UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL REPORT AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended January 31, 2004
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. Yes [ ] No [X]
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, 2003 was $169,315,283 based on the closing
price of $11.90 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 1, 2004:
13,921,518
Number of shares of Class B Common Stock outstanding as of April 1,
2004: 142
DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part IV -- Portions of the registrant's annual report to
stockholders for the registrant's fiscal year ended January 31, 2004 (the "2003
Annual Report"), as indicated herein.
Part III -- Portions of the registrant's definitive proxy statement to be
distributed in conjunction with the registrant's annual stockholders' meeting to
be held in 2004 (the "Proxy Statement"), as indicated herein.
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," "may," "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 Securities
and Exchange Commission ("SEC") and U.S. Attorney's office investigations and
shareholder and other civil litigation, 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.
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ITEM 1. BUSINESS
THE COMPANY
Founded in 1895, we are a leading national specialty retailer
of fine jewelry (based on number of stores) offering an in-depth selection in
the following categories of merchandise: diamond, gold, precious and
semi-precious jewelry and watches. Our target customers are middle to
upper-middle income men and women over 25 years of age. As of April 1, 2004, we
operated 384 mall-based stores in 38 states under the established brand names of
Whitehall Co. Jewellers (325 stores), Lundstrom Jewelers (57 stores) and Marks
Bros. Jewelers (2 stores).
OPERATING STRATEGIES
The principal elements of our operating strategy are as
follows:
Small, Flexible Store Format. We believe that we have a
competitive advantage in obtaining high traffic, "center court" locations in
desirable regional and super-regional malls principally due to:
- our ability to adapt our average store size of approximately
870 square feet to various sizes and configurations; and
- our high average sales per square foot (approximately $1,066
for the 12 months ended January 31, 2004).
Our stores are typically located in high visibility mall
locations and provide our customers with a comfortable and inviting shopping
environment. The stores' open, attractive design appeals to customers, while
facilitating foot traffic and enhancing sales opportunities for us. Furthermore,
the stores' small, flexible format (which lowers our fixed occupancy costs) and
high productivity are desirable to mall owners.
In addition, we follow a disciplined approach when evaluating
new store opportunities. We select locations for our stores based on an
evaluation of individual site economics and market conditions. Because of our
flexible store format and our reputation among mall developers as a strong
tenant, we have historically received more offers for attractive new store sites
than we accept. We believe that real estate is important to our business, and
site selection is a competency of our management team.
Store Operating Model. Our store model has proven to be
attractive across brands and mall locations. Historically, new stores on average
generate positive operating cash flow (defined as income from operations plus
depreciation and amortization) within their first full 12 months of operations.
Brand Imaging. We reinforce the upscale, trustworthy image of
our store brand names, Whitehall Co. Jewellers and Lundstrom Jewelers, through
merchandise selection and price points, store layout and fixtures, packaging,
marketing and promotions. Whitehall Co. Jewellers is our primary trademark and
is positioned to be somewhat more upscale than the average mall-based jewelry
store. Additionally, having two strong brands allows us to enter a given mall
with multiple locations, leverage our infrastructure within a given region and
increase the number of potential store sites available to us.
Merchandising. We offer a selection of fine jewelry in the
following categories: diamond, gold, precious and semi-precious jewelry and
watches. Our merchandise assortments are focused on our target customer, middle
to upper-middle income men and women over 25 years of age. Within these
categories, we augment our selection with consignment merchandise, providing
increased selection while reducing our inventory risk. In addition, we continue
to stock a broad assortment of higher price point merchandise. For example, in
fiscal 2003 more than 30% of our overall sales resulted from purchases of items
priced at or above $1,500. Although we have expanded our watch lines, we carry a
more focused selection of watches and virtually no costume jewelry or gift
merchandise as compared to some of our competitors.
Sales-Oriented Store Personnel. We believe that the quality of
our sales personnel is important to our success. Our sales personnel are
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authorized to discount prices within specifically developed guidelines to
assist their selling efforts. Compensation and bonus programs reinforce sales
and margin goals on a daily, weekly, monthly and annual basis. We seek to
enhance the selling skills of our sales associates through recruitment of
experienced sales personnel and ongoing training programs. Many non-sale
activities are centralized, allowing sales personnel to focus on our customers.
Absence of Recourse Credit Risk. We operate based upon a "no
credit risk" policy. When purchasing on credit, customers must use their
personal credit cards (e.g., Visa, MasterCard, American Express and others), our
private label credit card (which is available through a third party and is
non-recourse to us) or other non-recourse third party credit arrangements. Our
policy limits credit risk associated with a customer's failure to pay. Recourse
against us is limited to those cases where the receivable itself is defective
(such as incorrectly completed documentation or certain situations involving
fraud). This policy also distinguishes us from some of our competitors, which
not only bear such credit risk, but also rely on finance income in addition to
merchandise sales. In cooperation with providers of non-recourse credit under
private label programs, we often offer our customers competitive, interest-free
terms and other attractive offerings in the promotion of our jewelry.
Operating Controls. Our experienced management team exercises
significant control over many non-sale aspects of our store operations,
including site selection, purchasing, store development, financial reporting and
sales training. Management has focused on a series of actions that we feel will
increase our operational control as well as reduce certain expenses. We have
reduced certain operating costs at our stores and corporate headquarters, and we
plan to gradually reduce average store inventory levels. We closed 11 stores
during each of fiscal 2003 and fiscal 2002.
Emphasis on Risk Management. A strength of our management team
is our disciplined approach to three principal operating strategies that are
designed to mitigate risk to our business: our small, flexible store format, our
non-recourse credit policy and our use of consignment inventory. Our store
format, which averages approximately 870 square feet, is smaller than that of
many of our mall-based competitors. This usually means that we are not competing
with these competitors for the same location in a mall, which often gives us
more location opportunities. In general, it also means that our rents are lower,
not only because of reduced competition for space, but also because a smaller
store means lower fixed occupancy costs. Secondly, we have limited credit risk.
