----------------- ------------------- -----------------
139,967 142,654 126,636
----------------- ------------------- -----------------
Less:
Treasury stock, at cost (3,629,148, 3,200,209 and
3,200,876 shares, respectively) (33,583) (28,970) (28,977)
----------------- ------------------- -----------------
Total stockholders' equity, net 106,384 113,684 97,659
----------------- ------------------- -----------------
Total liabilities and stockholders' equity $299,155 $ 252,348 $267,880
================= =================== =================
</Table>
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, 2002 and 2001
(unaudited, in thousands)
<Table>
<Caption>
Nine months ended
-----------------
October
31, 2002 October
(Restated) 31, 2001
------------ -----------
Cash flows from operating activities:
Net income $ (4,556) $ (5,757)
Adjustments to reconcile net income to net cash (used in) operating activities:
Depreciation and amortization 8,342 7,966
Loss on disposition of assets 120 894
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (407) 362
(Increase) in merchandise inventories, net of gold consignment (25,958) (4,944)
Decrease in other current assets 785 269
(Increase) in prepaid income tax (3,690) (4,776)
Decrease in deferred income taxes 660 353
(Decrease)increase in customer deposits (174) 251
(Decrease)increase in accounts payable (1,524) 145
(Decrease) in taxes payable (3,226) (2,940)
Increase in accrued liabilities 236 277
------------ -----------
Net cash (used in) operating activities (29,392) (7,900)
Cash flows from investing activities:
Capital expenditures (6,851) (11,233)
------------ -----------
Net cash used in investing activities (6,851) (11,233)
Cash flows from financing activities:
Borrowing on revolver loan 696,648 781,545
Repayment of revolver loan (633,521) (745,422)
Repayment of term loan (3,750) (3,000)
Proceeds from gold consignment --- 3,107
Purchase of consigned gold (20,453) (3,319)
Purchase of treasury stock (4,194) ---
Proceeds from exercise of stock options 1,410 245
Proceeds under employee stock purchase plan 40 ---
Financing costs --- (316)
Decrease in outstanding checks, net (761) (13,822)
------------ -----------
Net cash provided by financing activities 35,419 19,018
------------ -----------
Net change in cash and cash equivalents (824) (115)
Cash and cash equivalents at beginning of period 2,741 2,926
------------ -----------
Cash and cash equivalents at end of period $ 1,917 $ 2,811
============ ===========
</Table>
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 375 stores as
of October 31, 2002, located in 38 states, operating in regional or
super-regional 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 October 31, 2002, the Company had repurchased a total of 410,600
shares of Common Stock under the stock repurchase program at a total cost of
approximately $4.2 million.
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 October 31, 2002 and 2001, the
Statements of Income for the three and nine months ended October 31, 2002 and
2001 and the Statements of Cash Flows for the nine months ended October 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 $447,000, $673,000, and $1,358,000 as of October 31, 2002, January
31, 2002 and October 31, 2001, respectively.
5. Inventory
As of October 31, 2002, January 31, 2002 and October 31, 2001,
merchandising inventories consisted of (in thousands):
October 31, 2002 January 31, 2002 October 31, 2001
(Restated)
Raw Materials $ 7,483 $ 6,958 $ 8,456
Finished Goods 212,859 166,973 174,753
---------- ----------- ----------
Inventory $ 220,342 $ 173,931 $ 183,209
========== =========== ==========
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 $3,505,000,
$3,003,000, and $3,197,000 as of October 31, 2002, January 31, 2002 and October
31, 2001, respectively. As of October 31, 2002, January 31, 2002 and October 31,
2001, consignment inventories held by the Company that were not included in the
balance sheets totaled $76,099,000, $80,425,000, and $81,970,000, respectively.
Certain merchandise procurement, distribution and warehousing costs
were allocated to inventory. As of October 31, 2002, January 31, 2002 and
October 31, 2001, the amounts included in inventory were $3,567,000, $3,306,000
and $3,348,000, respectively.
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 (as described in
Note 7 below). The purchase had 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 estimated
subsequent cost of sales as a result of this transaction to 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 $200,000 of this increase in cost of sales is reflected in the
three months ended October 31, 2002. This purchase increased 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.
Gold consignments of $23,298,000 and $26,097,000 were not included in the
Company's balance sheets as of January 31, 2002 and October 31, 2001,
respectively.
6. Accounts Payable
Accounts payable includes outstanding checks, which were $6,379,000,
$7,140,000 and $6,882,000 as of October 31, 2002, January 31, 2002 and October
31, 2001, respectively.
7
7. Financing Arrangements
The Company's Amended and Restated Revolving Credit, Term Loan and Gold
Consignment Agreement (the "Credit Agreement") with its bank group 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.
