UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to
[X] ANNUAL report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 31, 2003
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 Identification Number)
Incorporation or Organization)
155 N. WACKER DR., STE. 500, CHICAGO, IL 60606
(Address of Principal Executive Offices) (Zip Code)
(312) 782-6800
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 Per Share, Including
Associated Preferred Stock Purchase Rights
(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of July 31, 2002 was $161,611,326 based on the closing
price of $10.92 of the registrant's common stock on the New York Stock Exchange.
This calculation does not reflect a determination that persons are affiliates
for any other purposes.
Number of shares of Common Stock outstanding as of April 25, 2003:
14,203,227
Number of shares of Class B Common Stock outstanding as of April 25,
2003: 142
1
EXPLANATORY NOTE
RESTATEMENT OF PRIOR FINANCIAL INFORMATION
This Amendment No. 1 to our annual report on Form 10-K ("Form 10-K/A")
is being filed to amend items 6, 7, 8, 14 and 15 of Whitehall Jewellers, Inc.'s
(the "Company") annual report on Form 10-K for the year ended January 31, 2003
which was filed with the Securities and Exchange Commission on May 1, 2003,
("Original Form 10-K"). Accordingly, pursuant to rule 12b-15 under the
Securities and Exchange Commission Act of 1934, as amended, the Form 10-K/A
contains the complete text of items 6, 7, 8, 14 and 15, as amended, as well as
certain currently dated certifications and except for such items and
certifications, no other information in the Original Form 10-K is amended
hereby.
As announced on December 22, 2003, the amendments contained in this
Form 10-K/A reflect certain adjustments to restate the Company's financial
statements. Adjustments to restate the financial statements are summarized into
the following two categories:
A. Merchandise inventory valuation adjustments
In prior periods, the Company entered into certain contemporaneous
agreements to both purchase merchandise and return substandard merchandise
inventory to vendors, outside of the normal contractual return privileges.
Additionally, in fiscal 2001, the Company entered into a barter arrangement for
approximately $250,000 of merchandise inventory that involved the exchange of
merchandise inventory for barter credits. These arrangements involved receiving
vendor allowances at an amount greater than the merchandise inventory fair
market value in exchange for purchases of merchandise inventory at a date in the
future. The Company has restated the financial statements to write-down the
substandard merchandise inventory to fair market value and record the
consideration received in excess of the fair market value of the substandard
inventory as a vendor allowance, which is a reduction to inventory. This vendor
allowance reduces the cost of inventory and as the inventory is sold the Company
will recognize lower cost of sales.
In periods prior to February 1, 2000, the Company had written down
substandard inventory to fair market value and did not exchange such inventory
with vendors.
B. Tax effect of the adjustments
As a result of the restatement adjustments, income tax provisions were
revised in the Statement of Operations.
The Company recommends this report be read in conjunction with the
Company's reports filed subsequent to May 1, 2003.
2
PART I
As used herein, references to the "Company," "Whitehall Jewellers,"
"we," "us," and "our" refer to Whitehall Jewellers, Inc. This report contains
certain forward-looking statements (as such term is defined in Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) and information relating to the Company that are based on the current
beliefs of management of the Company as well as assumptions made by and
information currently available to management including statements related to
the markets for our products, general trends and trends in our operations or
financial results, plans, expectations, estimates and beliefs. In addition, when
used in this report, the words "anticipate," "believe," "estimate," "expect,"
"intend," "plan," "predict" and similar expressions and their variants, as they
relate to the Company or our management, may identify forward-looking
statements. Such statements reflect our judgment as of the date of this report
with respect to future events, the outcome of which is subject to certain risks,
including the factors described below, which may have a significant impact on
our business, operating results or financial condition. Investors are cautioned
that these forward-looking statements are inherently uncertain. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described herein. Whitehall Jewellers undertakes no obligation to update
forward-looking statements. The following factors, among others, may impact
forward-looking statements contained in this report: (1) a change in economic
conditions or the financial markets which negatively impacts the retail sales
environment and reduces discretionary spending on goods such as jewelry; (2)
reduced levels of mall traffic caused by economic or other factors; (3) our
ability to execute our business strategy and the related effects on comparable
store sales and other results; (4) the extent and results of our store expansion
strategy and associated occupancy costs, and access to funds for new store
openings; (5) the high degree of fourth quarter seasonality of our business; (6)
the extent and success of our marketing and promotional programs; (7) personnel
costs and the extent to which we are able to retain and attract key personnel;
(8) the effects of competition; (9) the availability and cost of consumer
credit; (10) relationships with suppliers; (11) our ability to maintain adequate
information systems capacity and infrastructure; (12) our leverage and cost of
funds and changes in interest rates that may increase such costs; (13) our
ability to maintain adequate loss prevention measures; (14) fluctuations in raw
material prices, including diamond, gem and gold prices; (15) developments
relating to the consolidated Capital Factors actions and the related SEC and
U.S. Attorney's office investigations, including the impact of such developments
on our results of operations and financial condition and relationship with our
lenders or with our vendors; (16) regulation affecting the industry generally,
including regulation of marketing practices; (17) the successful integration of
acquired locations and assets into our existing operations; and (18) the risk
factors identified from time to time in our filings with the SEC.
3
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth certain financial and operating data of the
Company, which as described in Note 19 has been restated for the years ended
January 31, 2003, 2002 and 2001. The selected statement of operations data and
balance sheet data as of and for the fiscal year ended January 31, 2003 (fiscal
2002) and each of the four prior fiscal years are derived from audited financial
statements of the Company. The selected financial information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's audited
financial statements appearing elsewhere herein.
(In thousands, except per share Fiscal 2002 Fiscal 2001 Fiscal 2000
and selected operating data) (Restated - Note 19) (Restated - Note 19) (Restated - Note 19) Fiscal 1999 Fiscal 1998
- ---------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
Net sales $ 341,037 $ 338,911 $ 355,065 $ 315,406 $ 238,942
Cost of sales (including buying
and occupancy expenses) 213,242 207,227 217,344 182,898 139,368
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 127,795 131,684 137,721 132,508 99,574
Selling, general and
administrative expenses (1) 107,790 109,975 115,600 95,252 72,261
- ---------------------------------------------------------------------------------------------------------------------------------
Income from operations 20,005 21,709 22,121 37,256 27,313
Interest expense 4,341 6,902 5,757 5,819 4,123
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income
taxes 15,664 14,807 16,364 31,437 23,190
Income tax expense 5,970 5,153 6,103 12,103 8,928
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative
effect of accounting change 9,694 9,654 10,261 19,334 14,262
Cumulative effect of
accounting change, net (2) --- --- (3,068) --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,694 $ 9,654 $ 7,193 $ 19,334 $ 14,262
=================================================================================================================================
DILUTED EARNINGS PER SHARE:
Income before cumulative
effect of accounting change $ 0.64 $ 0.66 $ 0.64 $ 1.28 $ 0.92
Selected Operating Data:
Stores open at end of period 370 364 348 290 250
Average net sales per store (3) $ 925,000 $ 952,000 $ 1,116,000 $1,163,000 $1,073,000
Average net sales per gross
square foot (4) $ 1,068 $ 1,093 $ 1,286 $ 1,319 $ 1,323
Average merchandise sale $ 302 $ 304 $ 319 $ 303 $ 286
Comparable store sales
(decrease) increase (5) (1.9%) (10.7%) (1.7%) 11.0% 5.8%
Balance Sheet Data (at end of
period)
Merchandise inventories $ 196,694 $ 173,098 $ 184,185 $ 147,691 $ 116,748
Working capital 57,777 52,658 46,074 31,338 38,478
Total assets 272,479 252,091 261,926 219,363 171,601
Total debt 99,630 45,667 61,860 59,007 49,526
Stockholders' equity, net 117,901 113,145 103,058 71,928 62,168
(1) In fiscal 2002, the Company adopted FAS 142 and has discontinued
amortization of goodwill. (See Note 9)
(2) Reflects net cumulative effect in the change in accounting for layaway
sales. (See Note 2)
(3) Average net sales per store represents the total net sales for stores open
for a full fiscal year divided by the total number of such stores.
(4) Average net sales per gross square foot represents total net sales for
stores open for a full fiscal year divided by the total square feet of such
stores.
(5) Comparable store sales are defined as net sales of stores which are
operating for the month in the current reporting period as well as open for the
same month during the prior year reporting period. Fiscal year 1998 includes
sales from the acquired Jewel Box stores from October 1998 through January 1999.
Fiscal year 1999 includes sales from these acquired Jewel Box stores from
February through July 1999 and from October through January 2000.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's financial statements, including the notes thereto.
Restatements of Prior Results
In December 2003, the Company restated previously issued financial
statements to record adjustments resulting from various accounting matters
described in Note 19 to the financial statements. In connection with the
process, the Company restated its financial statements for the fiscal years
ended January 31, 2003, 2002 and 2001. Accordingly, the financial statements
included in Management's Discussion and Analysis are discussed as adjusted by
the restatement of prior periods discussed in Note 19.
BACKGROUND The Company is a leading national specialty retailer of fine jewelry
operating 370 stores in 38 states as of January 31, 2003. The Company
experienced rapid growth over a number of years with net sales increasing to
$341.0 million in fiscal 2002 compared with $91.1 million in fiscal 1993 and the
number of Company stores growing to 370 from 122 during that same period.
However, a lackluster economy, lower consumer confidence and an unstable
geopolitical environment leading up to and during fiscal 2002 resulted in lower
comparable store sales than in the prior fiscal year. The Company continued a
course of action during 2002 to reduce supply chain costs and improve its
expense structure. This course of action included a series of targeted
initiatives. While the Company continued to implement processes to improve
control over price discounting in stores, promotional pricing initiatives and
reduced leverage of certain buying and occupancy costs, gross profit decreased
by 300 basis points in 2002. The Company's continued focus on expense controls
resulted in $2.2 million of selling general and administrative expense savings.
The Company also used the strength of its balance sheet to make opportunistic
inventory purchases. Also during 2002, the Company repurchased $6.5 million of
common stock under a newly instituted $25 million stock repurchase program.
The Company's business is highly seasonal, with a significant portion of
its sales transacted and substantially all of its income generated during the
fourth fiscal quarter ending January 31, 2003. Historically, income generated in
the fourth fiscal quarter ending each January 31 represents all or a majority of
the income generated during the fiscal year. The Company has historically
experienced lower net sales in each of its first three fiscal quarters and
expects this trend to continue. The Company's quarterly and annual results of
operations may fluctuate significantly as a result of factors including, among
others, increases or decreases in comparable store sales, the timing of new
store openings, net sales contributed by new stores, timing of certain holidays
and Company initiated special events, changes in the Company's merchandise,
marketing, or credit programs, general economic, industry, weather conditions
and calamitous national events that affect consumer spending, as well as
pricing, merchandising, marketing, credit and other programs of competitors.
The Company offers a layaway program that enables its customers to hold an
item at its stores and pay for it over a one-year period without interest
charges. The Company retains possession of merchandise placed in layaway until
the customer has made all required payments. On December 3, 1999, the SEC issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101"). Among other things, SAB 101 requires the deferral of revenue from
layaway sales until merchandise is delivered to the customer. Accordingly, the
Company implemented a change in accounting in the first quarter of fiscal year
2000. The Company recorded a charge of approximately $5.0 million ($3.1 million
net of tax) on February 1, 2000, which represented the cumulative effect of this
accounting change.
5
RESULTS OF OPERATIONS The following table sets forth for the periods indicated
certain information derived from the statements of operations of the Company
expressed as a percentage of net sales for such periods.
Fiscal 2002 Fiscal 2001 Fiscal 2000
Percentage of Net sales (Restated - Note 19) (Restated - Note 19) (Restated - Note 19)
- -------------------------------------------------------------------------------------------------------------------
Net sales 100% 100% 100%
Cost of sales (including buying and occupancy
expenses) 62.5 61.1 61.2
- ----------------------------------------------------------------------------------------------------------
Gross profit 37.5 38.9 38.8
Selling, general and administrative expenses 31.6 32.5 32.6
- ----------------------------------------------------------------------------------------------------------
Income from operations 5.9 6.4 6.2
Interest expense 1.3 2.0 1.6
- ----------------------------------------------------------------------------------------------------------
Income before income taxes 4.6 4.4 4.6
Income tax expense 1.8 1.5 1.7
- ----------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 2.8 2.9 2.9
Cumulative effect of accounting change, net --- --- (0.9)
- ----------------------------------------------------------------------------------------------------------
Net income 2.8% 2.9% 2.0%
==========================================================================================================
FISCAL 2002 COMPARED TO FISCAL 2001 Net sales increased $2.1 million, or 0 .6%,
to $341.0 million in fiscal 2002 from $338.9 million in fiscal 2001. Comparable
store sales decreased $6.4 million, or 1.9%, in fiscal 2002. Additionally, sales
were lower by $5.8 million due to store closings and stores closed for
remodeling for limited periods. These decreases were offset by sales from new
store openings of $12.5 million and a reduction in the reserve for sales returns
and allowances of $1.6 million. The total number of merchandise units sold
slightly increased compared to fiscal 2001, while the average price per
merchandise item sold decreased by approximately 0.7% to $302 in fiscal 2002
from $304 in fiscal 2001, reflecting a continued reduction in consumer demand
for higher priced items. Comparable store sales decreased in fiscal 2002
primarily due to the recession and lower consumer confidence. The reduction in
the reserve for sales returns and allowances reflects the historical trends in
returns which are governed by the Company's return policies and management's
initiatives to ensure compliance with those policies. Credit sales increased to
40.6% in fiscal 2002 from 40.1% in fiscal 2001. Higher third party credit sales
resulted from more aggressive promotional credit activities which were partially
offset by lower third party finance contract sales. The Company opened 17 new
stores and closed eleven stores during fiscal 2002, increasing the number of
stores operated to 370 as of January 31, 2003 from 364 as of January 31, 2002.
Gross profit decreased $3.9 million, or 3.0%, to $127.8 million in fiscal
2002, from $131.7 in fiscal 2001. As a percentage of net sales, gross profit
decreased to 37.5% in fiscal 2002 from 38.9% in fiscal 2001. During fiscal 2002,
gross merchandise margin declined by approximately 100 basis points compared to
fiscal 2001. This decline resulted from, among other things, an increase in
promotional pricing activity and an increase in the mix of sales of lower margin
diamond merchandise. Store occupancy and buying expenses which increased at a
higher rate than the increase in sales, also contributed to the reduction in
gross profit percentage. These declines in gross profit were somewhat offset by
better experience associated with sales returns and allowances. Due to the
adjustments resulting from the restatement, for fiscal 2002, gross profit as a
percent of net sales decreased ten basis points to 37.5% from 37.6%.