Unlike many of our competitors, we utilize a non-recourse, private label credit
card program. As a result, we often limit our credit risk associated with a
customer's failure to pay. Lastly, we utilize consignment inventory providing
increased selection while reducing our inventory risk.
Experienced Management Team. Our four-person executive
management team has on average 24 years of retail industry experience and an
average of over 21 years of experience with Whitehall Jewellers. In addition,
this group has a combined beneficial interest in the Company in excess of 23.9%
of our common stock. The Company is in the process of interviewing candidates
for the newly created position of Chief Operating Officer and filling the
position of Executive Vice President, Merchandising. Later this year, the
Company will begin recruiting for a General Counsel. The Company has already
hired a Director of Internal Audit, which is a newly created position that
reports directly to the Chairman of the Audit Committee of the Board of
Directors. The hiring of individuals for the new positions noted above, as well
as the upgrading of certain management positions will increase the Company's
personnel costs. We also have an experienced middle management team. We are
focused on identifying, recruiting and retaining skilled and experienced
individuals for our management organization.
GROWTH STRATEGIES
The important elements of our growth strategy are as follows:
Enhance Sales and Marketing Initiatives. We use direct
marketing and in-store promotions to stimulate store sales. We plan to continue
to maintain our customer file of over 1.1 million names with targeted direct
mailing initiatives. The Company has slightly reduced the size of its total
direct mailings during fiscal 2003 as the Company has refined its direct mail
campaign to focus its mailing selection criteria on the most responsive
customers. We intend to continue to refine the direct mail program in fiscal
2004.
4
Refine Merchandising Initiatives. We continue to refine our
product offerings with the long-term goal of increasing the number of customer
transactions and the average transaction value per customer. We intend to
continue to apply these practices by adjusting the quality, selection and price
points in our key merchandise categories: diamonds, gold, precious and
semi-precious jewelry and watches.
New Store Growth. New stores are a part of our long-term
growth plan. As of January 31, 2004, we have grown to 380 stores from 122 in
1993, entering 15 new states during this period. During fiscal 2003, we opened
21 new stores. The initial performance of these new stores closely approximated
our recent historical new store sales levels. During fiscal 2004, we expect to
open 6 new stores, most in existing Company markets, and anticipate that all of
the openings will be completed by June. Our new stores are in what we consider
to be some of the better malls in the country. We believe that our Whitehall
Jewellers and Lundstrom Jewelers stores can achieve strong, long-term cash
returns on investment and can operate successfully in a wide variety of
geographic and demographic markets. Because of this, we believe that there is
the potential to double our store base over the long-term within the United
States.
STORE OPERATIONS
Site Selection. We are disciplined in our site selection
methodology. Our stores average approximately 870 square feet and our layout is
flexible. We typically locate our stores in high traffic, "center court"
locations in desirable regional and super-regional malls throughout the United
States. We select locations for stores based on our evaluation of individual
site economics and market conditions. When deciding to enter a new market, we
evaluate a number of criteria including the following:
- current and future size, demographic make-up and growth
potential of the market;
- total store sales potential;
- ability to leverage existing infrastructure, personnel and
brand awareness; and
- the size, strength and merchandising philosophy of existing
and potential competitors in the marketplace.
In choosing specific sites within a given mall, whether in a
new or existing market, we apply site selection criteria taking into account
numerous factors, including the following:
- size of space;
- store visibility;
- traffic patterns;
- real estate costs;
- store locations of our competitors; and
- overall retail potential.
Store Layout. Our stores are typically located in high
traffic, "center court" locations and provide our customers with a comfortable
and inviting shopping environment. Most of the stores have an open entrance.
Stores are brightly lit and generally are designed to have display cases
situated near the lease line. Formatting the stores in this "customer-friendly"
manner and without a formal entryway allows a casual mall shopper to come in
close contact with the store's merchandise and personnel without the natural
apprehension many have upon entering a fine jewelry store. We occasionally
adjust our store concepts to blend an appropriate theme of elegance, with a goal
of creating a "customer-friendly" environment.
Store Management. Each of our stores is operated under the
direction of a store manager who is responsible for management of all
store-level operations, including sales and most personnel matters. A
5
number of non-sales related administrative functions are performed at our
corporate office in Chicago. A significant portion of the compensation of store
managers is based on incentives which focus on sales productivity and store
profitability. The store managers are assisted by a staff that usually includes
an assistant manager and four to eight sales associates, depending upon store
operating hours and anticipated sales volume. We have approximately 36 district
managers, each supervising between 8 and 14 stores, who concentrate their
efforts on store-focused sales strategies. In addition, 8 regional supervisors
oversee all field operations and concentrate their efforts on the execution of
store-focused sales strategies, communication between the corporate office and
field, and compliance with operating strategies. Certain senior officers spend a
substantial amount of their time working with store supervisors and visiting
stores to reinforce the close communication between senior executives and store
personnel.
Operating Cost Controls. Our store operations are designed to
maintain low operating costs at the store level. Our small average store size
reduces fixed costs, and the lack of recourse credit eliminates the need for
most overhead expenses normally associated with credit operations. We also seek
to reduce store-level operating costs through efficient sales staff utilization.
To assist store personnel in their selling efforts, a number of administrative
functions are performed at the corporate level.
Store Employee Compensation. We seek to hire experienced sales
personnel and motivate our store employees by linking a meaningful percentage of
employee compensation to individual and/or store sales performance, as well as
by offering opportunities for promotion within the Company.
Employee Training. We believe that providing knowledgeable and
responsive customer service is important to our success and, accordingly, have
developed and implemented employee training programs. New sales staff receive
on-the-job training during the first weeks of employment. This training
continues throughout the employee's tenure following a workbook-based program of
product knowledge, sales and operational process training. New store managers
experience a similar sequence of learning activities.
MERCHANDISING
We believe that an important element of our success is our
merchandising strategy that reflects our upscale customer orientation and small
store format. We seek to provide an assortment of items across a broad range of
price points in our product categories: diamonds (such as diamond jewelry,
diamond solitaires and bridal), gold, precious and semi-precious jewelry and
watches. Although we have expanded our watch lines, we carry a more focused
selection of watches and virtually no costume jewelry or gift merchandise as
compared to some of our competitors.