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 October 31, 2002, the principal amount of the term loan under the
Credit Agreement was $6.0 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
provided 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
consigned 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 risk of loss and damage to the
inventory, as is the case in all of its consigned inventory arrangements with
its other vendors.
8
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 has not been included in the assets of the Company.
The terms of the Gold Consignment Agreement require the Company to deliver the
outstanding amounts of consigned gold back to the third party financial
institution at the end of the agreement (which currently expires in 2004).
Physical delivery can be made from the Company's inventory or from gold acquired
by the Company in the open market. As an alternative to physical delivery of
these specific troy ounces of gold, the Company can, from time to time, elect to
purchase the consigned quantities at the current market price for gold on that
date.
The Agreement provides for the consignment of a maximum 115,000 troy
ounces or $40.0 million. 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. This purchase increased 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. Although the Company
extinguished all existing gold consignments under the facility, the facility
remains in effect until June 2004.
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 October 31, 2002 and 2001.
<Table>
<Caption>
Three months ended Nine months Ended
October October
31, 2002 October 31, 2002 October
(Restated) 31, 2001 (Restated) 31, 2001
---------- --------- ---------- ---------
(in thousands, except per share amounts)
Net loss for basic and diluted EPS $ (5,039) $ (3,492) $ (4,556) $ (5,757)
Weighted average shares for basic EPS 14,475 14,588 14,637 14,581
Incremental shares upon conversions:
Stock options --- --- --- ---
Weighted average shares for diluted EPS 14,475 14,588 14,637 14,581
Stock options excluded from the calculation
of diluted earnings per share [due to their
antidilutive effect on the calculations] 2,818 2,829 2,853 2,815
</Table>
9
9. Accounting of Business Combinations and Goodwill and Other Intangibles
In July, 2001, the Financial Accounting Standards Board issued
Statement No. 141 ("SFAS 141"), "Business Combinations" and Statement No. 142
("SFAS 142"), "Goodwill and Other Intangible Assets", which requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but rather be tested for impairment at least annually. The Company
adopted the provisions of SFAS 142 effective February 1, 2002 and has
discontinued the amortization of goodwill. The Company has no other separately
identifiable intangible assets. Pursuant to this standard, the Company has
completed an assessment of the categorization of its existing goodwill. In
addition, the Company completed an analysis of the fair value of its single
reporting unit using both a discounted cash flow analysis and market multiple
approach and has determined that the fair value of its reporting unit 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 October
31, 2002, January 31, 2002 and October 31, 2001 was $5,662,000, $5,662,000 and
$5,728,000, respectively. The table below shows income before income taxes, net
income and earnings per share amounts for the three months and nine months ended
October 31, 2002 and October 31, 2001 adjusted to add back goodwill amortization
and related tax effects for the three months and nine months ended October 31,
2001.
<Table>
<Caption>
Three months ended Nine months ended
October October
31, 2002 October 31, 2002 October
(Restated) 31, 2001 (Restated) 31, 2001
======================================================
(in thousands, except per share amounts)
Reported net loss $ (5,039) $ (3,492) $ (4,556) $ (5,757)
Add back: After tax impact of goodwill
amortization --- 41 --- 123
--------- --------- --------- ---------
Adjusted net loss $ (5,039) $ (3,451) $ (4,556) $ (5,634)
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Reported net loss
$ (0.35) $ (0.24) $ (0.31) $ (0.39)
Goodwill amortization --- --- --- 0.01
--------- --------- --------- ---------
Adjusted net loss $ (0.35) $ (0.24) $ (0.31) $ (0.38)
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Reported net loss
$ (0.35) $ (0.24) $ (0.31) $ (0.39)
Goodwill amortization --- --- --- 0.01
--------- --------- --------- ---------
Adjusted net loss $ (0.35) $ (0.24) $ (0.31) $ (0.38)
========= ========= ========= =========
</Table>
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.
10
11. Commitments and Contingencies
The Company was named a defendant in a wage hour class action suit
filed in California by two former store managers on August 5, 2002. The case is
based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. The plaintiffs seek recovery of allegedly unpaid overtime wages for
the four-year period preceding the filing date, along with certain penalties,
interest, and attorneys fees. The purported class includes all current and
former store managers employed by the Company in California for the four-year
period preceding the filing of the complaint. During that four-year period the
Company operated 19 to 49 stores in California. The Company is currently
evaluating the complaint and intends to defend the case vigorously.
The Company is subject to other claims and litigation in the normal
course of business. It is the opinion of management that additional liabilities,
if any, resulting from these claims and litigation are not expected to have a
material adverse effect on the Company's financial condition or results of
operations.