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 the gold to its banks and extinguished all existing Company
gold consignment obligations to the banks under the Credit Agreement. The
purchase had the effect of increasing the weighted average cost of gold
available for retail sale by the Company, resulting in a higher weighted average
cost of sales in future periods. The Company then estimated that future costs of
sales would be approximately $1.5 million greater based on the effect of the
transaction on the weighted
6
average cost of gold product in its inventory. Approximately $725,000 of this
increase in cost of sales is reflected in the year ended January 31, 2003. 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 $2.2 million,
or 2.0%, to $107.8 million in fiscal 2002 from $110.0 million in fiscal 2001,
while opening 17 new stores. As a percentage of net sales, selling, general and
administrative expenses decreased to 31.6% in fiscal 2002 from 32.4% in fiscal
2001. The dollar decrease was related to lower personnel expense ($2.0 million),
lower other expenses ($1.5 million) and lower advertising costs ($0.5 million),
somewhat offset by higher credit expense ($2.3 million). Selling, general and
administrative expense attributable to 17 stores opened in fiscal 2002 and 27
stores opened in fiscal 2001 were absorbed in developing the overall reduction
in selling, general and administrative expense and were partially offset by
greater reductions achieved in existing stores. Payroll costs decreased in
fiscal 2002 as compared to fiscal 2001 as a result of continued efforts to
reduce store payroll hours and control labor rates. 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 these terms, somewhat offset by an additional litigation accrual.
Advertising costs decreased in fiscal 2002, as compared to fiscal 2001, due to
the Company's efforts to reduce production costs through a competitive bidding
process and increased vendor funding of promotional initiatives.
The increase in credit expense relates to, among other things, a
significant increase in the use of one year no interest promotions, higher
credit sales volume, and higher bad debt expense. The increase in bad debt
expense versus fiscal 2001 relates to reductions taken in the accounts
receivable reserve in fiscal 2001, which are established to address exposures to
chargebacks on credit receivables that have already been collected. These
reserves were reduced in fiscal 2001 as a result of improved credit practices,
reductions in the use of third party finance contract sales and management's
belief that the Company's exposure was diminished. The reserve calculation
assumptions remained unchanged in fiscal 2002.
As a result of the factors discussed above, income from operations
decreased to $20.0 million in fiscal 2002 from $21.7 million in fiscal 2001. As
a percentage of net sales, income from operations decreased to 5.9% in fiscal
2002 from 6.4% in fiscal 2001.
Interest expense decreased $2.6 million, or 37.1%, to $4.3 million in
fiscal 2002 from $6.9 million in 2001. The decrease in interest expense resulted
from lower average outstanding borrowings and lower average interest rates.
Income tax effective rate increased in fiscal 2002 to 38.1% from 34.8% in
fiscal 2001. The Company expects to utilize certain income tax net operating
losses over the next fifteen to twenty years.
FISCAL 2001 COMPARED TO FISCAL 2000 Net sales decreased $16.2 million, or 4.6%,
to $338.9 million in fiscal 2001 from $355.1 million in fiscal 2000. Comparable
store sales decreased $36.4 million, or 10.7%, in fiscal 2001. Additionally,
sales were lower by $9.4 million due to store closings and stores closed for
remodeling for limited periods. These decreases were partially offset by sales
from new store openings of $29.7 million. The total number of merchandise units
sold remained flat compared to fiscal 2000, while the average price per
merchandise item sold decreased by approximately 4.7% to $304 in fiscal 2001
from $319 in fiscal 2000 reflecting a reduction in consumer demand for higher
priced items. Comparable store sales decreased in fiscal 2001 primarily due to
the recession, lower consumer confidence and the elimination during fiscal 2001
of certain promotional practices related to break-up sales and trade-ins (which
the Company believes negatively impacted comparable store sales by 5%). Also,
the use
7
of third party credit decreased to 40.1% of sales in fiscal 2001 from 41.4% of
sales in fiscal 2000. The decrease in credit sales resulted from lower third
party finance contract sales. The Company opened 27 new stores and closed eleven
stores during fiscal 2001, increasing the number of stores operated to 364 as of
January 31, 2002 from 348 as of January 31, 2001.
Gross profit decreased $6.0 million, or 4.4%, to $131.7 million in fiscal
2001, from $137.7 million in fiscal 2000. As a percentage of net sales, gross
profit increased to 38.9% in fiscal 2001 from 38.8% in fiscal 2000. During
fiscal 2001, gross merchandise margin improved by over 100 basis points compared
to fiscal 2000. This improvement resulted from, among other things, the impact
of eliminating two promotional practices, outside trade-ins and certain breakup
sales, an improvement in diamond jewelry gross margins, repair margins and the
higher penetration of warranty sales. This increase was offset by a shift in
demand away from slightly higher margin categories of gold, precious and
semi-precious merchandise to the diamond category which carries a somewhat lower
gross margin. The improvement in merchandise gross margin was offset by higher
occupancy, depreciation and buying expenses which grew more than the sales
contributed by the operation of an additional sixteen stores in fiscal 2001. In
addition, an impairment write-off of leasehold improvements and other fixed
assets totaling $0.8 million for seven store closings was taken in the third
quarter. Due to the adjustments resulting from the restatement, for fiscal 2001,
gross profit as a percent of net sales decreased ten basis points to 38.9% from
39.0%.
Management initiatives reduced selling, general and administrative expenses
by $5.6 million, or 4.9%, to $110.0 million in fiscal 2001 from $115.6 million
in fiscal 2000 while opening 27 new stores. As a percentage of net sales,
selling, general and administrative expenses decreased to 32.4% in fiscal 2001
from 32.6% in fiscal 2000. The dollar decrease related to lower other expense
($3.8 million) and lower credit expense ($3.4 million), somewhat offset by
higher payroll costs ($1.3 million) and higher advertising costs ($0.3 million).
Selling, general and administrative expenses attributable to the 27 stores
opened in fiscal 2001 and the 66 stores opened in fiscal 2000 were absorbed in
developing the overall reduction in selling, general and administrative expenses
and partially offset greater reductions achieved in existing stores. Advertising
expenses increased in fiscal 2001, as compared to fiscal 2000, due to an
expansion of the Company's marketing and promotion programs. Payroll costs
increased in fiscal 2001, as compared to fiscal 2000, due to, among other
things, the increased number of stores, but were offset by expense reductions to
reduce store payroll hours and control labor rates. The reduction in credit
expense relates to a significant reduction in the use of one year no interest
promotions. Also, lower sales volumes and reduced credit sales along with
reductions in accounts receivable reserves ($1.0 million), which are established
to address exposures to chargebacks on credit receivables that have already been
collected. These reserves were reduced as a result of improved credit practices,
reductions in the use of third party finance contract sales and management's
belief that the Company's exposure was diminished. The decrease in other
expenses resulted from the increased oversight and consolidation of service and
supply purchases.
As a result of the factors discussed above, income from operations
decreased to $21.7 million in fiscal 2001 from $22.1 million in fiscal 2000. As
a percentage of net sales, income from operations increased to 6.4% in fiscal
2001 from 6.2% in fiscal 2000.
Interest expense increased $1.1 million, or 19.9%, to $6.9 million in
fiscal 2001 from $5.8 million in fiscal 2000. The increase in interest expense
is a result of an increase in average outstanding borrowings partially offset by
lower average interest rates.
Income tax effective rate decreased from 37.3% in fiscal 2000 to 34.8% in
fiscal 2001 primarily due to lower income tax and estimated accruals. The
Company expects to utilize certain income tax net operating losses expiring over
the next fifteen to twenty years.
8
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 historically been cash flow from
operations and bank borrowings under the Company's Credit Agreement, which was
amended effective January 31, 2003 as discussed in Note (11) of the January 31,
2003 financial statements.
FISCAL 2002 The Company's cash flow used in operating activities was $20.1
million in fiscal 2002 compared to cash flow provided by operating activities of
$45.2 million in fiscal 2001. Decreases in accounts payable ($34.4 million) in
order to gain cash discounts and increases in merchandise inventories ($3.1
million) as compared to a prior year decrease in inventory ($14.1 million) and
increase in accounts payable ($7.7 million) were the significant changes in
fiscal 2002. Cash used in investing activities included the funding of capital
expenditures of $8.6 million, related primarily to the opening of 17 new stores
in fiscal 2002 compared to $12.7 used for capital expenditures in 2001.
Cash generated by financing activities included revolver borrowings ($59.2
million) and proceeds from the exercise of options ($1.6 million). The Company
utilized cash for financing activities in fiscal 2002 primarily to (i) purchase
gold to settle the gold consignment facility ($20.5 million), (ii) make
scheduled principal payments on the term loan ($5.3 million) and (iii)
repurchase of 605,600 shares of common stock under the Stock Repurchase Program
announced July 23, 2002 ($6.5 million). Stockholders equity increased from
$113.1 million at January 31, 2002 to $117.9 million at January 31, 2003.
FISCAL 2001 The Company's cash flow provided by operating activities increased
to $45.2 million in fiscal 2001 compared to cash flow used in operating
activities of $6.2 million in fiscal 2000. Increases in accounts payable ($7.7
million) and decreases in merchandise inventories ($14.1 million) were the
primary changes in fiscal 2001. The decrease in inventory was achieved while the
Company operated an additional 16 stores resulting in a decrease of over 6% in
average store inventory. Since the majority of the inventory reduction took
place in central inventory, store assortments continued to be very strong.
Additional focus was given to the timing and flow of merchandise purchases which
contributed to the increase in accounts payable. Cash used in investing
activities included the funding of capital expenditures of $12.7 million,
related primarily to the opening of 27 new stores in fiscal 2001.
Cash generated by financing activities included proceeds received from gold
transferred and consigned under the gold consignment facility ($3.1 million) and
proceeds from the exercise of options ($0.4 million). The Company utilized cash
for financing activities in fiscal 2001 primarily to (i) decrease revolver
borrowings under the credit facility ($12.0 million), (ii) decrease outstanding
checks ($13.6 million), (iii) make scheduled principal payment on the term loan
($4.3 million) and (iv) purchase gold under the gold consignment facility ($6.1
million). Stockholders equity increased from $103.0 million at January 31, 2001
to $113.1 million at January 31, 2002.
OTHER LIQUIDITY AND CAPITAL RESOURCES ELEMENTS During fiscal 2002, the Company
amended its $166.5 million credit facility. The Company has a $150.0 million
revolving credit facility and a $4.5 million term loan facility (originally
$16.5 million, less principal repayments) through June 30, 2004. A gold
consignment facility of up to $40.0 million is available under the revolving
credit facility. Interest rates and commitment fees charged on the unused
facility float based on the Company's quarterly performance. Since these
interest rates are determined by reference to Eurodollar or prime rates, changes
in market interests rates can materially affect the Company's interest expense.
Borrowings under the revolver are limited to a borrowing base
9
determined based on the levels of the Company's inventory and accounts
receivable. Availability under the revolver is based on amounts outstanding
thereunder, including the value of consigned gold which fluctuates based on
current gold prices. The Company periodically determines the value of the unused
facility based upon a formula the result of which varies with fluctuations in
inventory levels, aggregate borrowings and performance versus certain financial
covenant ratios. As of January 31, 2003, the most restrictive financial covenant
was total funded debt to earnings before interest, taxes, depreciation and
amortization as defined in the agreement. This financial covenant was set at a
ratio of 2.95 to 1.00, as amended. The peak outstanding borrowing under the
Company's revolver during fiscal 2002 and 2001 was $111.9 million and $90.4
million, respectively. The unused facility was $28.9 million as of January 31,
2003.
The Company has a gold consignment facility as part of its credit facility
pursuant to which the Company accepts as consignee, and is responsible to return
at a future date, a fixed number of ounces of gold. The Company has 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. 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.
The gold consignment facility is a transfer of title in specified
quantities of the gold content of the Company's inventory. 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. 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.
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 the gold to its banks and extinguished all existing Company
gold consignment obligations to the banks under the Credit Agreement (See Note
11). 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 $725,000 of
this increase in cost of sales is reflected in the year ended January 31, 2003.
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 was unchanged.
A substantial portion of the merchandise sold by the Company is carried on
a consignment basis prior to sale or is otherwise financed by vendors, thereby
reducing the Company's direct capital investment in inventory. The peak
consigned inventories from merchandise vendors were $85.7 million and $87.0
million during fiscal 2002 and 2001, respectively. The willingness of vendors to
enter into such arrangements may vary substantially from time to time based on a
number of factors, including the merchandise involved, the financial resources
of vendors, interest rates, availability of financing, fluctuations in gem and
gold prices, inflation, the financial condition of the Company, the vendors'
understanding that the Company bears risk of loss but does not possess title,
and a number of economic or competitive conditions in the jewelry business or
the general economy. Any change in these relationships could have a material
adverse effect on the Company's results of operations or financial condition.
10
On March 6, 2000, the Company completed the sale to the public of 2,325,000
shares of its common stock at an offering price of $19.5625 per share. The
Company received net proceeds of approximately $42.5 million, which it used to
reduce bank debt, to accelerate new store openings and for working capital and
general corporate purposes.
On July 14, 2000, the Company announced that its Board of Directors had
authorized the repurchase of up to $15.0 million of its common stock. The
repurchase program authorized the Company to purchase shares over an 18-month
period in the open market or through privately negotiated transactions. On
August 23, 2000, the Company announced that its Board of Directors had
authorized a $5.0 million increase in the stock repurchase program (increasing
the total authorized to $20 million). As of January 31, 2002, the Company had
repurchased 2,317,500 shares at a total cost of approximately $19.0 million
under this program. This program has been terminated.
On July 23, 2002, the Company announced that the Board of Directors had
established a new stock repurchase program covering up to $25.0 million of its
common stock. As of January 31, 2003, the Company had repurchased a total of
605,600 shares at a total cost of $6.5 million under this program.
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.
Management expects that cash flows from operating activities and funds
available under its revolving credit facility will be sufficient to support the
Company's current new store expansion program and seasonal working capital needs
for the foreseeable future.
INTEREST RATE RISK The Company's exposure to changes in interest rates relates
primarily to its borrowing activities to fund business operations. The Company
principally uses floating rate borrowings under its revolving credit and term
loan facilities. The Company currently does not use derivative financial
instruments to protect itself from fluctuations in interest rates.
The information below summarizes the Company's interest rate risk
associated with debt obligations outstanding as of January 31, 2003. The table
presents principal cash flows and related interest rates by fiscal year of
maturity or repricing date.
(in thousands) 2003 2004 2005 Total
- ------------------------------------------------------------------------------------------
Variable rate (a) $ 98,990 --- --- $ 98,990
Average interest rate 4.3% --- --- 4.3%
Fixed rate --- $ 640 --- $ 640
Average interest rate --- 12.15% --- 12.15%
- ------------------------------------------------------------------------------------------
(a) Includes $4.5 million of term debt with scheduled principal payments due
between April 2003 and September 2003. All term loans are variable rate, which
reprice within 2003. Interest rates charged on the facility float based on the
Company's quarterly financial performance.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities" (the effective date of which was
amended in September 1999 by SFAS No. 137). This Statement was further amended
in June 2000 by SFAS No. 138. SFAS No. 133 and the amendments found in SFAS No.
138 require that entities recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.
11
Effective February 1, 2001, the Company adopted SFAS133, as amended, with
no impact on its financial statements.
GOLD PRICE RISK The Company does not hedge gold price changes. Current increases
in gold prices have had and may have a future negative impact on gross margin to
the extent sales prices do not increase commensurately.