On average, our stores each offer approximately 2,700
individual items, including approximately 1,450 core jewelry items. These core
items, which comprise many of our more popular merchandise programs, accounted
for approximately 63% of net sales in fiscal 2003. In addition, we have expanded
our merchandise assortment in higher price points. A substantial portion of our
sales are made at prices discounted from listed reference prices. The
methodology for achieving these discounts is monitored on an on-going basis.
The following table sets forth our percentage of total
merchandise sales by category for the following periods:
FISCAL YEAR ENDED JANUARY 31,
-----------------------------------------
2001 2002 2003 2004
Diamonds 62.6% 64.6% 66.4% 65.2%
Gold 19.5 18.6 17.4 15.7
Precious/Semi-Precious 16.5 15.3 14.2 14.6
Watches 1.4 1.5 2.0 4.5
-----------------------------------------
Total Merchandise Sales 100.0% 100.0% 100.0% 100.0%
=========================================
We also customize the merchandising of our stores based upon
each store's sales volume, individual market preferences and historical selling
patterns. We test new items in our stores and monitor their sales performance to
identify additional sales opportunities.
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Along with our merchandise assortments, we also provide
jewelry repair services to our customers (sales from which represented 2.4% of
fiscal 2003 net sales) and jewelry service plans (sales from which represented
2.4% of fiscal 2003 net sales). In some of our stores, repair work is performed
on-site by jewelers under independent contract.
ADVERTISING AND PROMOTIONS
Our advertising strategy includes in-store and point-of-sale
marketing and direct mail campaigns. We believe that the quality of our customer
database, which currently consists of over 1.1 million customers, has allowed us
to develop targeted advertising, marketing and promotional campaigns. We test
various direct mail campaigns as part of our advertising initiatives. Frequent
special promotions such as our semi-annual two-day events, diamond remount
events, "Vice President's Day Events" and similar promotions, as well as
point-of-sale signage and in-store flyers, are designed to increase traffic
through our stores and generate an urgency for customers to make purchases.
These promotions vary from year to year and among stores. Publicized promotional
events are an important part of our marketing efforts, and we generate a
significant portion of our revenues during such events.
Over the past several years, direct marketing has become an
increasingly important element of our advertising and promotion strategy. We
intend to continue to refine direct mail programs in fiscal 2004.
We generally offer customers a 30-day return or 90-day
exchange policy.
We also offer a layaway program that enables our customers to
hold an item at our stores and pay for it over a one-year period without
interest charges. The customer is required to make an initial deposit to
establish the layaway and is required to make monthly payments. We retain
possession of merchandise placed in layaway until the customer has made all
required payments.
CREDIT
We operate based upon a "no credit risk" policy. When
purchasing on credit, customers must use their personal credit cards (e.g.,
Visa, MasterCard, American Express and others), our private label credit card,
which is available through a third party and is non-recourse to us, or other
non-recourse third party credit arrangements. Our policy limits credit risk
associated with a customer's failure to pay. Recourse against us is restricted
to those cases where the receivable itself is defective (such as incorrectly
completed documentation or certain situations involving fraud.) At the same
time, we believe that our ability to offer credit through our "private label"
credit cards and other non-recourse arrangements is attractive to many
customers, including those who prefer not to have their jewelry purchases count
towards their credit limits on their personal third party credit cards. We
encourage sales on our private label credit card or other non-recourse third
party credit arrangements because customer purchases on this type of credit tend
to generate higher average sales. In fiscal 2003, our average private label
credit sale was approximately $782, compared to our average personal credit card
sale of approximately $251.
Our private label credit program is currently run through G.E.
Capital Consumer Card Co. ("G.E.CC"). We also offer other non-recourse credit
arrangements through other third parties. Under these programs customers may
apply for credit for merchandise purchases.
Our credit strategy and our focus on a more upscale clientele
are interrelated. A substantial portion of the users of private label credit
offered by many jewelers tend to be customers with more limited financial
resources or a weaker credit history. In contrast, our adherence to a "no credit
risk" policy limits our sales to such individuals. Thus, we have historically
oriented our merchandising programs to appeal to a more affluent, less
credit-reliant consumer.
Under the credit programs, the credit purveyors have no
recourse against us based on the customer's failure to pay; recourse against us
is limited to those cases where the receivable itself is defective (such as
incorrectly completed documentation or certain situations involving fraud). Our
expense related to these cases was less than 0.5% of sales during fiscal 2003.
Our credit card discount expense for fiscal 2003 and fiscal 2002 represented
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3.0% and 2.9%, respectively, of credit sales. In general, our credit card
discount expense is higher for our private label programs than for personal
credit cards, such as Visa and MasterCard. G.E.CC provides credit to our
customers using its own credit criteria and policies. We pay a fee to G.E.CC
based primarily upon the volume of credit, average ticket and type of promotion
extended. We have similar non-recourse arrangements with other credit purveyors,
which we use in addition to G.E.CC's program to assist customers in financing
their purchases. In addition, we utilize a check authorization company which,
for a fee, guarantees payments on transactions involving certain personal
checks.
Several years ago, we introduced a "One-Year No Interest"
program through G.E.CC. Under this program, G.E.CC offers customers a financing
arrangement with no interest for one year, for which we pay G.E.CC a
significantly higher fee than we pay under its standard program. We have
successfully used this program and continue to offer this and other
interest-free promotions (e.g., three-month no interest, six-month no interest)
from time to time. This program enables us to offer our customers competitive,
interest-free terms and other attractive promotions despite our "no credit risk"
policy.
During the third quarter of fiscal 2003, the Company began
testing a new program through G.E.CC, which extends minimum credit limits to
certain credit customers that meet the specific requirements of this new test
program. Under this new test program, G.E.CC extends credit to customers that
did not qualify under the standard program, for which we pay a significantly
higher fee to G.E.CC than we pay under its standard program.