12. Subsequent Events
As of December 12, 2002, the Company had repurchased a total of 605,600
shares of common stock under the stock repurchase program (Note 2) at a total
cost of approximately $6.5 million.
13. Restatement
The accompanying interim financial statements for the three and nine
months ended October 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
<Table>
<Caption>
Three months ended Nine months ended
October 31, 2002 October 31, 2002
--------------------------------------------------------------------------
As Previously As As Previously As
Reported Restated Reported Restated
------------------ ----------------- ----------------- -----------------
Net sales $ 61,831 $ 61,831 $212,662 $212,662
------------------ ----------------- ----------------- -----------------
Cost of sales 43,071 42,959 139,565 140,038
Gross profit 18,760 18,872 73,097 72,624
Selling, general and administrative expense 25,553 25,553 76,502 76,431
(Loss) from operations (6,793) (6,681) (3,405) (3,807)
Income tax benefit (2,850) (2,810) (2,398) (2,542)
Net (loss) (5,111) (5,039) (4,298) (4,556)
Basic EPS (0.35) (0.35) (0.29) (0.31)
Diluted EPS (0.35) (0.35) (0.29) (0.31)
Prepaid income tax 3,546 3,690 3,546 3,690
Merchandise inventories 222,171 220,342 222,171 220,342
Total current assets 232,151 230,466 232,151 230,466
Total assets 300,840 299,155 300,840 299,155
Accounts payable 55,837 54,410 55,837 54,410
Total current liabilities 188,349 186,922 188,349 186,922
Total liabilities 194,198 192,771 194,198 192,771
Accumulated earnings 34,572 34,314 34,572 34,314
Total stockholders' equity 106,642 106,384 106,642 106,384
Total liabilities and stockholders' equity 300,840 299,155 300,840 299,155
</Table>
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 October 31, 2002
Net sales for the third quarter of fiscal 2002 decreased $3.3 million,
or 5.1%, to $61.8 million from $65.1 million in the third quarter of fiscal
2001. Comparable store sales decreased $4.1 million, or 6.4%, in the third
quarter of fiscal 2002 from the third quarter of fiscal 2001. Additionally,
there was a sales decrease of $1.3 million related to closed stores. These
decreases were partially offset by sales from new stores of $2.0 million. The
total number of merchandise units sold decreased by approximately 8.8% in the
third quarter of fiscal 2002 from the third quarter of fiscal 2001 while the
average price per merchandise sale increased to $347 in fiscal 2002 from $336 in
fiscal 2001. The weaker economy, reduced mall traffic and lower consumer
confidence had a negative impact on sales. Credit sales as a percentage of net
sales increased to 45.5% in the third quarter of fiscal 2002 compared to 43.7%
in the third quarter of fiscal 2001. The Company opened one new store in the
third quarter of fiscal 2002 increasing the number of stores open to 375 as of
October 31, 2002 compared to 367, as of October 31, 2001.
Gross profit for the third quarter of fiscal 2002 decreased $3.2
million, or 14.6%, to $18.9 million from $22.1 million in the same period in
fiscal 2001. Gross profit as a percentage of net sales decreased to 30.5% in the
third quarter of fiscal 2002 from 33.9% in the third quarter of fiscal 2001. The
reduction in gross profit margin of 340 basis points resulted from, among other
things, store occupancy expenses which increased while sales decreased, an
increase in promotional pricing activity, an increase in the mix of sales of
lower margin diamond merchandise, and higher inventory capitalization charges.
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 estimated subsequent cost of sales as a
result of this transaction would 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 $200,000 of this increase in cost of sales is
reflected in the three months ended October 31, 2002. This purchase increased
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 $0.3
million, or 1.0%, to $25.6 million in the third quarter of fiscal 2002 from
$25.8 million in the third quarter of fiscal 2001. As a percentage of net sales,
selling, general and administrative expenses increased to 41.3% in the third
quarter of fiscal 2002 from 39.6% in the third quarter of fiscal 2001. The
dollar decrease was related to lower other expenses ($0.9 million) and lower
personnel expense ($0.2 million) which were partially offset by higher credit
expense ($0.9 million) and higher advertising expense ($0.2 million). The
decrease in other expenses resulted from, among other things, centralized
control of the consumption of certain supplies and services along with
13
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 expense associated with the opening of new stores.
Interest expense decreased $0.7 million to $1.2 million in the third
quarter of fiscal 2002 from $1.9 million in the third quarter of fiscal 2001,
resulting from lower average borrowings and lower interest rates.