CONTRACTUAL OBLIGATIONS AND CONTINGENCIES The following summarizes the Company's
contractual obligations at January 31, 2003:
Due Fiscal Due Fiscal Due
(in thousands) Total 2003 2004-2006 Thereafter
- ----------------------------------------------------------------------------------------------------
Revolver $ 94,490 $ 94,490 $ --- $ ---
Accrued interest 268 268 --- ---
Long-term debt 4,500 4,500 --- ---
Subordinated debt 640 --- 640 ---
Operating leases 195,190 28,945 80,015 86,230
- ---------------------------------------------------------------------------------------------------
Total contractual obligations $295,088 $128,203 $80,655 $86,230
- ---------------------------------------------------------------------------------------------------
On July 25, 2002, the Company was named a defendant in a wage hour
class suit filed in California by three former store managers. 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. The Company denied liability and asserted
that its managers were properly classified. The parties have reached a
preliminary agreement to settle the matter resulting in a pre-tax charge of
$1,000,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs. This settlement covers the period
from July 25, 1998 through the date of settlement approval. Completion of the
settlement is subject to, among other things, the successful negotiation and
execution of a written settlement agreement, opt out and other potential
contingencies in the settlement agreement, court approval and administration of
the claims process. The parties are in the process of negotiating the specific
settlement terms.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's critical accounting
policies and estimates, including the assumptions and judgments underlying them,
are disclosed in the Notes to the Financial Statements. These policies have been
consistently applied in all material respects and address such matters as
revenue recognition, inventory valuation, depreciation methods and asset
impairment recognition. While the estimates and judgments associated with the
application of these policies may be affected by different assumptions or
conditions, the Company believes the estimates and judgments associated with the
reported amounts are appropriate in the circumstances. Management has discussed
the development and selection of these critical accounting estimates with the
audit committee of our Board of Directors.
ACCOUNTS RECEIVABLE Accounts receivable consists primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.
12
MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Purchase cost is reduced to reflect
certain allowances and discounts received from merchandise vendors. Periodic
credits or payments from merchandise vendors in the form of buydowns, volume or
other purchase discounts and other vendor consideration are reflected in the
carrying value of the inventory and recognized as a component of cost of sales
as the merchandise is sold. Additionally, to the extent it is not addressed by
established vendor return privileges, and if the amount of cash consideration
received from the vendor exceeds the estimated fair value of the goods returned,
that excess amount is reflected as a reduction in the purchase cost of the
inventory acquired.
To the extent the Company's agreements with merchandise vendors provide
credits for co-op advertising, the Company has historically classified such
credits as a reduction to advertising expense in selling, general and
administrative expenses. Emerging Issues Task Force Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), which was effective for all arrangements entered into
after December 31, 2002, requires certain merchandise vendor allowances to be
classified as a reduction to inventory cost unless evidence exists supporting an
alternative classification.
The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations associated with holding and safekeeping such consigned inventory 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 consignor cost of such merchandise in cost of sales.
REVENUE RECOGNITION The Company recognizes revenue from sales of merchandise
when earned, as required by SAB 101. Revenue is recognized when delivery has
occurred and title and risk of loss have transferred to the customer. The
Company accrues an estimate of expected returns based on the Company's
historical returns experience which is governed by the Company's merchandise
returns policy for expected returns which have not been presented. The Company
charges the customer to cover the costs of administration for inactive layaways.
ACCOUNTING FOR STOCK BASED COMPENSATION The Company follows APB No. 25
"Accounting for Stock Issued to Employees" and the related interpretations in
accounting for its stock option plans. Since the stock option plans meet certain
criteria of APB No. 25, the Company does not recognize any compensation cost in
the income statement. SFAS No. 123, "Accounting for Stock-Based Compensation"
issued subsequent to APB No. 25, defines a "fair value based method" of
accounting for employee stock options but allows companies to continue to
measure compensation cost for employee stock options using the "intrinsic value
based method" prescribed in APB No. 25.
The Company believes that applying the intrinsic value based method of
accounting for stock options prescribed by APB No. 25 is a critical accounting
policy because application of SFAS No. 123 would require the Company to estimate
the fair value of employee stock options at the date of the grant and record an
expense in the income statement over the vesting period for the fair value
calculated, thus reducing net income and earnings per share. Our accounting
policy to follow APB No. 25 in accounting for our stock options plans is a
critical accounting policy.
The Company has no immediate plans at this time to voluntarily change its
accounting policy to the fair value based method; however, the Company continues
to evaluate this alternative. In accordance with SFAS No. 123, the Company has
been disclosing in the Notes to the Financial Statements the impact on net
income and earnings per share as if the fair value based method was adopted.
13
ACCOUNTING OF BUSINESS COMBINATIONS AND GOODWILL AND OTHER TANGIBLES In
accordance with the Financial Accounting Standard Board Statement No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets," the Company evaluates goodwill
for impairment on an annual basis or whenever indicators of impairment exist.
SFAS 142 requires that if the carrying value of a reporting unit for which the
goodwill relates to exceeds its fair value, an impairment loss is recognized to
the extent that the carrying value of the reporting unit goodwill exceeds the
"implied fair value" of reporting unit goodwill. As discussed in the notes to
the financial statements, the Company evaluated goodwill using discounted cash
flow and a market multiple approach for impairment and concluded that no
impairment currently exists.
The Company believes that the accounting estimate related to determining
fair value is a critical accounting estimate because: (1) it is highly
susceptible to change from period to period because it requires Company
management to make assumptions about the future cash flows over several years in
the future and (2) the impact that recognizing an impairment would have on the
assets reported on our balance sheet as well as our results of operations could
be material. Management's assumptions about future cash flows requires
significant judgment and actual cash flows in the future may differ
significantly from those forecasted today.
NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS In August 2001,
the Financial Accounting Standards Board issued Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS 144
establishes accounting requirements for impaired long-lived assets to be held
and used, long-lived assets to be disposed of other than by sale and long-lived
assets to be disposed of by sale. The Company adopted SFAS 144 effective
February 1, 2002, which had no impact on its financial statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002,
the Financial Accounting Standards Board issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
requires that costs associated with disposal or exit activities after December
31, 2002 be recorded at fair value in the period the liability is incurred. The
Company adopted SFAS 146 effective January 1, 2003, which had no impact on its
financial statements.
ACCOUNTING FOR STOCK BASED COMPENSATION The Financial Accounting Standards Board
issued Statement No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure", during fiscal 2002. This Statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company adopted the disclosure requirements of this statement as of January 31,
2003.
ACCOUNTING FOR GUARANTEES The Financial Standards Accounting Board issued FASB
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34. Under its bylaws, the Company has agreed to
indemnify its officers and directors for certain events or occurrences while the
officer or director is, or was serving, at its request in such capacity. The
maximum potential amount of future payments the Company could be required to
make pursuant to indemnification obligations is unlimited; however, the Company
has a directors and officer liability insurance policy that, under certain
circumstances, enables it to recover a portion
14
of any future amounts paid. As a result of its insurance policy coverage, the
Company believes the estimated fair value of these indemnification obligations
is minimal. The Company has no liabilities recorded for these obligations as of
January 31, 2003.
TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES The Company provides certain
office services to Double P Corporation, PDP Limited Liability Company and CBN
Limited Liability Company or other companies, from time to time, which own and
operate primarily mall-based snack food stores, and in which Messrs. Hugh
Patinkin, John Desjardins and Matthew Patinkin own a 52% equity interest. A
substantial portion of the remaining equity interest is owned by the adult
children and other family members of Norman Patinkin. For these services, Double
P Corporation pays the Company $700 per month. Matthew Patinkin has served as a
director of Double P Corporation and one of Norman Patinkin's adult children is
a director and chief executive officer of Double P Corporation. Messrs. Hugh
Patinkin, John Desjardins and Matthew Patinkin spend a limited amount of time
providing services to Double P Corporation, PDP Limited Liability Company and
CBN Limited Liability Company. In the case of Hugh Patinkin and John Desjardins,
these services are performed solely in their capacities as shareholders of
Double P Corporation. In the case of Matthew Patinkin, these services are
performed in his capacity as a shareholder of Double P Corporation and were
previously performed in his capacities as a director and a shareholder of Double
P Corporation. Messrs. Hugh Patinkin and John Desjardins receive no remuneration
for these services. Matthew Patinkin receives no remuneration for these services
other than the fee he previously received for his services as a director of
Double P Corporation. In several cases the Company and Double P Corporation have
reached joint agreements to divide and separately lease contiguous mall space.
The Company and Double P Corporation concurrently negotiated separately with the
landlord to reach such a joint agreement. Since the Company's initial public
offering, its policy has required that the terms of any such leases must be
approved by a majority of the Company's outside directors.
INFLATION The Company believes that inflation generally has not had a material
effect on the results of its operations. There is no assurance, however, that
inflation will not materially affect the Company in the future.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Whitehall Jewellers, Inc.
Statements of Operations
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002 2001
(In thousands, except per share and selected operating data) (Restated - Note 19) (Restated - Note 19) (Restated - Note 19)
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales $341,037 $338,911 $ 355,065
Cost of sales (including buying and occupancy expenses) 213,242 207,227 217,344
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 127,795 131,684 137,721
Selling, general and administrative expenses 107,790 109,975 115,600
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations 20,005 21,709 22,121
Interest expense 4,341 6,902 5,757
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 15,664 14,807 16,364
Income tax expense 5,970 5,153 6,103
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting 9,694 9,654 10,261
Cumulative effect of change in accounting, net --- --- (3,068)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 9,694 $ 9,654 $ 7,193
- ------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income before cumulative effect of change in accounting, net $ 0.67 $ 0.66 $ 0.65
Cumulative effect of change in accounting, net --- --- (0.19)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.67 $ 0.66 $ 0.46
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares 14,545 14,584 15,617
- ------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Income before cumulative effect of change in accounting, net $ 0.64 $ 0.66 $ 0.64
- ------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting, net --- --- (0.19)
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.64 $ 0.66 $ 0.45
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares and common share
equivalents 15,038 14,685 15,964
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
16
Whitehall Jewellers, Inc.
Balance Sheets
As of January 31, 2003 and January 31, 2002
2003 2002
(in thousands, except share data) (Restated - Note 19) (Restated - Note 19)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 2,048 $ 2,741
Accounts receivable, net 1,621 1,189
Merchandise inventories 196,694 173,098
Other current assets 1,470 1,224
Deferred income taxes, net 2,627 3,029
Deferred financing costs 510 511
- ---------------------------------------------------------------------------------------------------------------
Total current assets 204,970 181,792
Property and equipment, net 61,634 63,914
Goodwill, net 5,662 5,662
Deferred financing costs 213 723
- ---------------------------------------------------------------------------------------------------------------
Total assets $272,479 $252,091
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolver loans $ 94,490 $ 35,277
Current portion of long-term debt 4,500 5,250
Customer deposits 3,454 3,963
Accounts payable 26,784 61,793
Income taxes payable 3,303 3,257
Accrued payroll 3,282 6,270
Other accrued expenses 11,380 13,324
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 147,193 129,134
Long-term debt 640 5,140
Deferred income taxes, net 3,607 2,012
Other long-term liabilities 3,138 2,660
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 154,578 138,946
Commitments and contingencies
Stockholders' equity:
Common Stock, ($.001 par value; 30,000,000 shares authorized;
18,020,968 shares and 17,809,830 shares issued, respectively) 18 17
Class B Common Stock, ($1.00 par value; 29,567 shares authorized; --- ---
142 shares and 142 shares issued and outstanding, respectively)
Additional paid-in capital 105,795 103,767
Retained earnings 48,025 38,331
- ---------------------------------------------------------------------------------------------------------------
153,838 142,115
Treasury stock, 3,822,637 and 3,200,209 shares, respectively at (35,937) (28,970)
cost
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity, net 117,901 113,145
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 272,479 $ 252,091
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
17
Whitehall Jewellers, Inc.
Statements of Stockholders' Equity
For the Years Ended January 31, 2003, 2002 and 2001
Retained
Class B Additional Earnings
Common Common Paid-in (Restated - Treasury
(in thousands) Stock Stock Capital Note 19) Stock
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 2000 $ 15 $ --- $ 60,426 $ 21,484 $ (9,997)
Net income --- --- --- 7,193 ---
Exercise of options --- --- 380 --- ---
Equity offering 2 --- 42,535 --- ---
Treasury stock repurchase --- --- --- --- (18,980)
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 2001 17 --- 103,341 28,677 (28,977)
Net income --- --- --- 9,654 ---
Exercise of options --- --- 426 --- ---
Stock issued under Employee Stock Purchase Plan --- --- --- --- 7
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 2002 17 --- 103,767 38,331 (28,970)
Net income --- --- --- 9,694 --
Exercise of options 1 --- 2,028 --- (459)
Treasury stock repurchase --- --- --- --- (6,548)
Stock issued under Employee Stock Purchase Plan --- --- --- --- 40
- ----------------------------------------------------------------------------------------------------
Balance at January 31, 2003 $ 18 $ --- $105,795 $ 48,025 $ (35,937)
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
18
Whitehall Jewellers, Inc.
Statements of Cash Flows
For the Years Ended January 31, 2003, 2002 and 2001
2003 2002 2001
(Restated - (Restated - (Restated -
(in thousands) Note 19) Note 19) Note 19)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities: $ 9,694 $ 9,654 $ 7,193
Net income
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Cumulative effect of accounting change, net --- --- 3,068
Depreciation and amortization 11,216 10,715 9,198
Store closing impairment charge --- 822 1,118
Loss on disposition of assets 146 74 75
Changes in assets and liabilities:
(Increase) decrease in accounts receivables, net (432) 217 1,753
(Increase) decrease in merchandise inventories, net of gold
consignment (3,143) 14,098 (33,906)
(Increase) decrease in other current assets (246) (536) 421
Increase (decrease) in deferred taxes, net 1,997 2,327 (645)
(Decrease) increase in accounts payable (34,381) 7,695 6,349
(Decrease) increase customer deposits (509) (251) 260
Increase (decrease) in income taxes payable 46 384 (2,522)
(Decrease) increase in accrued payroll (2,988) 1,100 (775)
(Decrease) increase in other accrued expenses (1,944) (1,638) 1,698
Increase in other long-term liabilities 478 532 467
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (20,066) 45,193 (6,248)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (8,571) (12,695) (22,688)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,571) (12,695) (22,688)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows financing activities:
Borrowing on revolver loan 1,065,170 1,043,464 444,147
Repayment of revolver loan (1,005,957) (1,055,407) (438,044)
Repayment of term loan (5,250) (4,250) (3,250)
Purchase of gold to settle the gold consignment (20,453) (6,118) ---
Proceeds from gold consignment --- 3,107 2,016
Proceeds from equity offering --- --- 42,537
Financing costs --- (348) (441)
Proceeds from exercise of stock options 1,570 426 380
Proceeds from stock issued under the Employee Stock Purchase 40 7 ---
Plan
Purchase of treasury stock (6,548) --- (18,980)
(Decrease) increase in outstanding checks, net (628) (13,564) 1,071
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 27,944 (32,683) 29,436
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (693) (185) 500
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 2,741 2,926 2,426
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,048 $ 2,741 $ 2,926
- ---------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Interest paid during year $ 2,515 $ 6,372 $ 5,383
Income taxes paid during year $ 3,809 $ 2,274 $ 9,319
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
19
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 business segment, specialty retail jewelry.