SEASONALITY
Our business is highly seasonal. During fiscal 2003, a
significant portion of our sales, and net income of $4.3 million, was generated
during the fourth fiscal quarter ending January 31, 2004, as compared to a net
loss of $13.0 million experienced in the previous three quarters. 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.
PURCHASING
We do not manufacture our merchandise. We purchase
substantially all of our inventory, including loose gems, directly from leading
suppliers located in the United States and abroad. We purchase merchandise from
approximately 120 vendors, primarily in the United States, Israel, Italy, India,
China, and the Far East, who supply various jewelry products under U.S.
dollar-denominated agreements. During fiscal 2003, our largest supplier and five
largest suppliers accounted for approximately 11% and 46%, respectively, of the
merchandise we purchased. During fiscal 2002, our largest supplier and five
largest suppliers accounted for approximately 12% and 37%, respectively, of the
merchandise we purchased. We also have certain subcontracting arrangements with
jewelry finishers to set loose diamonds and gemstones into rings and other
jewelry, using styles established by us or by other companies. We believe that
the relationships we have established with our suppliers and subcontractors are
good. We have not experienced difficulty in obtaining satisfactory sources of
supply and believe that adequate alternative sources of supply exist for
substantially all types of merchandise sold in our stores. However, the loss of
one or more of our major suppliers, particularly at certain critical times
during the year, could have a material adverse effect on us.
We maintain a quality assurance program, with most shipments
from suppliers being counted or weighed and visually inspected upon receipt at
our headquarters in Chicago, Illinois.
During fiscal 2003, our average net monthly investment in
inventory (i.e., the total cost of inventory owned and paid for) was
approximately 57% of the total cost of our on-hand merchandise with the
remaining percentage being trade payables and consignment inventory. For
example, as of January 31, 2004, the average amount of consignment merchandise
per store was approximately $247,000. Under the terms of our vendor trading
agreements for non-consignment inventory, we are often granted exchange
privileges, based on a formula, which permit us to return or exchange certain
unsold merchandise. Our consignment inventory permits us to have more
merchandise available for sale in stores, providing increased selection while
reducing our inventory risk.
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As participants in the jewelry industry, we are affected by
general industry-wide fluctuations in the prices of diamonds and gold and, to a
lesser extent, other precious and semi-precious metals and stones. During fiscal
2003, diamonds, gold, precious and semi-precious jewelry accounted for
approximately 95.5% of our net merchandise sales. The supply and price of
diamonds in the principal world markets are significantly influenced by a single
entity, the Diamond Trading Company (formerly called the Central Selling
Organization), a marketing arm of DeBeers Consolidated Mines Ltd. of South
Africa. The Diamond Trading Company has traditionally controlled the marketing
of a majority of the world's supply of diamonds and sells rough diamonds to
worldwide diamond cutters from its London office in quantities and at prices
determined in its discretion. The Diamond Trading Company recently implemented a
"Supplier of Choice" initiative. The impact of this initiative on the diamond
supplier base is not yet known. The availability of diamonds to the Diamond
Trading Company and our suppliers is to some extent dependent on the political
situation in diamond producing countries, such as South Africa, Botswana, Zaire,
republics of the former Soviet Union and Australia, and on continuation of the
prevailing supply and marketing arrangements for raw diamonds. Until alternate
sources could be developed, any sustained interruption in the supply of diamonds
or any oversupply from the producing countries could adversely affect us and the
retail jewelry industry as a whole.
We are constantly altering the mix of our products and we have
increased the percentage of higher priced items in our stores. Higher priced
jewelry items tend to have a slower rate of turnover, thereby increasing the
risks to us associated with price fluctuations and changes in fashion trends.
INVENTORY LOSS PREVENTION
We undertake substantial efforts to safeguard our jewelry
inventory from loss and theft, including the use of security alarm systems and
safes at each store and the taking of daily inventory of higher value items. In
addition, our inventory management and control system, which tracks each item in
our inventory, provides a further check against loss or theft. We have a
full-time executive who directs our loss prevention department. We maintain
insurance (subject to certain deductibles) covering the risk of loss of
merchandise in transit, on store premises and in our distribution facility,
whether owned or on consignment, in amounts that we believe are reasonable and
adequate for the types and amounts of merchandise that we carry. During fiscal
2003, inventory shrinkage was less than 1.0% of sales.
MANAGEMENT INFORMATION SYSTEMS
We utilize customized management information systems
throughout our business to facilitate the design and implementation of selling
strategies and as an integral part of our financial and other operational
controls. Our management information system utilizes IBM AS400 systems as its
foundation. The system incorporates point-of-sale computers in our stores with a
merchandise management and purchase order management system and utilizes
software specifically designed or customized for the jewelry industry. The
information system has been upgraded to support our current needs but further
upgrading is necessary to support our growth.
We use the management information system to track each
individual item of merchandise from receipt to ultimate sale to the customer or
return to the vendor. As a result, management can closely monitor inventory by
location, sales, gross margin, inventory levels and turnover statistics,
reallocating inventory among stores when beneficial. This system also enables
management to review each store's and each employee's productivity and
performance. Based on the sales data, we tailor each store's inventory
composition and plan our purchasing requirements accordingly. The system enables
us to manage our inventory at the store level, including the automatic
replenishment of merchandise generally once or twice a week.
The system also automatically provides a daily reconciliation
of each store's transactions for prompt investigation of discrepancies. The
point-of-sale computers are polled nightly by the headquarters system and
updated data is available at the beginning of the following day for use by
support office and store supervisory personnel, and for transfer into our
accounting, merchandising and other management information systems.
We have implemented, through our point-of-sale system, the
ability to capture and retain selected customer data from each sale (name,
address, phone, birthday, anniversaries, historical purchases, etc.).
9
Our store managers and sales associates often use this data in their efforts to
contact customers and anticipate and facilitate future add-on purchases by our
customers. We use the customer data in our direct marketing promotional
campaigns. The point-of-sale systems also track required inspection dates for
customers with diamond warranties. Sales associates are prompted by the system
to contact these customers to remind them of the required in-store inspection.