Income taxes decreased $0.7 million resulting in a benefit of $2.8
million in the third quarter of fiscal 2002 compared to a benefit of $2.1
million in the third quarter of fiscal 2001, reflecting an effective annual tax
rate of 35.8% and 37.8% in the third 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 Nine Months Ended October 31, 2002
Net sales for the nine months ended October 31, 2002 increased $4.2
million, or 2.0%, to $212.7 million from $208.4 million in the nine months ended
October 31, 2001. Sales from new stores were $8.5 million. This increase was
partially offset by a decrease in comparable store sales of $1.3 million, or
0.6%, in the first nine months of fiscal 2002 from the same period in fiscal
2001 and sales decreases of $3.0 million related to closed stores. The total
number of merchandise units sold increased by approximately 5.3% in the first
nine months of fiscal 2002 from the first nine months of fiscal 2001 and the
average price per merchandise sale declined to $312 in fiscal 2002 from $323 in
fiscal 2001. The weaker economy and reduced mall traffic had a negative impact
on sales. Credit sales as a percentage of net sales increased slightly in the
first nine months of fiscal 2002 compared to the first nine months of fiscal
2001. The Company opened 16 new stores and closed five stores in the first nine
months of fiscal 2002 increasing the number of stores open to 375 as of October
31, 2002 compared to 367 as of October 31, 2001.
Gross profit for the first nine months of fiscal 2002 decreased $3.0
million, or 4.0%, to $72.6 million from $75.6 million compared to the same
period in fiscal 2001. Gross profit as a percentage of sales decreased to 34.1%
from 36.3% in the same period of fiscal 2001. The 220 basis point reduction in
gross profit margin resulted from, among other things, an increase in selective
and targeted promotional pricing activity, an increase in the mix of sales of
lower margin diamond merchandise, and 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 $2.9
million, or 3.6%, to $76.4 million for the first nine months of fiscal 2002 from
$79.3 million in the first nine months of fiscal 2001. As a percentage of net
sales, selling, general and administrative expenses decreased to 35.9% in the
first nine months of fiscal 2002 from 38.0% in the first nine months of fiscal
2001. The dollar decrease was related to lower other expenses ($3.5 million),
lower advertising expense ($ 0.4 million), and lower personnel expense ($0.2
million) which were partially offset by higher credit expense ($1.6 million).
The decrease in other expenses resulted from, among other things, centralized
control of the consumption of certain supplies and services along with
reductions in negotiated rates for those items. Personnel expense decreased due
to efforts to reduce payroll hours and the control of labor rates which was
partially offset by the personnel expense associated
14
with the opening of new stores. The reduction in store personnel expense
contributed 40 basis points of the 200 basis point improvement in SG&A.
Interest expense decreased $2.3 million to $3.3 million in the first
nine months of fiscal 2002 from $5.6 million in the first nine months of fiscal
2001, resulting from lower average borrowings and lower interest rates.
Income taxes increased $1.0 million resulting in a benefit of $2.5
million in the first nine months of fiscal 2002 compared to a benefit of $3.5
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
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.
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
October 31, 2002, the maximum availability under the credit facility was $35.7
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 December 12, 2002, the Company had repurchased 605,600 shares of Common
Stock under this Stock Repurchase Program at a total cost of approximately $6.5
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 $29.4
million in the nine months ended October 31, 2002 from $7.9 million in the nine
months ended October 31, 2001. Lower losses from operations ($4.6 million)
together with depreciation, amortization and loss on disposition of assets ($8.5
million), decreases in other current assets ($0.8 million), decreases in
deferred income taxes ($0.7 million) and increases in accrued liabilities ($0.2
million) were offset by increases in merchandise inventories ($26.0 million),
increases in prepaid income taxes ($3.7 million), decreases
15
in taxes payable ($3.2 million), increases in accounts receivables ($0.4
million), decreases in customer deposits ($0.2 million), and decreases in
accounts payable ($1.5 million). The increase in merchandise inventories relates
to the purchase of $20.5 million of gold in connection with the extinguishment
of its gold consignment obligations, the receipt of goods for the holiday
selling season, new store openings and discounted purchases of previously
consigned vendor merchandise.
In the first nine months of fiscal 2002, the primary sources of the
Company's liquidity included a net increase of $63.1 million in the amount
outstanding under the Company's revolver and proceeds from the exercise of
options ($1.4 million). The Company's revolver loan balance was $98.4 million on
October 31, 2002 versus $83.3 million on October 31, 2001. The Company utilized
cash in the first nine months of fiscal 2002 to fund the purchase of 66,500 troy
ounces of fine gold to extinguish all existing company gold consignment
obligations ($20.5 million), the purchase of Company stock under the Stock
Repurchase Program ($4.2 million), decreases in outstanding checks ($0.8
million) and capital expenditures of $6.9 million, which was primarily related
to the opening of 16 new stores in the first nine months of fiscal 2002, and to
repay a portion of the term loan ($3.8 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.
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 and Administrative
Officer 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