The Company has a national presence with 370 and 364 stores located in 38 states
operating in regional or super-regional shopping malls as of January 31, 2003
and January 31, 2002, respectively. The consolidated financial statements
include the accounts and transactions of the Company and its subsidiaries.
Intercompany accounts and transactions have been eliminated.
(2) Accounting Change
On December 3, 1999 the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" ("SAB 101"). SAB 101, among other things,
requires that revenue from layaway sales should only be recognized upon delivery
of merchandise to the customer. The accounting required by this bulletin became
effective for the Company the first fiscal quarter of the fiscal year beginning
after December 15, 1999. Accordingly, the Company adopted this pronouncement in
the first quarter of fiscal year 2000.
Effective February 1, 2000, the Company changed its accounting policy
for layaway sales in accordance with SAB 101, which requires that revenue from
layaway sales be deferred until merchandise is delivered to the customer. The
Company charges the customer to cover the costs of administration for inactive
layaways.
Prior to February 1, 2000, layaway receivables included those sales to
customers under the Company's layaway policies, which had not been fully
collected as of the end of the fiscal year. Layaway receivables are net of
customer payments received to date and net of an estimate for payments on
layaway sales which the Company anticipated would never be consummated. This
estimate is based on the Company's historical calculation of layaway sales.
The Company recorded a charge of approximately $3.1 million during the
first quarter, which is net of a $1.9 million tax benefit, presented as a
cumulative effect of this accounting change as of February 1, 2000.
(3) Equity Offering
In March 2000, the Company completed an offering of common stock. The Company
issued 2,325,500 shares of common stock, and received proceeds of $42.5 million
net of underwriting discounts and offering costs. The Company used the proceeds
to reduce the Company's indebtedness and for working capital and other general
corporate purposes.
(4) Common Stock Repurchase Program
On July 14, 2000, the Board of Directors authorized the Company to repurchase up
to $15.0 million of its common stock. On August 23, 2000, the Company announced
that its Board of Directors had increased the authorization to purchase shares
under the stock repurchase program from $15.0 million to $20.0 million of the
Company's common stock. As of January 31, 2002, the Company had repurchased
2,317,500 shares under this stock repurchase program, at a total cost of
approximately $19.0 million. This program has been terminated.
20
On July 23, 2002, the Company announced that the Board of Directors had
established a new stock repurchase program covering up to $25.0 million of its
common stock. As of January 31, 2003, the Company had repurchased a total of
605,600 shares of common stock under the stock repurchase program at a total
cost of approximately $6.5 million. Shares repurchased by the Company reduce the
weighted average number of shares of Common Stock outstanding for basic and
diluted earnings per share calculations.
(5) Summary of Significant Accounting Policies
CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the
Company considers any temporary cash investments purchased with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE Accounts receivable consists primarily of customer credit
card charges and other non-recourse third party credit arrangements for
merchandise delivered to the customer for which the Company has not yet received
payment under the terms of the arrangements. Allowance for doubtful accounts
represents reserves established to address exposures to chargebacks on credit
receivables that have already been collected. The Company accrues an estimate of
expected chargebacks based on the Company's historical chargeback experience.
MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the
lower of weighted average cost or market. Purchase cost is reduced to reflect
certain allowances and discounts received from merchandise vendors. Periodic
credits or payments from merchandise vendors in the form of buydowns, volume or
other purchase discounts and other vendor consideration are reflected in the
carrying value of the inventory and recognized as a component of cost of sales
as the merchandise is sold. Additionally, to the extent it is not addressed by
established vendor return privileges, and if the amount of cash consideration
received from the vendor exceeds the estimated fair value of the goods returned,
that excess amount is reflected as a reduction in the purchase cost of the
inventory acquired.
To the extent the Company's agreements with merchandise vendors provide
credits for co-op advertising, the Company has historically classified such
credits as a reduction to advertising expense in selling, general and
administrative expenses. Emerging Issues Task Force Issue No. 02-16, "Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" ("EITF 02-16"), which was effective for all arrangements entered into
after December 31, 2002, requires certain merchandise vendor allowances to be
classified as a reduction to inventory cost unless evidence exists supporting an
alternative classification.
The Company also obtains merchandise from vendors under various
consignment agreements. The consigned inventory and related contingent
obligations associated with holding and safekeeping such consigned inventory 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 consignor cost of such merchandise in cost of sales.
PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less
accumulated depreciation and amortization. Furniture and fixtures are
depreciated on a straight-line basis over estimated useful lives ranging from
five to ten years. Software costs are amortized on a straight-line basis over
five years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the remaining lease terms or ten years.
21
Upon retirement or disposition of property and equipment, the
applicable cost and accumulated depreciation are removed from the accounts and
any resulting gains or losses are included in the results of operations.
LONG-LIVED ASSETS When facts and circumstances indicate potential impairment,
the Company evaluates the recoverability of long-lived asset carrying values,
using projections of undiscounted future cash flows over remaining asset lives.
When impairment is indicated, any impairment loss is measured by the excess of
carrying values over fair values.
GOODWILL Goodwill represents the excess of cost over the fair value of assets
acquired in purchase business combinations. Under the Financial Standards
Accounting Board Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets" goodwill and indefinite lived intangible assets are reviewed annually
(or more frequently if impairment indicators arise) for impairment. The Company
adopted SFAS 142 on February 1, 2002 and has discontinued the amortization of
goodwill. The Company reviewed goodwill for impairment as of January 31, 2003
and determined that no impairment existed.
DEFERRED FINANCING COSTS In connection with the Company's financing agreements,
the Company incurred various financing costs, which have been deferred on the
Company's balance sheet and are amortized over the terms of the agreements and
included in interest expense.
ACCOUNTS PAYABLE Accounts payable includes outstanding checks which were
$6,512,000 and $7,140,000 as of January 31, 2003 and 2002, respectively.
STORE PREOPENING EXPENSE Expenses associated with the opening of new store
locations are expensed in the period such costs are incurred.
LEASE EXPENSE The Company leases the premises for its office facilities and all
of its retail stores. Certain leases require increasing annual minimum lease
payments over the term of the lease. Minimum lease expense under these
agreements is recognized on a straight-line basis over the terms of the
respective leases. Virtually all leases covering retail stores provide for
additional contingent rentals based on a percentage of sales. These costs are
expensed in the period incurred.
SELF-INSURANCE The Company self-insures or retains a portion of the exposure for
losses related to workers compensation and general liability costs. It is the
Company's policy to record self-insurance reserves, as determined actuarially,
based upon claims filed and an estimate of claims incurred but not yet reported.
REVENUE RECOGNITION The Company recognizes revenue from sales of merchandise
when earned, as required by SAB 101. Revenue is recognized when delivery has
occurred and title and risk of loss have transferred to the customer. The
Company accrues an estimate of expected returns based on the Company's
historical returns experience which is governed by the Company's merchandise
returns policy. The Company charges the customer to cover the costs of
administration for inactive layaways.
EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings
available to holders of common stock by the weighted average number of shares of
common stock outstanding. Diluted earnings per share are computed assuming the
exercise of all dilutive stock options. Under these assumptions, the weighted
average number of common shares outstanding is increased accordingly.
22
INCOME TAXES Deferred income taxes are recognized for the tax consequences in
future years of differences between the tax basis of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
STOCK BASED COMPENSATION The Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure,"
during 2002. This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted the disclosure requirements of
this statement as of January 31, 2003.
The Company accounts for stock-based compensation according to
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", which results in no charge to earnings when options are issued at
fair market value.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation," as amended by
FASB Statement No. 148, "Accounting for Stock-Based Compensation and
Disclosure," to stock-based employee compensation.
2003 2002 2001
(Restated - (Restated - (Restated
(in thousands, except per share amounts) Note 19) Note 19) - Note 19)
- ----------------------------------------------------------------------------------------------------------
Net income, as reported $ 9,694 $ 9,654 $ 7,193
Deduct: Total stock-based employee compensation expense
determined under fair value based method, net of related
tax effects (1,951) (2,459) (3,583)
- --------------------------------------------------------------------------------------------------------
Pro forma net income $ 7,743 $ 7,195 $ 3,610
- --------------------------------------------------------------------------------------------------------
Earnings per share:
Basic-as reported 0.67 0.66 0.46
Basic-pro forma 0.53 0.49 0.23
Diluted-as reported 0.64 0.66 0.45
Diluted-pro forma 0.51 0.49 0.23
- --------------------------------------------------------------------------------------------------------
For purposes of pro forma net income and earnings per share calculation
in accordance with SFAS No. 123, for each option granted during the years ended
January 31, 2003, 2002, 2001, 2000, and 1999 the fair value is estimated using
the Black-Scholes option-pricing model. The assumptions used are as follows:
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------
Risk-free interest rate 4.1% 5.1% 6.6% 5.3% 5.3%
Dividend yield 0 0 0 0 0
Option life 5.5 years 7 years 7 years 6 years 6 years
Volatility 62% 44% 53% 39% 40%
- ------------------------------------------------------------------------------
MANAGEMENT ESTIMATES The preparation of financial statements in conjunction with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Valuation reserves for inventory, accounts
receivable, sales returns and deferred tax assets are significant examples of
the use of such estimates. Actual results could differ from those estimates.
23
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), as amended by Statement of Financial
Accounting Standards No. 137, was required to be adopted by the Company for its
fiscal year beginning after December 1, 2000. SFAS 133 requires disclosures of
the objectives for holding or issuing derivative instruments, the context to
understand the objectives and the strategies for achieving the objectives and
disclosures related to the impact of derivatives as reflected in the statement
of comprehensive income and requires that all derivative instruments be
recognized as either assets or liabilities in the balance sheet and measured at
their fair values. SFAS 133 also requires changes in the fair value of
derivatives to be recorded in each period in current earnings or comprehensive
income, depending on the intended use of the derivatives. The Company adopted
SFAS 133, as amended, effective February 1, 2001, which had no impact on its
financial statements.
ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OF LONG-LIVED ASSETS In August 2001,
the Financial Accounting Standards Board issued Statement No. 144 ("SFAS 144"),
"Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS 144
establishes accounting requirements for impaired long-lived assets to be held
and used, long-lived assets to be disposed of other than by sale and long-lived
assets to be disposed of by sale. The Company adopted SFAS 144 effective
February 1, 2002, which had no impact on its financial statements.
ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSED ACTIVITIES In June 2002,
the Financial Accounting Standards Board issued Statement No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
requires that costs associated with disposal or exit activities after December
31, 2002 be recorded at fair value in the period the liability is incurred. The
Company adopted SFAS 146 effective January 1, 2003, which had no impact on its
financial statements.
ACCOUNTING FOR GUARANTEES The Financial Standards Accounting Board issued FASB
Interpretation No. 45 ("FIN 45") Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and interpretation of FASB Statements No. 5, 57 and 107 and Rescission
of FASB Interpretation No. 34. Under its bylaws, the Company has agreed to
indemnify its officers and directors for certain events or occurrences while the
officer or director is, or was serving, at its request in such capacity. The
maximum potential amount of future payments the Company could be required to
make pursuant to these indemnification obligations is unlimited; however, the
Company has a directors and officer liability insurance policy that, under
certain circumstances, enables it to recover a portion of any future amounts
paid. As a result of its insurance policy coverage, the Company believes the
estimated fair value of these indemnification obligations is minimal. The
Company has no liabilities recorded for these obligations as of January 31,
2003.
(6) Accounts Receivable, Net
Accounts receivables, net included the following as of January 31:
(in thousands) 2003 2002
- -----------------------------------------------------------------------
Accounts receivable $ 2,165 $ 1,862
Less: allowance for doubtful accounts (544) (673)
- -----------------------------------------------------------------------
Accounts receivable, net $ 1,621 $ 1,189
- -----------------------------------------------------------------------
24
The Company has charged bad debt expense of $1,686,000, $577,000 and $2,331,000
for doubtful accounts for the years ended January 31, 2003, 2002 and 2001,
respectively.
(7) Inventory
Merchandise inventories consisted of the following as of January 31:
2003 2002
(in thousands) (Restated - Note 19) (Restated - Note 19)
- ----------------------------------------------------------------------------------------
Raw materials $ 7,657 $ 6,958
Finished goods inventory 189,037 166,140
- ----------------------------------------------------------------------------------
Merchandise inventories $ 196,694 $ 173,098
==================================================================================
Raw materials consist primarily of diamonds, precious gems, semi-precious gems
and gold. Included within finished goods inventory are allowances for inventory
shrink, scrap and miscellaneous costs of $3,567,000 and $3,579,000 for the years
ended January 31, 2003 and 2002, respectively. As of January 31, 2003 and 2002,
merchandise consignment inventories held by the Company that are not included in
its balance sheets total $74,924,000 and $80,425,000, respectively.
Gold consignments of $23,298,000 are not included in the Company's
balance sheet at January 31, 2002 (see Note 11, Financing Arrangements) as the
title to such gold has passed to the consignor and is subject to the same risk
of physical loss as other inventory held on consignment by the Company. 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 the gold to its banks and extinguished all existing Company gold
consignment obligations to the banks under the Credit Agreement (See Note 11).
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 $725,000 of
this increase in cost of sales is reflected in the year ended January 31, 2003.
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.
Certain merchandise procurement, distribution and warehousing costs are
allocated to inventory. As of January 31, 2003 and 2002, these amounts included
in inventory are $3,364,000 and $3,306,000, respectively. The amounts comprising
the overhead pool of capitalizable costs were $5,566,000, $5,211,000 and
$4,964,000 for the years ended January 31, 2003, 2002 and 2001, respectively.
(8) Property and Equipment
Property and equipment included the following as of January 31:
(in thousands) 2003 2002
- ------------------------------------------------------------------------------
Furniture and fixtures, and software $ 77,614 $ 71,245
Leasehold improvements 36,407 37,417
- ------------------------------------------------------------------------------
Property and equipment 114,021 108,662
Accumulated depreciation and amortization (52,387) (44,748)
- ------------------------------------------------------------------------------
Property and equipment, net $ 61,634 $ 63,914
- ------------------------------------------------------------------------------
25
Depreciation expense was $10,704,000, $9,955,000 and $8,558,000 for the
years ended January 31, 2003, 2002, and 2001, respectively.
The Company has recognized impairment charges included in costs of
sales, measured as the excess of net book value of furniture, fixtures and
leasehold improvements over their fair values, associated with management's
decision to close stores. The Company recorded $822,000 and $1,118,000 in
impairment charges for the years ended January 31, 2002 and 2001. As of January
31, 2003 the Company has completed the closure of eleven stores without
requiring significant adjustment to the originally recorded charges and
continues to pursue the closure of the remainder.
The amount of internally developed software capitalized during the year
ending January 31, 2003 and 2002 was $53,000 and $198,000, respectively and is
included in furniture, fixtures and software. Amortization of capitalized
software for the year ended January 31, 2003 and 2002, was $69,000 and $17,000,
respectively. The remaining unamortized costs of internally developed software
included in property and equipment as of January 31, 2003 and 2002 was $164,000
and $181,000, respectively.