COMPETITION
The jewelry retail business is fragmented and highly
competitive. We primarily compete with national and regional jewelry chains and
local independently owned jewelry stores, especially those that operate in
malls, as well as with department stores, discounters, direct mail suppliers,
televised home shopping networks and Internet commerce. Diamond Trading Company,
a marketing arm of DeBeers, has traditionally controlled the marketing of a
substantial majority of the world's supply of diamonds. Certain of our
competitors are substantially larger and have greater financial resources than
the Company and can take advantage of national advertising programs. We also
believe that we compete for consumers' discretionary spending dollars with
retailers that offer merchandise other than jewelry.
We believe that the primary competitive factors affecting our
operations are store location and atmosphere, quality of sales personnel and
service, breadth, depth and quality of merchandise offered, pricing, credit,
marketing and reputation. We emphasize our merchandise selection, sales
personnel, store location and design, credit, marketing and pricing in competing
in our target market.
In the past few years several businesses began marketing fine
jewelry via the Internet. Large scale consumer acceptance of Internet fine
jewelry retailing could transform the jewelry retailing business, result in
lower price points and margins, and adversely affect our results of operations
or financial condition. Although we initiated an e-commerce sales program in
2000, to date our e-commerce initiatives have not resulted in significant
on-line sales. We are not currently transacting Internet sales of jewelry, and
we are not currently pursuing an e-commerce strategy.
INTELLECTUAL PROPERTY
Whitehall(R) Co. Jewellers, Lundstrom(R) Jewelers and Marks
Bros.(R) Jewelers are registered trademarks in the United States. We also have
registered the Internet domain names "whitehalljewellers.com" and
"lundstromjewelers.com." Our trademarks are held by, and our licensing activity
is conducted by, WH Inc. of Illinois, a wholly owned subsidiary of Whitehall
Jewellers.
During 2002, four stores operated in Japan under the name
"Lundstrom" pursuant to a license agreement with Nihon Gold Chain Co-Operation.
The license agreement has been terminated and the right to operate using the
Lundstrom name ended January 31, 2003.
EMPLOYEES
As of January 31, 2004, we had 2,450 employees, including
2,292 store level employees. We usually hire a limited number of temporary
employees during each Christmas selling season. None of our employees are
represented by a union. We believe that our relations with our employees are
good.
REGULATION
Our operations are affected by numerous federal and state laws
that impose disclosure and other requirements upon the origination, servicing,
enforcement and advertising of credit accounts, and limitations on the maximum
amount of finance charges that may be charged by a credit provider. Although
credit to our customers is provided by third parties without recourse to us
based upon a customer's failure to pay, any restrictive change in the regulation
of credit, including the imposition of, or changes in, interest rate ceilings,
could adversely affect the cost or availability of credit to our customers and,
consequently, our results of operations or financial condition.
Our operations are also affected by federal and state laws
relating to marketing practices in the retail jewelry industry. In marketing to
our customers, we compare many of our prices to "reference prices." Our
literature indicates to customers that our reference price for an item is our
10
general determination of the non-discounted price at which comparable
merchandise of like grade or quality is advertised or offered for sale by
competitive retailers. Our literature further notes that we do not know whether
competitive retailers have actually made any sales at the reference price, and
the reference price is not our current selling price or the price at which we
formerly sold an item. We are, from time to time, subject to regulatory
investigation relating to our "reference prices" in marketing to our customers.
Although we believe that pricing comparisons are common in the jewelry business,
there can be no assurance that this position would be upheld.
AVAILABLE INFORMATION
We maintain an Internet website at www.whitehalljewellers.com
that includes a hypertext link to the Securities and Exchange Commission's
website where our Annual Report on Form 10-K, Quarterly Reports on 10-Q, Current
Reports on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive
officers, and all amendments to those reports are available without charge, as
soon as reasonably practicable following the time that they are filed with or
furnished to the Securities and Exchange Commission. You may read and copy any
document we file at the SEC's Public Reference Room at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
information on the Public Reference Room. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at http://www.sec.gov.
The Company's Corporate Governance Guidelines, Audit Committee
Charter, Compensation Committee Charter and Governance and Nominating Committee
Charter are available upon written or verbal request. Requests for copies of any
of these documents should be directed in writing to Whitehall Jewellers, Inc.,
155 North Wacker Drive, Suite 500, Chicago, Illinois 60606, Attention: John R.
Desjardins or by telephone to (312) 782-6800.
ITEM 2. PROPERTIES
As of April 1, 2004, we operated 384 stores in 38 states. All
of these stores are leased and are located in regional or super-regional malls.
Our typical new store lease has a term of 10 years plus the first partial lease
year. Terms generally include a minimum base rent, a percentage rent payment
based on store sales and certain other occupancy charges. At January 31, 2004
the average remaining life of the leases for our stores was approximately six
years. While there can be no assurance, we expect to be generally able to renew
these leases as they expire.
We also lease approximately 28,400 square feet of office and
administrative space in Chicago, Illinois in an office building housing our
corporate headquarters, distribution functions and quality assurance operations.
This lease expires on December 31, 2005.
ITEM 3. LEGAL PROCEEDINGS
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. The parties reached an 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, which was
approved by the court on December 11, 2003. This settlement covers the period
from July 25, 1998 through the date of final settlement approval by the court.
The Company has made payments totaling approximately $1,000,000, per the terms
of the settlement agreement, as of January 31, 2004.
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 asserted a claim
for $1,000,000. The parties have reached a settlement of the suit for an amount
that is not significant in relation to the Company's financial statements.