(9) Goodwill
On September 10, 1998, the Company acquired substantially all of the assets of
36 jewelry stores operating under the Jewel Box name from Carlyle & Co. Jewelers
and its affiliates, headquartered in Greensboro, North Carolina. The Company
purchased all associated inventory, accounts receivable and fixed assets for
approximately $22 million (including fees and other costs) in cash (the
"Acquisition"). The Acquisition has been accounted for using the purchase method
of accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of Acquisition. The excess of the purchase price over the fair values of
the net assets acquired was $6.6 million and has been recorded as goodwill.
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 using
both a discounted cash flow analysis and market multiple approach and has
determined that no impairment of goodwill was recorded. The carrying amount of
goodwill as of January 31, 2003 and January 31, 2002 was $5,662,000. The table
below shows income before income taxes, net income and earnings per share for
the years ended January 31, 2003, 2002 and 2001, adjusted to add back goodwill
amortization and related tax effects.
26
January 31, 2003 January 31, 2002 January 31, 2001
(in thousands, except per share data) (Restated - Note 19) (Restated - Note 19) (Restated - Note 19)
- --------------------------------------------------------------------------------------------------------------
Reported income before income taxes $ 15,664 $ 14,807 $ 16,364
Add back: Goodwill amortization -- 262 262
- --------------------------------------------------------------------------------------------------------------
Adjusted income before income taxes $ 15,664 $ 15,069 $ 16,626
==============================================================================================================
Reported net income $ 9,694 $ 9,654 $ 7,193
Add back: After tax impact of goodwill
amortization -- 171 164
- --------------------------------------------------------------------------------------------------------------
Adjusted net income $ 9,694 $ 9,825 $ 7,357
==============================================================================================================
Basic earnings per share:
Reported net income $ 0.67 $ 0.66 $ 0.46
After tax impact of goodwill amortization -- 0.01 0.01
- --------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.67 $ 0.67 $ 0.47
==============================================================================================================
Diluted earnings per share:
Reported net income $ 0.64 $ 0.66 $ 0.45
After tax impact of goodwill amortization -- 0.01 0.01
- --------------------------------------------------------------------------------------------------------------
Adjusted net income $ 0.64 $ 0.67 $ 0.46
==============================================================================================================
(10) Long-Term Liabilities
Included in long-term liabilities at January 31, 2003 and 2002 are $3,138,000
and $2,660,000 respectively, of deferred lease costs.
(11) Financing Arrangements
Effective January 31, 2003, 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 to provide for a total
facility of $166.5 million through June 30, 2004. Interest rates and the
commitment fee charged on the unused portion of the facility float based upon
the Company's quarterly financial performance.
Under this Credit Agreement, the banks have a collateral security
interest in substantially all of the assets of the Company. The Credit Agreement
contains certain restrictions on capital expenditures, investments, payment of
dividends, assumption of additional debt, acquisitions and divestitures, among
others, and requires the Company to maintain certain financial ratios based on
levels of funded debt, capital expenditures and earnings before interest, taxes,
depreciation and amortization. As of January 31, 2003, the most restrictive
financial covenant was total funded debt to earnings before interest, taxes,
depreciation and amortization as defined in the agreement. This financial
covenant was set at a ratio of 2.95 to 1.00, as amended, and is calculated based
on the daily outstanding average of all debt outstanding for the trailing four
quarters including borrowing under the credit facility, senior subordinated
debt, capital leases and other indebtedness divided by earnings before interest,
taxes, deprecation and amortization for the trailing four quarters.
REVOLVER LOAN The revolving loan facility under the Credit Agreement is
available up to a maximum of $150.0 million, including amounts borrowed under
the gold consignment facility, and is limited by a borrowing base computed based
on the value of the Company's inventory and accounts receivable. Availability
under the revolver is based on amounts outstanding thereunder, including the
value of consigned gold which fluctuates based on current gold prices. Interest
rates and commitment fees on the unused facility float based on the Company's
quarterly financial performance.
Current interest rates for borrowings under this agreement are, at the
Company's option, based on Eurodollar rates or the banks' prime rate. Interest
is payable monthly for prime borrowings and upon maturity for Eurodollar
borrowings. The interest expense under the
27
revolver facility for the years ended January 31, 2003, 2002 and 2001 was
$3,008,000, $4,650,000 and $3,449,000, respectively, reflecting a weighted
average interest rate of 4.2%, 6.4% and 8.0%, respectively.
TERM LOAN The term loan facility under the Credit Agreement is available up to a
maximum of $4.5 million (originally $16.5 million, less principal repayments).
Current interest rates for these borrowings are, at the Company's option, based
on Eurodollar rates or the banks' prime rate. Interest is payable monthly for
prime borrowings and upon maturity for Eurodollar borrowings. Interest rates and
the commitment fee charged on the unused facility float based on the Company's
quarterly financial performance. The interest expense under the term loan
facility for the years ended January 31, 2003, 2002 and 2001 was $353,000,
$841,000 and $1,348,000, respectively for these borrowings, reflecting a
weighted average interest rate of 4.4%, 6.7% and 8.3%, respectively.
GOLD CONSIGNMENT FACILITY The Company has 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. The Gold Consignment Facility 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, as 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
specified quantities of consigned gold back to the third party financial
institution at the end of the facility (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 elect to purchase the
consigned quantities at the end of the Gold Consignment Facility at the current
market price for gold on that date.
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
obligations under the Credit Agreement.
The facility provides for the sale of a maximum of 115,000 troy ounces
of gold or $40.0 million. Under the agreement, the Company pays consignment fees
at the rate set by the bank based on the London Interbank Bullion Rates payable
monthly. A commitment fee on the unused portion of the Gold Consignment Facility
is payable monthly. Interest rates and the commitment fees charged on the unused
facility float based on the Company's quarterly financial performance. The
consignment fees totaled $354,000, $804,000 and $520,000 for the years ended
January 31, 2003, 2002 and 2001, respectively, at a weighted average rate of
3.0%, 3.7% and 2.5%, respectively.
SUBORDINATED NOTES As of January 31, 2003 and 2002, the Company had Series C
Senior Subordinated Notes due 2004 (the "Series C Notes") totaling $640,000
which bear interest at 12.15% per annum payable in cash, with interest payments
due quarterly. Interest expense was $78,000 for each of the years ended January
31, 2003, 2002 and 2001, respectively.
28
As of January 31, 2003 and 2002, the current portion and noncurrent
portion of long-term debt consisted of the following:
(in thousands) 2003 2002
- -------------------------------------------------------------------------
Current portion of long-term debt:
Term loan $ 4,500 $ 5,250
- -------------------------------------------------------------------------
Total $ 4,500 $ 5,250
- -------------------------------------------------------------------------
Long-term debt, net of current portion:
Term loan $ --- $ 4,500
Subordinated debt 640 640
- -------------------------------------------------------------------------
Total $ 640 $ 5,140
- -------------------------------------------------------------------------
Future scheduled maturities under the loan agreements, excluding the revolver
for January 31, 2003, are as follows:
Subordinated
(in thousands) Term Notes Total
- ----------------------------------------------------------------------
January 31, 2004 $ 4,500 $ -- $ 4,500
April 30, 2004 -- 640 640
- ----------------------------------------------------------------------
Total $ 4,500 $ $ 640 $ 5,140
- ----------------------------------------------------------------------
The carrying amount of the Company's borrowings under the Credit
Agreement and other long-term borrowings approximates fair value based on
current market rates.
(12) Deferred Financing Costs
In conjunction with the Company's recapitalization of its financing arrangements
in fiscal 1997, the establishment of the Credit Agreement in fiscal 1998 and the
amendments to the Credit Agreement through fiscal 2003, costs associated with
these agreements are being amortized over the extended term of the Credit
Agreement. Amortization expense in the years ended January 31, 2003, 2002 and
2001 was $511,000, $487,000 and $378,000, respectively.
(13) Income Taxes
The temporary differences between the tax basis of assets and liabilities and
their financial reporting amounts that give rise to a significant portion of the
deferred tax asset and deferred tax liability and their approximate tax effects
are as follows, as of January 31:
2003 2002
(Restated - Note 19) (Restated - Note 19)
------------------------------------------------
Temporary Temporary
(in thousands) Difference Tax Effect Difference Tax Effect
- -------------------------------------------------------------------------------------------
Merchandise inventories $ 1,699 $ 664 $ 1,510 $ 574
Accrued rent 3,412 1,331 2,833 1,043
Accounts receivable 935 365 1,011 372
Sales returns 709 276 1,525 561
Vacation pay 1,132 441 1,379 507
State and local government fees 937 365 600 221
Other 1,408 550 1,057 389
Net operating loss carryforward 858 334 552 203
- -------------------------------------------------------------------------------------------
Total deferred tax asset 11,090 4,326 10,467 3,870
- -------------------------------------------------------------------------------------------
Property and equipment, net 12,446 4,854 7,017 2,582
Goodwill 1,160 452 737 271
- -------------------------------------------------------------------------------------------
Total deferred tax liability (13,606) (5,306) (7,754) (2,853)
- -------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (2,516) $ (980) $ 2,713 $ 1,017
- -------------------------------------------------------------------------------------------
29
The net current and non-current components of deferred income taxes
recognized in the balance sheet at January 31 are as follows:
2003 2002
(in thousands) (Restated - Note 19) (Restated - Note 19)
- -------------------------------------------------------------------------------------------
Net current assets $ 2,627 $ 3,029
Net non-current (liability) (3,607) (2,012)
- --------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (980) $ 1,017
- --------------------------------------------------------------------------------------
The Company has gross state net operating loss carryforwards of
$9,931,000, which have been benefited for deferred income tax purposes. The
Company expects to utilize certain income tax net operating losses expiring over
the next fifteen to twenty years.
The income tax expense for the years ended January 31, consists of the
following:
2003 2002 2001
(Restated - (Restated - (Restated -
(in thousands) Note 19) Note 19) Note 19)
- ------------------------------------------------------------------------------------------
Current expense $ 3,795 $ 3,548 $ 7,175
Deferred tax expense 2,175 1,605 (1,072)
- ----------------------------------------------------------------------------------------
Total income tax expense 5,970 5,153 6,103
- ----------------------------------------------------------------------------------------
The provision for income taxes on income differs from the statutory tax
expense computed by applying the federal corporate tax rate of 35%, 34% and 34%
for the years ended January 31, 2003, 2002 and 2001, respectively.
2003 2002 2001
(Restated - (Restated - (Restated -
(in thousands) Note 19) Note 19) Note 19)
- ------------------------------------------------------------------------------------------
Taxes computed at statutory rate $ 5,482 $ 5,034 $ 5,564
State income tax expense, net of federal benefit 499 206 597
Other (11) (87) (58)
- ----------------------------------------------------------------------------------------
Total income tax expense $ 5,970 $ 5,153 $ 6,103
- ----------------------------------------------------------------------------------------
(14) Common Stock
Following are the number of shares issued and outstanding for each of the
Company's classes of Common Stock as of January 31:
Class B
Common Stock Common Stock Treasury
(in thousands) (par value $.001 (par value $.001 Stock
- ---------------------------------------------------------------------------------------------
Balance at January 31, 2000 15,353,120 152 (883,376)
Conversion of Class B Common Stock 151 (4) ---
Exercise of Options/Restricted Shares 54,616 --- ---
Issuance of Stock 2,325,500 --- ---
Purchase of Treasury Stock --- --- (2,317,500)
- ---------------------------------------------------------------------------------------------
Balance at January 31, 2000 17,733,387 148 (3,200,876)
Conversion of Class B Common Stock 213 (6) ---
Exercise of Options/Restricted Shares 76,230 --- ---
Issuance of Stock --- --- 667
- ---------------------------------------------------------------------------------------------
Balance at January 31, 2000 17,809,830 142 (3,200,209)
Exercise of Options/Restricted Shares 211,138 --- (21,418)
Purchase of Treasury Stock --- --- (605,600)
Issuance of Stock --- --- 4,590
- ---------------------------------------------------------------------------------------------
Balance at January 31, 2003 18,020,968 142 (3,822,637)
- ---------------------------------------------------------------------------------------------
30
Each share of Class B Common Stock is exchangeable into common stock on
a 35.4 for 1 basis. Each share of Common Stock is entitled to one vote, and each
share of Class B Common Stock is entitled to 35.4 votes on each matter submitted
to stockholders for vote.
(15) Earnings Per Common Share
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed assuming the exercise of
all dilutive stock options. Under these assumptions, the weighted average number
of common shares outstanding is increased accordingly.
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share ("EPS") computations (in thousands, except
per share amounts) for the years ended January 31:
2003 2002 2001
(Restated - Note 19) (Restated - Note 19) (Restated - Note 19)
-----------------------------------------------------------------
Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------------------------------
EPS Numerator:
Net income $ 9,694 $ 9,694 $ 9,654 $ 9,654 $ 7,193 $ 7,193
EPS Denominator:
Average common shares outstanding: 14,545 14,545 14,584 14,584 15,617 15,617
Effect of dilutive securities:
Stock options --- 493 --- 101 --- 347
- --------------------------------------------------------------------------------------------------------
Total shares 14,545 15,038 14,584 14,685 15,617 15,964
- --------------------------------------------------------------------------------------------------------
Earnings per share $ 0.67 $ 0.64 $ 0.66 $ 0.66 $ 0.46 $ 0.45
- --------------------------------------------------------------------------------------------------------
Stock options excluded from the
calculation of diluted earnings per
share (due to their antidilutive
effect on the calculation) --- 606 --- 1,133 --- 483
- --------------------------------------------------------------------------------------------------------
(16) Employee Benefit Plans
Effective October 1, 2001, the Company established an Employee Stock Purchase
Plan ("ESPP") for the benefit of substantially all employees. Employees become
eligible to participate in the ESPP after six consecutive months of employment
and the employee's customary employment is more than 20 hours per week. Through
employee contributions to the ESPP, the employee can purchase common stock of
the Company at 90% of the market value.
Effective October 1, 1997, the Company established a 401(k) Plan (the
"Plan") for the benefit of substantially all employees, the assets of which are
not commingled with Company funds. Employees become eligible to participate in
the Plan after one year of service, which is defined as at least one year of
employment and 1,000 hours worked in that year. The Company may make
discretionary contributions to the Plan. No such discretionary contributions
have been made since inception.
In 1988, the Company established an Employee Stock Ownership Plan (the
"ESOP"), which is a noncontributory plan established to acquire shares of the
Company's Class B Common Stock for the benefit of all employees. In conjunction
with completion of the Company's initial public offering and recapitalization of
its financing arrangements, the Company restructured the ESOP. As of January 31,
1998, all remaining shares had been released to participants. As long as the
stock is publicly traded the Company is not required to repurchase shares from
ESOP participants. The Company has approximately 500,000 shares held by the ESOP
that would be subject to redemption at future market value if the Company
31
were to cease being public. The only remaining activity of the ESOP is to make
distributions to existing participants or beneficiaries.
(17) Stock Plans
On September 28, 1995, the Company authorized the equivalent of 1,039,647
options under the Incentive Stock Option Plan (the "1995 Plan") to be granted to
certain members of the Company's management. Options for the equivalent of
1,032,342 were issued at exercise prices ranging from $0.60 to $0.66 per share.