11
The Company has been 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 asserted
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
the interpleader, Capital Factors has asserted that the Company owes
Cosmopolitan $8,600,000 in accounts receivable on invoices assigned to Capital
Factors. This amount is included in the $30,000,000 of losses that Capital
Factors seeks in its RICO claims. In addition, Ultimo, Inc. ("Ultimo"), a
jewelry supplier, is a defendant in the International action and in the
interpleader action. Ultimo provided certain items of jewelry to the Company on
a consignment basis and asserts that: (1) the Company has sold approximately
$450,000 worth of such items, the proceeds of which it claims remain in the
Company's possession; and (2) the Company continues to possess approximately
$1,780,000 worth of its consignment goods. Ultimo asserts that it should receive
these consignment proceeds and goods. Capital Factors and International also
have asserted claims to these proceeds and goods. The Company plans to place the
remaining consignment goods into escrow, and the New York State Supreme Court
has announced that it will hold a hearing as early as May 2004 to determine the
proper distribution of these consignment goods. The consignment proceeds already
have been placed in the Company's outside counsel's escrow account pending court
determination of the proper recipient. 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, document
discovery has begun, but depositions have been stayed until April 19, 2004 upon
consent of the parties. In addition, the Company has filed motions to dismiss
both the Capital Factors and International/Astra complaints. The motions are
currently pending before the court.
As previously disclosed, 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 this criminal investigation and is
cooperating fully with the United States Attorney.
12
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 the matters that
are the subject of the consolidated Capital Factors actions. The Company
produced documents to the SEC in response to the SEC's subpoena and information
requests. The Company is cooperating fully with the SEC in connection with this
formal investigation.
In accordance with Financial Accounting Standards Board
Statement No. 5, "Accounting for Contingencies," the Company determines whether
an estimated loss from a loss contingency should be accrued by assessing whether
a loss is deemed probable and can be reasonably estimated. As previously
disclosed in a press release furnished to the SEC under cover of a Current
Report on Form 8-K dated March 23, 2004, for the fourth quarter of the fiscal
year ended January 31, 2004, the Company accrued a litigation reserve of $6.0
million for the consolidated Capital Factors actions and the United States
Attorney and SEC investigations. Since March 23, 2004, the Company has engaged
in additional settlement negotiations relating to these matters. In light of
developments in the ongoing settlement discussions, the Company has accrued an
additional reserve for the fourth quarter of the fiscal year ended January 31,
2004, in the amount of $2.6 million, with respect to these matters. There are no
assurances that the Company will be able to reach a settlement with any of the
parties to the consolidated Capital Factors actions or that such a settlement or
settlements, as the case may be, will be for the amount recorded as a reserve.
However, the Company currently believes that it is more likely than not that it
will reach a settlement or settlements, as the case may be, pertaining to the
consolidated Capital Factors actions in the near term. Given the amounts sought
in the consolidated Capital Factors actions, and the inherent unpredictability
of litigation, it is possible that an adverse outcome in excess of the amount
recorded could occur and these actions could have a material adverse effect on
the Company's results of operations, financial condition or liquidity. The
Company is unable at this time to predict the ultimate outcome of the
consolidated Capital Factors actions or the United States Attorney and SEC
investigations. Professional fees of approximately $9.6 million incurred as a
result of the consolidated Capital Factors actions, the United States Attorney
and SEC investigations, and the Company's internal investigation, have been
expensed through January 31, 2004.
On February 12, 2004, a putative class action complaint
captioned Greater Pennsylvania Carpenters Pension Fund, et al. v. Whitehall
Jewellers, Inc. et al., Case No. 04 C 1007, was filed in the U.S. District Court
for the Northern District of Illinois against the Company and certain of the
Company's current and former officers. The complaint makes reference to the
litigation filed by Capital Factors Inc. above and to the Company's November 21,
2003 announcement that it had discovered violations of Company policy by the
Company's Executive Vice President, Merchandising, with respect to Company
documentation regarding the age of certain store inventory. The complaint
further makes reference to the Company's December 22, 2003 announcement that it
would restate results for certain prior periods. The complaint purports to
allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 ("1934 Act") and Rule 10b-5 promulgated thereunder, and alleging that the
Company and its officers made false and misleading statements and falsely
accounted for revenue and inventory during the putative class period of November
19, 2001 to December 10, 2003.
On February 18, 2004, a putative class action complaint
captioned Michael Radigan, et al., v. Whitehall Jewellers, Inc. et al., Case No.
04 C 1196, was filed in the U.S. District Court for the Northern District of
Illinois against the Company and certain of the Company's current and former
officers, charging violations of Sections 10(b) and 20(a) of the 1934 Act and
Rule 10b-5 promulgated thereunder, and alleging that the Company and its
officers made false and misleading statements and falsely accounted for revenue
and inventory during the putative class period of November 19, 2001 to December
10, 2003. The factual allegations of this complaint are similar to those made in
the Greater Pennsylvania Carpenters Pension Fund complaint discussed above.
On February 20, 2004, a putative class action complaint
captioned Milton Pfeiffer, et al., v. Whitehall Jewellers, Inc. et al., Case No.
04 C 1285, was filed in the U.S. District Court for the Northern District of
Illinois against the Company and certain of the Company's current and former
officers, charging violations of Sections 10(b) and 20(a) of the 1934 Act and
Rule 10b-5 promulgated thereunder, and alleging that the Company and its
officers made false and misleading statements and falsely accounted for revenue,
accounts payable, inventory, and vendor allowances during the putative class
period of November 19, 2001 to December 10, 2003. The factual allegations of
this complaint are similar to those made in the Greater Pennsylvania Carpenters
Pension Fund complaint discussed above.
On April 6, 2004, the District Court in the Greater
Pennsylvania Carpenters case, No. 04 C 1107 consolidated the Pfeiffer and
Radigan complaints with the Greater Pennsylvania Carpenters complaint, and on
April 14, 2004, granted the plaintiffs up to 60 days from the date to file an
amended consolidated complaint.
13
The Company intends to vigorously contest these putative class
action complaints and exercise all of its available rights and remedies. Given
that these cases are in their early stages, and no substantive proceedings have
occurred, it is not possible to evaluate the likelihood of an unfavorable
outcome in any of these matters, or to estimate any amount or range of potential
loss, if any. While there are many potential outcomes, an adverse outcome in any
of these actions could have a material adverse effect on the Company's results
of operations, financial condition or liquidity. It cannot be determined at this
stage whether these claims will be resolved in the fiscal year ending January
31, 2005.
On January 16, 2004, the Company was named as a defendant in a
copyright infringement lawsuit filed in the United States District Court for the
District of Minnesota by Janel Russell Designs, Inc. ("Janel Russell Designs").
Janel Russell Designs asserts that the Company is infringing its copyright in a
jewelry design by selling infringing merchandise. Janel Russell Designs seeks
unquantified damages. Two of the allegedly infringing pieces are supplied to the
Company by Samuel Aaron Inc. and one is supplied by Princess Pride Creations.
Each of the suppliers has also been sued by Janel Russell Designs in separate
lawsuits. Pursuant to language in certain Vendor Trading Agreements the Company
entered into with each supplier, the Company tendered the defense of the cases
to Samuel Aaron and Princess Pride and demanded indemnification. Both vendors,
through counsel, have indicated they will defend and indemnify the Company. The
Company filed its answer on March 3, 2004.
The Company is also involved from time to time in certain
other legal actions and regulatory investigations arising in the ordinary course
of business. Although there can be no certainty, it is the opinion of management
that none of these other actions or investigations will have a material adverse
effect on our results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference to section entitled "Market
for the Registrant's Common Equity and Related Stockholder Matters" in the
Company's 2003 Annual Report, which is included as Exhibit 13 to this Annual
Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to section entitled "Selected
Historical Financial and Operating Data" in the Company's 2003 Annual Report,
which is included as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference to section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 2003 Annual Report, which is included as Exhibit 13
to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference to section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 2003 Annual Report, which is included as Exhibit 13
to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to sections entitled
"Statements of Operations," "Balance Sheets," "Statements of Stockholders'
Equity," "Statements of Cash Flows" and "Notes to Financial Statements" in the
Company's 2003 Annual Report, which is included as Exhibit 13 to this Annual
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 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, 2004 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.
During the fiscal fourth quarter ended January 31, 2004, the
Company (1) instituted a compliance program, as part of which the Company
adopted a Code of Business Conduct and Ethics and appointed a Chief Corporate
Compliance Officer; (2) implemented improvements in the process by which monthly
statements from vendors of outstanding invoices and credits are reconciled to
the Company's records; and (3) implemented additional procedures for approving
purchases by the Company of merchandise inventory items previously provided to
the Company on consignment. There was no other change in the Company's internal
control over financial reporting that occurred during the Company's fiscal
quarter ended January 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
In addition, following the end of the fourth quarter, the
Company hired a Director of Internal Audit, who reports directly to the Chairman
of the Audit Committee of the Board of Directors.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement (which Proxy Statement we intend to
file with the SEC on or about May 17, 2004) is incorporated herein by reference.
The Company has adopted a Code of Conduct that applies to all
of the Company's employees, officers and directors, including its principal
executive officer and principal financial officer. The Company's Code of Conduct
covers a variety of areas of professional conduct including conflicts of
interest, disclosure obligations, insider trading, confidential information, as
well as compliance with all laws, rules and regulations applicable to the
Company's business.
A copy of the Company's Code of Conduct is posted on its
website at www.whitehalljewellers.com. In the event that an amendment to, or a
waiver from, a provision of the Company's Code of Conduct that applies to any of
the Company's executive officers or directors occurs, the Company intends to
post such information on its website. The Company undertakes to provide without
charge to any person, upon written or verbal request of such person, a copy of
the Company's Code of Conduct. Requests for a copy should be directed in writing
to Whitehall Jewellers, Inc., 155 North Wacker Drive, Suite 500, Chicago,
Illinois 60606, Attention: John R. Desjardins or by telephone to (312) 782-6800.
ITEM 11. EXECUTIVE COMPENSATION
Except for information referred to in Item 402(a)(8) of
Regulation S-K, the information contained under the headings "Election of
Directors" and "Executive Compensation and Other Information" in the Proxy
Statement (which Proxy Statement we intend to file with the SEC on or about May
17, 2004) is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
(which Proxy Statement we intend to file with the SEC on or about May 17, 2004)
is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION TABLE
The following table provides information as of January 31,
2004 regarding the number of shares of the Company's common stock that may be
issued under its equity compensation plans.
(a) (b) (c)
- --------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Plan Category Number of securities to be Weighted-average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,745,598 $11.875 508,907
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain
Relationships and Related Transactions" in the Proxy Statement (which Proxy
Statement we intend to file with the SEC on or about May 17, 2004) is
incorporated herein by reference.
16
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information contained in the Company's Annual Proxy
Statement under the section titled "Independent Public Accountants" is
incorporated herein by reference in response to this item.
17
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,
2004, 2003, and 2002. *
Balance Sheets of the Company as of January 31, 2004 and 2003. *
Statements of Stockholders' Equity of the Company for the years ended
January 31, 2004, 2003, and 2002. *
Statements of Cash Flows of the Company for the years ended January 31,
2004, 2003 and 2002. *
Notes to Financial Statements. *
Report of Independent Auditors. *
* Incorporated herein by reference from the Company's 2003 Annual Report.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts Page 26
Report of Independent Public Accountants on Financial Statement Schedule
Page 27
All other schedules for which provision is made in the applicable
accounting regulation of the SEC 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 SEC, 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.
*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.
18
*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 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 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 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 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.
*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 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)
19
*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 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)
*10.7 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).
*10.8 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 on May 17, 1996 (Registration No. 333-04043).
*10.9 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.
*10.10 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 on January 27, 2000 (Registration
No. 333-95465).(1)
*10.11 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)
*10.12 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)
20
*10.13 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.
(1)
*10.14 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)
*10.15 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)
*10.16 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)
*10.17 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)
*10.18 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)
*10.19 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)
*10.20 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)
*10.21 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)
*10.22 2003 Special Bonus Program. Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for
the period ended April 30, 2003, file No. 0-028176. (1)
21
*10.23 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.
*10.24 Second Amended and Restated Revolving Credit and Gold Consignment
Agreement, dated as of July 29, 2003, among the Company, the
Banks listed therein, LaSalle Bank National Association, ABN AMRO
Bank N.V., and JP Morgan Chase Bank. Incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for
the period ended July 31, 2003, file No. 0-028176.