These prices were greater than or equal to the fair market value at the date of
grant, as determined by an independent third party valuation. The options
allowed the holders to purchase common stock within a period ranging from five
years and eight months, at a fixed price. No expense was recorded in connection
with these options.
In April 1996, the Company approved the 1996 Long-Term Incentive Plan
(the "1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock
options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended, or nonqualified stock options.
In addition, the Company may grant stock appreciation rights ("SARs"),
bonus stock awards which are vested upon grant, stock awards which may be
subject to a restriction period and specified performance measures and
performance shares. Performance shares are rights, contingent upon the
attainment of the performance measures within a specified performance period, to
receive one share of common stock, which may be restricted, or the fair market
value of such performance share in cash. No compensatory options have been
granted under the 1996 Plan during fiscal 2002. A total of 1,156,784 shares of
common stock have been reserved for issuance under the 1996 Plan. Grants may be
made under the 1996 Plan during the ten years after its effective date. Options
granted under the 1996 Plan generally vest in four equal annual installments and
expire ten years after the date of grant. Options and shares granted under the
plans are subject to forfeiture based on, among other things, the nature and
timing of the termination of employment.
The Company approved the 1997 Long-Term Incentive Plan (the "1997
Plan") on February 24, 1997 and the stockholders adopted the 1997 Plan on June
5, 1997. On June 8, 1999, June 1, 2000 and June 11, 2002, the stockholders
adopted an amendment to the 1997 Plan to increase the common stock reserved for
issuance under the 1997 Plan. Under the 1997 Plan, the Company may grant ISOs or
nonqualified stock options. The 1997 Plan also provides for the grant of SARs,
bonus stock awards which are vested upon grant, stock awards which may be
subject to a restriction period and specified performance measures, and
performance shares. Performance shares are rights, contingent upon the
attainment of performance measures within a specified performance period, to
receive one share of common stock, which may be restricted, or the fair market
value of such performance share in cash. No compensatory options have been
granted under the 1997 Plan during fiscal 2002. A total of 2,500,000 shares of
Common Stock have been reserved for issuance under the 1997 Plan. Grants may be
made under the 1997 Plan during the ten years after its effective date. Options
granted under the 1997 Plan generally vest in three or four equal annual
installments and expire ten years after the date of grant.
In December 1998, the Company adopted the 1998 Non-Employee Director
Stock Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998
Plan, non-employee directors may elect to receive all or a designated amount of
their directors' fee in the form of stock options. A total of 37,500 shares have
been reserved for issuance under the 1998 Plan. Grants may be made during the
ten years after its effective date. Options granted under the
32
1998 Plan vest at the end of the quarter in which the date of grant occurs and
expire ten years after the date of grant. During fiscal 2002, no options had
been granted under the 1998 Plan.
Option activity for the years ended January 31, 2001, 2002 and 2003 was as
follows:
Weighted-Average Options
Shares Exercise Price Exercisable
- -----------------------------------------------------------------------
Balance at January 31, 2000 2,171,621 $ 10.38 980,633
- -----------------------------------------------------------------------
Options granted 429,363 21.38
Options exercised (54,616) 7.24
Options canceled (48,951) 12.84
- -----------------------------------------------------------------------
Balance at January 31, 2001 2,497,417 $ 12.29 1,460,575
- -----------------------------------------------------------------------
Options granted 469,849 8.03
Options exercised (76,230) 11.75
Options canceled (120,318) 19.39
- -----------------------------------------------------------------------
Balance at January 31, 2002 2,770,718 $ 11.36 1,567,816
- -----------------------------------------------------------------------
Options granted 423,486 13.50
Options exercised (211,138) 8.87
Options canceled (27,062) 14.16
- -----------------------------------------------------------------------
Balance at January 31, 2003 2,956,004 $ 11.81 2,105,510
- -----------------------------------------------------------------------
The weighted-average fair value of 423,486, 469,849 and 429,363 options
granted was $7.17, $8.03 and $13.37 for the years ended January 31, 2003, 2002
and 2001, respectively.
The following table summarizes the status of outstanding stock options
as of January 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------
Number of Weighted Average Weighted- Number of Weighted-
Options Remaining Average Options Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
$6.532 - $9.333 1,517,837 4.71 $ 8.827 1,215,093 $ 9.038
$9.344 - $11.460 754,444 7.02 11.050 595,500 11.346
$11.540 - $16.453 296,122 8.39 14.382 57,125 12.818
$17.063 - $24.250 387,601 7.21 23.032 237,792 23.277
- ------------------------------------------------------------------------------------------------
$6.532 - $24.250 2,956,004 5.99 $ 11.814 2,105,510 $ 11.401
- ------------------------------------------------------------------------------------------------
(18) Commitments and Contingencies
The Company was named a defendant in a wage hour class action suit filed in
California by three former store managers on July 25, 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. (See Note 22 Subsequent Event - July 25,
2002 Wage Hour Class Action Suit and Note 23 Unaudited Other Subsequent Events)
The Company is subject to other claims and litigation in the normal
course of business. Although there can be no certainty, 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
33
on the Company's financial condition and such matters could have a material
adverse effect on quarterly or annual operating results and cash flows when
resolved in a future period.
The Company leases the premises for its office facilities and all of
its retail stores, and certain office and computer equipment generally under
noncancelable agreements for periods ranging from two to 13 years. Most leases
require the payment of taxes, insurance and maintenance costs. Future minimum
rentals under noncancelable operating leases as of January 31, 2003 are as
follows:
Years ending January 31 (in thousands) Amount
- -------------------------------------------------------------------------------------
2003 $ 28,945
2004 27,997
2005 26,386
2006 25,632
2007 23,906
- -------------------------------------------------------------------------------------
Thereafter 62,324
- -------------------------------------------------------------------------------------
$ 195,190
- -------------------------------------------------------------------------------------
Total rental expense for all operating leases for the years ended January 31, is
as follows:
(in thousands) 2003 2002 2001
- -----------------------------------------------------------
Rental expense:
Minimum $ 28,437 $ 26,730 $ 23,179
Rentals based on sales 923 1,137 2,247
Other 431 592 573
- -----------------------------------------------------------
$ 29,791 $ 28,459 $ 25,999
- -----------------------------------------------------------
(19) Restatement
In December 2003, the Company restated previously issued financial
statements to record adjustments resulting from the accounting matters described
below. In connection with the process, the Company restated its financial
statements for the fiscal years ended January 31, 2003, 2002 and 2001.
Adjustments to restate the financial statements are summarized into the
following two categories:
A. Merchandise inventory valuation adjustments
In prior periods, the Company entered into certain contemporaneous
agreements to both purchase merchandise and return substandard
merchandise inventory to vendors, outside of the normal contractual
return privileges. Additionally, in fiscal 2001, the Company entered
into a barter arrangement for approximately $250,000 of merchandise
inventory that involved the exchange of merchandise inventory for
barter credits. These arrangements involved receiving vendor allowances
at an amount greater than the merchandise inventory fair market value
in exchange for purchases of merchandise inventory at a date in the
future. The Company has restated the financial statements to write-down
the substandard merchandise inventory to fair market value and record
the consideration received in excess of the fair market value of the
substandard inventory as a vendor allowance, which is a reduction to
inventory. This allowance reduces the cost of inventory and as the
inventory is sold the Company will recognize lower cost of sales.
In periods prior to February 1, 2000, the Company had written down
substandard inventory to fair market value and did not exchange such
inventory with vendors.
34
B. Tax effect of the adjustments
As a result of the restatement adjustments, income tax provisions were
revised in the Statement of Operations.
The following tables set forth the effects of the restatement
adjustments discussed above on the restated components of the Statement of
Operations for the three years ended January 31, 2003 (in thousands, except per
share data):
2003 2002 2001
-----------------------------------------------------------------------------
As previously As previously As previously
reported Restated reported Restated reported Restated
-----------------------------------------------------------------------------
Cost of sales (including buying
and occupancy expenses) $ 212,910 $ 213,242 $ 206,574 $ 207,227 $ 217,164 $ 217,344
Gross profit 128,127 127,795 132,337 131,684 137,901 137,721
Income from operations 20,337 20,005 22,362 21,709 22,301 22,121
Income before income taxes 15,996 15,664 15,460 14,807 16,544 16,364
Income tax expense 6,089 5,970 5,380 5,153 6,170 6,103
Income before cumulative effect
of change in accounting, net 9,907 9,694 10,080 9,654 10,374 10,261
Cumulative effect of change in
accounting, net -- -- -- -- (3,068) (3,068)
Net income $ 9,907 $ 9,694 $ 10,080 $ 9,654 $ 7,306 $ 7,193
Basic earnings per share:
Income before cumulative
effect of change in
accounting, net $ 0.68 $ 0.67 $ 0.69 $ 0.66 $ 0.66 $ 0.65
Cumulative effect of change in
accounting, net -- -- -- -- (0.19) (0.19)
---------------------------------------------------------------------------
Net income $ 0.68 $ 0.67 $ 0.69 $ 0.66 $ 0.47 $ 0.46
---------------------------------------------------------------------------
Diluted earnings per share:
Income before cumulative
effect of change in
accounting, net $ 0.66 $ 0.64 $ 0.69 $ 0.66 $ 0.65 $ 0.64
Cumulative effect of change in
accounting, net -- -- -- -- (0.19) (0.19)
---------------------------------------------------------------------------
Net income $ 0.66 $ 0.64 $ 0.69 $ 0.66 $ 0.46 $ 0.45
---------------------------------------------------------------------------
35
The following table sets forth the effects of the restatement
adjustments discussed above on the restated components of the Balance Sheets at
January 31, 2003 and 2002 (in thousands):
Balance Sheets
---------------------------------------------------------------------------------
January 31, 2003 January 31, 2002
As previously As previously
reported Restated reported Restated
------------------ ------------ ------------- --------
Merchandise inventories $197,859 $196,694 $173,931 $173,098
Deferred income taxes, net 2,172 2,627 2,704 3,029
Total current assets 205,680 204,970 182,049 181,792
Total assets 273,189 272,479 252,348 252,091
Income taxes payable 3,261 3,303 3,226 3,257
Total current liabilities 147,151 147,193 128,852 129,134
Total liabilities 154,536 154,578 138,664 138,946
Retained earnings 48,777 48,025 38,870 38,331
Total stockholders' equity, net 118,653 117,901 113,684 113,145
Total liabilities and stockholders' equity 273,189 272,479 252,348 252,091
The following table sets forth the effects of the restatement
adjustments discussed above on the Statements of Operations for each of the
three years ended January 31, 2003 (in thousands, except per share data):
Statement of Operations for the
Years ended January 31
------------------------------------------
2003 2002 2001
------------------------------------------
Net income
As previously reported $ 9,907 $ 10,080 $ 7,306
Reduced/(additional) expense:
Merchandise inventory valuation adjustments (332) (653) (180)
Tax adjustments for effects of items
Above 119 227 67
------------------------------------------
As restated $ 9,694 $ 9,654 $ 7,193
==========================================
Basic earnings per share:
As previously reported(1) $ 0.68 $ 0.69 $ 0.47
As restated(1) $ 0.67 $ 0.66 $ 0.46
Weighted average common shares
14,545 14,584 15,617
Diluted earnings per share:
As previously reported(1) $ 0.66 $ 0.69 $ 0.46
As restated(1) $ 0.64 $ 0.66 $ 0.45
Weighted average common shares and
common share equivalents
15,038 14,685 15,964
(1) Reflects net cumulative effect of change in accounting of $(0.19) per share
for the year ended January 31, 2001.
36
(20) Unaudited Quarterly Results - Restated
The Company's results of operations fluctuate on a quarterly basis. The
following tables set forth the effects of the restatement adjustments discussed
in Note 19 on the restated components of the Statement of Operations for each
quarter in fiscal 2002 and 2001. In the opinion of management, this quarterly
information has been prepared on a basis consistent with the Company's audited
financial statements appearing elsewhere in this annual report, and reflects
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto.
2002 Quarters Ended
- ----------------------------------------------------------------------------------------------------------------
April 30, 2002 July 31, 2002 October 31, 2002 January 31, 2003
(in thousands, except per share data) Restated Restated Restated Restated
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 74,588 $ 76,243 $ 61,831 $ 128,375
Gross profit 27,094 26,445 18,762 55,494
Income (loss) from operations 1,467 1,194 (6,791) 24,135
Net income (loss) 293 54 (5,110) 14,457
Diluted earnings per share:
Net income (loss) $ 0.02 $ 0.00 $ (0.35) $ 1.00
- ----------------------------------------------------------------------------------------------------------------
2001 Quarters Ended
- ----------------------------------------------------------------------------------------------------------------
April 30, 2001 July 31, 2001 October 31, 2001 January 31, 2002
(in thousands, except per share data) Restated Restated Restated Restated
- ----------------------------------------------------------------------------------------------------------------
Net sales $ 68,931 $ 74,366 $ 65,136 $ 130,478
Gross profit 25,415 27,733 21,935 56,601
Income (loss) from operations (1,067) 753 (3,886) 25,909
Net income (loss) (1,746) (748) (3,599) 15,747
Diluted earnings per share: $ (0.12) $ (0.05) $ (0.25) $ 1.06
Net income (loss)
- ----------------------------------------------------------------------------------------------------------------
The following table reconciles the quarterly operating results as
previously reported to the restated amounts presented above.
Income Diluted
Net Gross (loss) from Net Income Earnings
(in thousands, except per share amounts) Sales Profit Operations (loss) Per Share
- --------------------------------------------------------------------------------------------------------------------------------
April 30, 2002, as originally reported $ 74,588 $ 27,212 $ 1,585 $ 369 $ 0.02
Merchandise inventory valuation adjustments -- (118) (118) (118) --
Tax effect of adjustments -- -- -- 42 --
- --------------------------------------------------------------------------------------------------------------------------------
April 30, 2002, as restated $ 74,588 $ 27,094 $ 1,467 $ 293 $ 0.02
- --------------------------------------------------------------------------------------------------------------------------------
July 31, 2002, as originally reported $ 76,243 $ 26,540 1,289 114 $ 0.01
Merchandise inventory valuation adjustments -- (95) (95) (95) (0.01)
Tax effect of adjustments -- -- -- 35 --
- --------------------------------------------------------------------------------------------------------------------------------
July 31, 2002, as restated $ 76,243 $ 26,445 $ 1,194 $ 54 $ 0.00
- --------------------------------------------------------------------------------------------------------------------------------
October 31, 2002, as originally reported $ 61,831 $ 18,872 $ (6,681) $ (5,039) $ (0.35)
Merchandise inventory valuation adjustments -- (110) (110) (110) (0.01)
Tax effect of adjustments -- -- -- 39 0.01
- --------------------------------------------------------------------------------------------------------------------------------
October 31, 2002, as restated $ 61,831 $ 18,762 $ (6,791) $ (5,110) $ (0.35)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
January 31, 2003, as originally reported $ 128,375 $ 55,503 $ 24,144 $ 14,463 $ 1.00
Merchandise inventory valuation adjustments -- (9) (9) (9) --
Tax effect of adjustments -- -- -- 3 --
- --------------------------------------------------------------------------------------------------------------------------------
January 31, 2003, as restated $ 128,375 $ 55,494 $ 24,135 $ 14,457 $ 1.00
- --------------------------------------------------------------------------------------------------------------------------------
37
Income (loss) Diluted
from Net Income Earnings Per
(in thousands, except per share data) Net Sales Gross Profit Operations (loss) Share
- --------------------------------------------------------------------------------------------------------------------------------
April 30, 2001, as originally reported $ 68,931 $ 25,614 $ (868) $ (1,622) $ (0.11)
Merchandise inventory valuation adjustments --- (199) (199) (199) (0.02)
Tax effect of adjustments --- --- --- 75 0.01
- --------------------------------------------------------------------------------------------------------------------------------
April 30, 2001, as restated $ 68,931 $ 25,415 $ (1,067) $ (1,746) $ (0.12)
- --------------------------------------------------------------------------------------------------------------------------------
July 31, 2001, as originally reported $ 74,366 $ 27,902 $ 922 $ (643) $ (0.04)
Merchandise inventory valuation adjustments --- (169) (169) (169) (0.01)
Tax effect of adjustments --- --- --- 64 ---
- --------------------------------------------------------------------------------------------------------------------------------
July 31, 2001, as restated $ 74,366 $ 27,733 $ 753 $ (748) $ (0.05)
- --------------------------------------------------------------------------------------------------------------------------------
October 31, 2001, as originally reported $ 65,136 $ 22,107 $ (3,714) $ (3,492) $ (0.24)
Merchandise inventory valuation adjustments --- (172) (172) (172) (0.01)
Tax effect of adjustments --- --- --- 65 ---
- --------------------------------------------------------------------------------------------------------------------------------
October 31, 2001, as restated $ 65,136 $ 21,935 $ (3,886) $ (3,599) $ (0.25)
- --------------------------------------------------------------------------------------------------------------------------------
January 31, 2002, as originally reported $130,478 $ 56,714 $ 26,022 $ 15,837 $ 1.07
Merchandise inventory valuation adjustments --- (113) (113) (113) (0.01)
Tax effect of adjustments --- --- --- 23 ---
- --------------------------------------------------------------------------------------------------------------------------------
January 31, 2002, as restated $130,478 $ 56,601 $ 25,909 $ 15,747 $ 1.06
- --------------------------------------------------------------------------------------------------------------------------------
(21) Reclassifications
Certain Balance Sheet amounts from prior periods were reclassified to conform to
the current year presentation. These reclassifications had no impact on
earnings.
(22) Subsequent Event -- July 25, 2002 Wage Hour Class Action Suit
On July 25, 2002, the Company was named a defendant in a wage hour
class action suit filed in California by three former store managers. 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. The Company denied liability and asserted
that its managers were properly classified. The parties have reached a
preliminary agreement to settle the matter resulting in an after tax charge of
$620,000, inclusive of the plaintiffs' attorneys' fees, interest, penalties,
administrative costs and other Company costs and other Company costs. This
settlement covers the period from July 25, 1998 through the date of settlement
approval. Completion of the settlement is subject to, among other things, the
successful negotiation and execution of a written settlement agreement, opt out
and other potential contingencies in the settlement agreement, court approval
and administration of the claims process. The parties are in the process of
negotiating the specific settlement terms.
38
(23) Unaudited -- Other Subsequent Events
On July 25, 2002, the Company was named a defendant in a wage hour
class action suit filed in California by three former store managers. The case
was based principally upon the allegation that store managers employed by the
Company in California should have been classified as non-exempt for overtime
purposes. In April 2003, the parties reached a preliminary agreement to settle
the matter resulting in a pre-tax charge of $1,000,000, inclusive of the
plaintiffs' attorneys' fees, interest, penalties, administrative costs and other
Company costs. This settlement covers the period from July 25, 1998 through the
date of final settlement approval by the court. The court granted final approval
to the settlement on December 11, 2003.
The Company was named a defendant in a wage hour suit filed in
California by a former employee on May 6, 2003. The case was based principally
upon the allegation that the amount of overtime paid to certain California
employees was less than the amount actually earned. The suit asserts a claim for
$1,000,000. In December 2003, the parties reached a settlement of the suit for
an amount that is not significant in relation to the Company's financial
statements.
In August 2003, the Company was named as one of 14 defendants in a
lawsuit originally filed in the United States District Court for the Southern
District of New York, now pending in New York State Supreme Court, Commercial
Division. The case is brought by Capital Factors, Inc. ("Capital Factors"),
which provided financing to defendant Cosmopolitan Gem Corp. ("Cosmopolitan"),
an entity with which the Company has certain consignment and other commercial
arrangements. The complaint alleges that Cosmopolitan defrauded Capital Factors
into advancing funds to Cosmopolitan by misrepresenting Cosmopolitan's finances
and the profitability of its operations, and that the Company, along with other
persons and entities, including other jewelry retailers, aided and abetted or
participated in the alleged fraud. The complaint asserts against the defendants,
including the Company, claims under common law and the Racketeer Influenced and
Corrupt Organizations Act ("RICO"). Capital Factors seeks aggregate damages from
all of the defendants, including the Company, of $30,000,000, plus unspecified
punitive damages, interest and fees. Damages, excluding punitive damages,
awarded pursuant to claims asserted under RICO, as well as interest on such
damages, are subject to trebling, within the discretion of the court.
The Company has also been named as one of 13 defendants in an amended
complaint filed on December 2, 2003 by International Diamonds, L.L.C.
("International") and its affiliate, Astra Diamonds Manufacturers, Ltd.
("Astra"). Astra is an Israeli diamond wholesaler that supplied diamonds to
Cosmopolitan; International is a joint venture formed by Cosmopolitan and Astra
to sell high quality finished diamond jewelry in the United States. The amended
complaint, consolidated with the Capital Factors action described above (the
"consolidated Capital Factors actions"), alleges that the Company, along with
other jewelry retailers and business affiliates of Cosmopolitan, participated in
Cosmopolitan's fraudulent scheme to defraud Capital Factors, and thus injured
International and Astra. The complaint asserts claims under common law and RICO,
seeking aggregate damages from all of the defendants, including the Company, of
$6,800,000, plus interest and fees. Damages awarded pursuant to claims under
RICO, as well as interest on such damages, are subject to trebling, within the
discretion of the court. In addition, the complaint alleges claims against the
Company for breach of contract for approximately $2,520,000 in goods delivered
and invoiced to the Company, for which International has not received payment.
In connection with the consolidated Capital Factors actions in New York
state court, the Company has filed an interpleader action for declaratory
relief, asking the Court to determine the proper parties to whom the Company
must pay amounts and deliver goods that are not in dispute related to goods
received from Cosmopolitan and certain other entities. In its answer to
39
the interpleader, Capital Factors has asserted that Whitehall owes Cosmopolitan
$8,600,000 in accounts receivable on invoices assigned to Capital Factors. This
amount may be included in the $30,000,000 of losses that Capital Factors seeks
in its RICO claims, although the Company is not certain at this time. The
Company is not currently aware of any accounts payable due and owing to any of
the claimants in this action that are not already reflected in the Company's
accounts payable and accrued liabilities.
In these consolidated Capital Factors actions, no depositions have been
taken and the Company has not answered either the Capital Factors complaint or
the amended International complaint. The Company intends to defend these
lawsuits vigorously.
The United States Attorney for the Eastern District of New York is
conducting a criminal investigation regarding matters that include those alleged
in the consolidated Capital Factors actions. The Company, among others, is a
subject of such criminal investigation and is cooperating fully with the United
States Attorney.
In addition, subsequent to the filing of the complaint by Capital
Factors and as previously disclosed, the SEC initiated an informal inquiry into
matters that are the subject of the consolidated Capital Factors actions. On
November 3, 2003, the Company received a subpoena issued by the SEC as a part of
a formal investigation by the SEC with respect to such matters. In connection
with this formal investigation, the SEC has requested that the Company produce
certain additional documents relating to the matters that are the subject of the
consolidated Capital Factors actions. The Company is cooperating fully with the
SEC in connection with this formal investigation.
As previously announced, the Company has conducted an internal
investigation in connection with the consolidated Capital Factors actions and
the related investigations by the United States Attorney for the Eastern
District of New York and the SEC. As a result of this internal investigation, as
previously announced, the Company terminated the employment of its Chief
Financial Officer who had been on leave.
Because these matters are still in their early stages, the Company is
unable at this time to predict the outcome of this contingency or the potential
exposure associated with the consolidated Capital Factors actions or the United
States Attorney and SEC investigations or to estimate the impact of this
reasonably possible contingent liability on the Company's results of operations,
financial condition or liquidity. Given the amounts sought in the consolidated
Capital Factors actions, and the inherent unpredictability of litigation, an
adverse outcome in these actions could have a material adverse effect on the
Company's results of operations, financial condition or liquidity, as further
described below.
On October 29, 2003, the Company entered into a letter agreement with
its lenders which clarified and supplements the existing provisions of the
Second Amended and Restated Revolving Credit, Term Loan and Gold Consignment
Agreement dated July 29, 2003 (the "Second Amended and Restated Credit
Agreement") with respect to the consolidated Capital Factors actions, the SEC
investigation and the investigation by the United States Attorney. Pursuant to
the letter agreement, the lenders under the Second Amended and Restated Credit
Agreement have reserved their rights to determine that the consolidated Capital
Factors actions, the SEC inquiry or the United States Attorney's investigation
constitutes a breach of the Second Amended and Restated Credit Agreement. If the
required lenders were to make such a determination, they would have the right to
declare an event of default and cease funding
40
under the revolving loan facility under the Second Amended and Restated Credit
Agreement, among other things. If the existing lenders were to cease funding
under the revolving loan facility, the Company would be required to seek new
financing. There is no assurance that new financing would be available on
acceptable terms or at all. If the existing lenders were to cease funding under
the revolving loan facility and if the Company were not able to arrange new
financing on acceptable terms, this would have a material adverse effect on the
Company, which could affect the underlying valuation of assets and liabilities.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern and do not include any adjustments that
might result from the occurrence of the previously mentioned uncertainties.
In the course of the Company's internal investigation, as previously
announced, the Company discovered that its Executive Vice President,
Merchandising, violated a Company policy with respect to Company documentation
regarding the age of certain store inventory. Following that discovery, the
Company placed the executive on leave pending further investigation. Since then,
the Company discovered additional irregularities with respect to the
classification of inventory for the year ending January 31, 2001 and for the
quarter ending April 30, 2001, and for certain prior periods. These
irregularities resulted in inventory and accounts payable being equally
understated by approximately $6,300,000 for the period ending January 31, 2001
and approximately $2,500,000 for the period ending April 30, 2001. Such
irregularities had no effect on the Company's balance sheet for any subsequent
periods, including the years ending January 31, 2003 and January 31, 2002. The
matters referred to above did not have any income statement effects. As a result
of these matters, the Company terminated the employment of its Executive Vice
President, Merchandising.
41
Report of Independent Accountants
To the Board of Directors and Shareholders of Whitehall Jewellers, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, shareholders' equity, and cash flow, present fairly,
in all material respects, the financial position of Whitehall Jewellers, Inc.
(the "Company") at January 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended January 31,
2003, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 9 to the financial statements, effective February
1, 2002, the Company adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets. Additionally, as described in Note 2
to the financial statements, the Company changed its method of recognizing
revenue for layaway sales during the year ended January 31, 2001.
As discussed in Note 19, the financial statements at January 31, 2003
and 2002 and for the three years in the period ended January 31, 2003 have been
restated for certain merchandise inventory valuation adjustments.
Chicago, Illinois
March 4, 2003, except for Note 22
as to which the date is April 29, 2003
and Note 19 as to which the date
is December 22, 2003
42
ITEM 14. CONTROLS AND PROCEDURES.
The Company's management, with the participation of our Chief Executive
Officer and our Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended). Based upon this evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of January 31, 2003 to
provide reasonable assurance that information required to be disclosed by the
Company in reports filed or submitted under the Securities Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported, within the time
periods specified in the SEC's rules and forms. There were no changes in the
Company's internal control over financial reporting that occurred during the
Company's fiscal quarter ended January 31, 2003 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
As previously reported in the Company's Form 10-Q for the quarterly
period ended October 31, 2003, in the course of performing its review of the
interim financial statements of the Company for the period ended October 31,
2003, PricewaterhouseCoopers advised the Company's audit committee and
management that the Company had internal control deficiencies in its cash
disbursements and merchandise areas that PricewaterhouseCoopers considered
collectively to be a "material weakness" under standards established by the
American Institute of Certified Public Accountants. These deficiencies had no
impact on the Company's results of operations or financial condition for and as
of the fiscal year ended January 31, 2003. During the third quarter of 2003, the
Company (1) implemented a policy requiring that each check disbursement be
accompanied by a remittance advice identifying the invoices and credit memos
covered by such disbursement and (2) formally adopted and internally promulgated
a policy detailing procedures for accounts payable disbursements.
Following the end of the third quarter of 2003, the Company has already
or will shortly undertake a number of additional measures in respect of its
internal control over financial reporting. Among these measures, the Company:
(1) commenced a search for an internal audit director, who will report directly
to the audit committee of the Board of Directors; (2) is in the process of
instituting a compliance program, as part of which the Company has adopted a
Code of Business Conduct and Ethics and has appointed a Chief Corporate
Compliance Officer; (3) implemented improvements in the process by which monthly
statements from vendors of outstanding invoices and credits are reconciled to
the Company's records; and (4) implemented additional procedures for approving
purchases by the Company of items previously provided to the Company on
consignment.
43
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are filed as part of this report:
Statements of Operations of the Company for the years ended January 31,
2003, 2002, and 2001. Page 16
Balance Sheets of the Company as of January 31, 2003 and 2002. Page 17
Statements of Stockholders' Equity of the Company for the years ended
January 31, 2003, 2002, and 2001. Page 18
Statements of Cash Flows of the Company for the years ended January 31,
2003, 2002 and 2001. Page 19
Notes to Financial Statements. Pages 20-41
Report of Independent Public Accountants. Page 42
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts Page 53
Report of Independent Public Accountants on Financial Statement
Schedule Page 54
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and
therefore have been omitted.
(a)(3) Exhibits
Exhibits marked with an asterisk (*) are incorporated by reference to
documents previously filed by the Company with the Securities and Exchange
Commission, as indicated. All other documents listed are filed with this Report.
EXHIBIT NO. DESCRIPTION
- -----------
*3.1 Second Restated Certificate of Incorporation of the Company.
Incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the period ended April 30,
2002, file No. 0-028176.
44
*3.2 Amended and Restated By-Laws of the Company. Incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999, file No.
0-028176.
*4.1 Amended and Restated Stockholders Rights Plan. Incorporated by
reference to Exhibit 99.2 of the Company's Registration Statement
as amended on Form 8-A/A and filed with the Securities and
Exchange Commission on April 28, 1999, file No. 0-028176.
*4.2 Certificate of Designations of Series A Junior Participating
Preferred Stock. Incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-1, as amended,
originally filed on February 29, 1996 (Registration No.
333-1794).