*10.25 First Amendment, dated as of March 23, 2004, to the Second
Amended and Restated Revolving Credit and Gold Consignment
Agreement dated as of July 29, 2003 by and among the Company,
LaSalle Bank National Association, as administrative agent for
the banks ("Banks") party thereto, the Banks, ABN AMRO Bank,
N.V., as syndication agent, JP Morgan Chase Bank, as
documentation agent. Incorporated by reference to Exhibit 10.2 of
the Company's Form 8-K filed on March 23, 2004, file No.
0-028176.
*10.26 Letter Agreement dated December 15, 2003 relating to the Second
Amended and Restated Revolving Credit and Gold Consignment
Agreement dated as of July 29, 2003 by and among the Company,
LaSalle Bank National Association, as administrative agent for
the Banks, the Banks, ABN AMRO Bank N.V., as syndication agent,
and JP Morgan Chase Bank, as documentation agent. Incorporated by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the period ended October 31, 2003, file No.
0-028176.
*10.27 Letter Agreement, dated March 23, 2004, to the Second Amended
and Restated Revolving Credit and Gold Consignment Agreement
dated as of July 29, 2003 by and among the Company, LaSalle Bank
National Association, as administrative agent for the Banks party
thereto, the Banks, ABN AMRO Bank, N.V., as syndication agent, JP
Morgan Chase Bank, as documentation agent. Incorporated by
reference to Exhibit 10.1 of the Company's Form 8-K filed on
March 23, 2004, file No. 0-028176.
*10.28 401(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)
*10.29 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)
*10.30 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)
22
*10.31 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)
*10.32 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)
10.33 Separation and Release Agreement dated March 3, 2004 between Jon
H. Browne and the Company. (1)
13 The sections in the 2003 Annual Report entitled "Market for the
Registrant's Common Equity and Related Stockholder Matters,"
"Selected Historical Financial and Operating Data," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Statements of Operations," "Balance Sheets,"
"Statements of Stockholders' Equity," "Statements of Cash Flows,"
"Notes to Financial Statements" and "Report of Independent
Auditors" but only to the extent set forth in Items 5-7, 7A, 8
and 15 hereof. With the exception of the aforementioned
information incorporated by reference in this Annual Report on
Form 10-K, the 2003 Annual Report is not to be deemed "filed" as
a part of this Report.
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney (included on signature page)
31.1 Certificate Pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934 of the Principal Executive Officer.
31.2 Certificate Pursuant to Rule 13a-14 under the Securities Exchange
Act of 1934 of the Principal Financial Officer.
32.1 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------
(1) Represents management contract or compensatory plan or arrangement.
23
(2) There is no First Amendment to 401(k) Plan.
(b) Reports on Form 8-K
On November 6, 2003, the Company filed a Current Report on
Form 8-K with the SEC to disclose information regarding a
formal inquiry by the Securities and Exchange Commission.
On November 10, 2003, the Company filed a Current Report on
Form 8-K with the SEC to furnish a press release announcing
sales for the third quarter ended October 31, 2003.
On November 21, 2003, the Company filed a Current Report on
Form 8-K with the SEC to disclose a press release announcing
that it has placed its Executive Vice President,
Merchandising, on leave.
On December 11, 2003, the Company filed a Current Report on
Form 8-K with the SEC to disclose a press release announcing
the termination of its Chief Financial Officer and commenting
on the release of financial results.
On December 22, 2003, the Company filed a Current Report on
Form 8-K with the SEC to furnish a press release regarding
financial results for the third quarter ended October 31,
2003, comparative store sales for November, 2003 and a portion
of December, 2003 and a restatement of its results for certain
previous periods primarily to reflect non-cash inventory
valuation adjustments.
On January 29, 2004, the Company filed a Current Report on
Form 8-K with the SEC to disclose a press release announcing
modifications to its Board of Directors.
24
WHITEHALL JEWELLERS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
TWELVE MONTHS ENDED JANUARY 31, 2002, 2003 AND 2004
(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 1/31/02
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
====== ====== ====== ======
Twelve months ended 1/31/04
Allowance for doubtful accounts $ 544 $ 663 $ 669 $ 538
====== ====== ====== ======
Inventory allowance 3,567 5,987 5,823 3,731
====== ====== ====== ======
25
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Whitehall Jewellers, Inc.:
Our audits of the financial statements referred to in our report dated March 22,
2004 (except for the last paragraph of Note 20 as to which the date is April 15,
2004) appearing in the 2003 Annual Report to Shareholders of Whitehall
Jewellers, Inc. (which report and financial statements are incorporated by
reference in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
March 22, 2004, except for the last paragraph of Note 20 of the audited
financial statements as to which the date is April 15, 2004
26
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: April 15, 2004 WHITEHALL JEWELLERS, INC.
(Registrant)
By: /s/ John R. Desjardins
-----------------------------
John R. Desjardins
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal financial and accounting officer)
POWER OF ATTORNEY AND SIGNATURES
Each of the undersigned officers and directors of Whitehall Jewellers,
Inc. hereby severally constitutes and appoints Hugh M. Patinkin and John R.
Desjardins, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, all amendments to this Annual Report on Form 10-K,
and generally to do all things in our names and on our behalf in such capacities
to enable Whitehall Jewellers, Inc. to comply with the provisions of the
Securities Exchange Act of 1934, as amended, and all requirements of the
Securities and Exchange Commission.
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 15th day of April, 2004.
Name Capacity
---- --------
/s/ Hugh M. Patinkin Chairman, President and Chief Executive Officer
- ------------------------------------ (Principal executive officer) and Director
Hugh M. Patinkin
/s/ Richard K. Berkowitz Director
- ------------------------------------
Richard K. Berkowitz
/s/ Daniel H. Levy Director
- ------------------------------------
Daniel H. Levy
/s/ Norman J. Patinkin Director
- ------------------------------------
Norman J. Patinkin
/s/ Sanford Shkolnik Director
- ------------------------------------
Sanford Shkolnik
/s/ John R. Desjardins Executive Vice President, Chief Financial Officer,
- ------------------------------------ Treasurer and Secretary
John R. Desjardins (Principal financial and accounting officer)