*4.3 Indenture governing the Notes dated as of April 15, 1996 between
the Company and Norwest Bank Minnesota, National Association, as
Trustee (the "Indenture"). Incorporated by reference to Exhibit
4.3 of the Company's Registration Statement on Form S-1
originally filed with the Securities and Exchange Commission on
May 17, 1996 (Registration No. 333-04043).
*4.4 Form of Series C Notes (included in Exhibit 4.3 to this Form
10-K). Incorporated by reference to Exhibit 4.6 of the Company's
Registration Statement on Form S-1 originally filed with the
Securities and Exchange Commission on May 17, 1996 (Registration
No. 333-04043).
*4.5 Form of Series D Notes (included in Exhibit 4.3 to this Form
10-K). Incorporated by reference to Exhibit 4.7 of the Company's
Registration Statement on Form S-1 originally filed with the
Securities and Exchange Commission on May 17, 1996 (Registration
No. 333-04043).
*4.6 First Supplemental Indenture to Indenture. Incorporated by
reference to Exhibit 4.4 of the Company's Registration Statement
on Form S-1 originally filed with the Securities and Exchange
Commission on May 17, 1996 (Registration No. 333-04043).
*4.7 Second Supplemental Indenture to Indenture. Incorporated by
reference to Exhibit 4.7 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1998, file No.
0-028176.
45
*10.1 Second Amended and Restated Registration Agreement. Incorporated
by reference to Exhibit 10.1 of the Company's Registration
Statement on Form S-1 originally filed with the Securities and
Exchange Commission on May 17, 1996 (Registration No. 333-04043).
*10.2 Letter Agreements re: Incentive Stock Option dated September 28,
1995 between the Company and each of Hugh M. Patinkin, John R.
Desjardins and Matthew M. Patinkin, respectively. Incorporated by
reference to Exhibit 10.2 of the Company's Registration Statement
on Form S-1, as amended, originally filed on February 29, 1996
(Registration No. 333-1794).(1)
*10.3 Letter Agreements re: Restricted Stock Awards dated September 28,
1995 between the Company and each of Hugh M. Patinkin, John R.
Desjardins and Matthew M. Patinkin. Incorporated by reference to
Exhibit 10.3 of the Company's Registration Statement on Form S-1,
as amended, originally filed on February 29, 1996 (Registration
No. 333-1794). (1)
*10.4 Letter Agreements re: Incentive Compensation dated September 28,
1995 between the Company and each of Hugh M. Patinkin, John R.
Desjardins and Matthew M. Patinkin. Incorporated by reference to
Exhibit 10.4 of the Company's Registration Statement on Form S-1,
as amended, originally filed on February 29, 1996 (Registration
No. 333-1794). (1)
*10.5 Company's 1995 Executive Incentive Stock Option Plan.
Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form S-1, as amended, originally filed
on February 29, 1996 (Registration No. 333-1794). (1)
*10.6 Letter Agreement re: Incentive Stock Option between the Company
and Lynn D. Eisenheim. Incorporated by reference to Exhibit 10.6
of the Company's Registration Statement on Form S-1, as amended,
originally filed on February 29, 1996 (Registration No.
333-1794).(1)
*10.7 1996 Long-Term Incentive Plan, as amended. Incorporated by
reference to Exhibit 10.7 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, file No.
0-028176.(1)
*10.8 Lease dated May 14, 1992 between the Company and New York Life
Insurance Company relating to the Company's corporate
headquarters. Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1, as amended,
originally filed on February 29, 1996 (Registration No.
333-1794).
46
*10.9 ESOP Restructuring Agreement, dated as of March 29, 1996, between
the Company and the Whitehall Jewellers, Inc. Employee Stock
Ownership Trust. Incorporated by reference to Exhibit 10.12 of
the Company's Registration Statement on Form S-1 originally filed
with the Securities and Exchange Commission on May 17, 1996
(Registration No. 333-04043).
*10.10 Amended and Restated Employee Stock Ownership Plan. Incorporated
herein by reference to Exhibit 10.15 of the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 1997,
file No. 0-028176.
*10.11 Form of Executive Severance Agreements, as amended, each dated
May 7, 1996, between the Company and each of Hugh M. Patinkin,
John R. Desjardins and Matthew M. Patinkin. Incorporated by
reference to Exhibit 10.3 of the Company's Registration Statement
on Form S-3 as originally filed with the Securities and Exchange
Commission on January 27, 2000 (Registration No. 333-95465).(1)
*10.12 Employment and Severance Agreement dated March 17, 1997 between
the Company and Manny A. Brown. Incorporated by reference to
Exhibit 10.22 filed with the Company's Annual Report on Form 10-K
for the fiscal year ended January 31, 1999, file No. 0-028176.(1)
*10.13 Employment and Severance Agreement, dated as of January 24, 2000,
between the Company and Jon H. Browne. Incorporated by reference
to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q
for the period ended July 31, 2000, file No. 0-028176.(1)
*10.14 Executive Severance Agreement dated November 1, 2000, between the
Company, WH Inc. of Illinois, a wholly owned subsidiary of the
Company, and Lynn D. Eisenheim. Incorporated by reference to
Exhibit 10.14 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2001, file No. 0-028176.(1)
*10.15 1997 Long-Term Incentive Plan, as amended. Incorporated by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the period ended April 30, 2002, File No. 0-028176
*10.16 Form of Stock Option Agreement for Employees under the 1997
Long-Term Incentive Plan. Incorporated by reference to Exhibit
10.16 of the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 2001, file No. 0-028176. (1)
47
*10.17 Performance Based Incentive Stock Option Agreements, each dated
March 18, 1999 and June 8, 1999, with each of Hugh M. Patinkin,
Matthew M. Patinkin, John R. Desjardins, Manny A. Brown and Lynn
D. Eisenheim, under the 1997 Long-Term Incentive Plan.
Incorporated by reference to Exhibit 10.17 of the Company's
Annual Report on Form 10-K for the fiscal year ended January 31,
2001, file No. 0-028176. (1)
*10.18 Incentive Stock Option Agreement, dated as of January 24, 2000,
between the Company and Jon H. Browne. Incorporated by reference
to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q
for the period ended July 31, 2000, file No. 0-028176.(1)
*10.19 Form of Non-Qualified Stock Option Agreement under the 1997
Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, file No.
0-028176. (1)
*10.20 Form of Restricted Stock Award Agreement for Executive Officers
under the 1997 Long-Term Incentive Plan. Incorporated by
reference to Exhibit 10.20 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, file No.
0-028176.(1)
*10.21 Form of Restricted Stock Award Agreement for Non-Employee
Directors under the 1997 Long-Term Incentive Plan. Incorporated
by reference to Exhibit 10.21 of the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2001, file No.
0-028176. (1)
*10.22 1998 Non-Employee Directors Stock Option Plan. Incorporated by
reference to Exhibit 99.1 of the Company's Registration Statement
on Form S-8 filed with the Securities and Exchange Commission on
April 15, 1998 (Registration No. 333-50159). (1)
*10.23 Amendment Number One to the 1998 Non-Employee Directors Stock
Option Plan. Incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1999, file No. 0-028176.(1)
*10.24 Form of Non-Qualified Stock Option Agreement under the 1998
Non-Employee Director Stock Option Plan. Incorporated by
reference to Exhibit 10.24 of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 2001, file No.
0-028176. (1)
*10.25 Asset Purchase Agreement dated as of June 19, 1998 by and among
Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.),
Carlyle & Co. Jewelers, Carlyle & Co. of Montgomery and J.E.
Caldwell Co. Incorporated by reference to Exhibit 2.2 of the
Company's Current Report on Form 8-K dated September 10, 1998 and
filed with the Securities and Exchange Commission on September
22, 1998, file No. 0-028176.
48
*10.26 Amended and Restated Revolving Credit, Term Loan and Gold
Consignment Agreement dated as of September 10, 1998 by and among
Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.) the
Banks (as defined therein), BankBoston, N.A. as Agents for the
Banks, and LaSalle National Bank and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.2
of the Company's Quarterly Report on Form 10-Q for the period
ended October 31, 1998, file No. 0-028176.
*10.27 First Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of November 17,
1998, by and among Whitehall Jewellers, Inc., the Banks (as
defined therein), BankBoston, N.A. as Agents for the Banks, and
LaSalle National Bank and ABN AMRO Bank, N.V. as Agents for the
Banks. Incorporated by reference to Exhibit 10.17 of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1999, file No. 0-028176.
*10.28 Second Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of October 5, 1999,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), BankBoston, N.A. as Agents for the Banks, and LaSalle
Bank National Association and ABN AMRO Bank, N.V. as Agents for
the Banks. Incorporated by reference to Exhibit 10.3 of the
Company's Quarterly Report on Form 10-Q for the period ended July
31, 2000, file No. 0-028176.
*10.29 Third Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of February 9, 2000,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), BankBoston, N.A. as Agents for the Banks, and LaSalle
Bank National Association and ABN AMRO Bank, N.V. as Agents for
the Banks. Incorporated by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the period ended July
31, 2000, file No. 0-028176.
*10.30 Fourth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of June 26, 2000, by
and among Whitehall Jewellers, Inc., the Banks (as defined
therein), BankBoston, N.A. as Agents for the Banks, and LaSalle
Bank National Association and ABN AMRO Bank, N.V. as Agents for
the Banks. Incorporated by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the period ended July
31, 2000, file No. 0-028176.
49
*10.31 Fifth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of August 18, 2000,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), BankBoston, N.A. as Agents for the Banks, and LaSalle
Bank National Association and ABN AMRO Bank, N.V. as Agents for
the Banks. Incorporated by reference to Exhibit 10.6 of the
Company's Quarterly Report on Form 10-Q for the period ended July
31, 2000, file No. 0-028176.
*10.32 Waiver and Sixth Amendment to Amended and Restated Revolving
Credit, Term Loan and Gold Consignment Agreement dated as of
November 16, 2000, by and among Whitehall Jewellers, Inc., the
Banks (as defined therein), Fleet Capital Corporation as Agents
for the Banks, and LaSalle Bank National Association and ABN AMRO
Bank, N.V. as Agents for the Banks. Incorporated by reference to
Exhibit 10.32 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2001, file No. 0-028176.
*10.33 Seventh Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of January 31, 2001,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), Fleet Capital Corporation as Agents for the Banks, and
LaSalle Bank National Association and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.33
of the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 2001, file No. 0-028176.
*10.34 Eighth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of April 27, 2001,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), Fleet Capital Corporation as Agents for the Banks, and
LaSalle Bank National Association and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the period
ended April 30, 2001, file No. 0-028176.
*10.35 Ninth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of October 31, 2001,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), Fleet Capital Corporation as Agents for the Banks, and
LaSalle Bank National Association and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the period
ended October 31, 2001, file No. 0-028176.
*10.36 Tenth Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of June 30, 2002, by
and among Whitehall Jewellers, Inc., the Banks (as defined
therein), Fleet Capital Corporation as Agents for the Banks, and
LaSalle Bank National Association and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-Q for the period
ended July 31, 2002, file No. 0-028176.
50
*10.37 Eleventh Amendment to Amended and Restated Revolving Credit, Term
Loan and Gold Consignment Agreement dated as of January 31, 2003,
by and among Whitehall Jewellers, Inc., the Banks (as defined
therein), Fleet Capital Corporation as Agents for the Banks, and
LaSalle Bank National Association and ABN AMRO Bank, N.V. as
Agents for the Banks. Incorporated by reference to Exhibit 10.37
of the Company's Annual Report on Form 10-K for the fiscal year
ended January 31, 2003, file No. 0-028176.
*10.38 401(k) Plan. Incorporated by reference to Exhibit 10.17 of the
Company's Annual Report on Form 10-K for the fiscal year ended
January 31, 1998, file No. 0-028176. (1)
*10.39 Second Amendment to 401(k) Plan. Incorporated by reference to
Exhibit 10.19 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1999, file No. 0-028176. (1) (2)
*10.40 Third Amendment to 401(k) Plan. Incorporated by reference to
Exhibit 10.20 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1999, file No. 0-028176. (1)
*10.41 Fourth Amendment to 401(k) Plan. Incorporated by reference to
Exhibit 10.21 of the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 1999, file No. 0-028176. (1)
*10.42 Whitehall Jewellers, Inc. Employee Stock Purchase Plan.
Incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8 filed with the Securities and
Exchange Commission on September 28, 2001 (Registration No.
333-70510). (1)
*13 2002 Annual Report
*21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
*24 Powers of Attorney (included on previously filed signature page)
31.1 Certificate Pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934.
31.2 Certificate Pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934.
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------------
51
(1) Represents management contract or compensatory plan or arrangement.
(2) There is no First Amendment to 401(k) Plan.
(b) Reports on Form 8-K
None
52
WHITEHALL JEWELLERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED JANUARY 31, 2001, 2002 AND 2003
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------- --------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END
DESCRIPTION PERIOD EXPENSES DEDUCTION OF PERIOD
- --------------------------- ------------ ---------- --------- ----------
Twelve months ended 1/31/01
Allowance for doubtful
accounts................. $ 720 $ 1,325 $ 573 $ 1,472
====== ======== ======= =======
Inventory allowance...... 3,517 10,503 10,493 3,527
====== ======== ======= =======
Twelve months ended 1/31/02
Allowance for doubtful
accounts $1,472 $ 577 $ 1,376 $ 673
====== ======== ======= =======
Inventory allowance 3,527 7,475 7,423 3,579
====== ======== ======= =======
Twelve months ended 1/31/03
Allowance for doubtful
accounts $ 673 $ 1,686 $ 1,815 $ 544
====== ======== ======= =======
Inventory allowance 3,579 7,480 7,492 3,567
====== ======== ======= =======
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Whitehall Jewellers, Inc.:
Our audits of the financial statements referred to in our report dated March 4,
2003 (except for Note 22 as to which the date is April 29, 2003 and Note 19 as
to which the date is December 22, 2003), appearing on Page 42 of this report on
Form 10-K/A of Whitehall Jewellers, Inc. also included an audit of the Financial
Statement Schedule listed in Item 15(a)(2) of this Form 10-K/A. In our opinion,
this Financial Statement Schedule presents fairly, in all material respects, the
information set forth herein when read in conjunction with the related financial
statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 4, 2003, except for Note 22 as to which the date is April 29, 2003 and
Note 19 as to which the date is December 22, 2003.
54
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, this Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: January 21, 2004 WHITEHALL JEWELLERS, INC.
(Registrant)
By: /s/ John R. Desjardins
--------------------------------------------------
John R. Desjardins
Executive Vice President, Chief Financial Officer,
Treasurer, Secretary and Director
(Principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 21st day of January, 2004.
Name Capacity
- ---------------------------- -----------------------------------------------
/s/ Hugh M. Patinkin Chairman, President and Chief Executive Officer
____________________________ (principal executive officer) and Director
Hugh M. Patinkin
* Executive Vice President and Director
____________________________
Matthew M. Patinkin
* Director
____________________________
Richard K. Berkowitz
* Director
____________________________
Daniel H. Levy
* Director
____________________________
Norman J. Patinkin
* Director
____________________________
Sanford Shkolnik
/s/ John R. Desjardins Executive Vice President, Chief Financial
____________________________ Officer, Treasurer, Secretary and Director
(Principal financial and accounting officer)
* By: /s/ John R. Desjardins Attorney-in-fact
____________________________
John R. Desjardins