-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Mp/ojFZnZRFTgBD/lOknlGDewoxePiQ6tKKv5a8QafDocgAsEMyxR1KeDcjEwmXw 6RskNKDMQe+2+V4Vo6bzIw== 0000950137-04-000249.txt : 20040121 0000950137-04-000249.hdr.sgml : 20040121 20040121125044 ACCESSION NUMBER: 0000950137-04-000249 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030430 FILED AS OF DATE: 20040121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WHITEHALL JEWELLERS INC CENTRAL INDEX KEY: 0000868984 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-JEWELRY STORES [5944] IRS NUMBER: 361433610 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15615 FILM NUMBER: 04534456 BUSINESS ADDRESS: STREET 1: 155 N WACKER DR STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3127826800 MAIL ADDRESS: STREET 1: 155 NORTH WACKER STREET 2: SUITE 500 CITY: CHICAGO STATE: IL ZIP: 60606 FORMER COMPANY: FORMER CONFORMED NAME: MARKS BROS JEWELERS INC DATE OF NAME CHANGE: 19960301 10-Q/A 1 c82195a1e10vqza.txt AMENDMENT NO. 1 TO FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Amendment No. 1 to (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: APRIL 30, 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 incorporation or organization) Identification No.) 155 N. Wacker Drive, Suite 500, Chicago, IL 60606 (Address of principal executive offices) (zip code) 312/782-6800 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. The number of shares of the Registrant's common stock, $.001 par value per share, outstanding as of June 6, 2003 was 14,206,561 and the number of shares of the Registrant's Class B common stock, $1.00 par value per share, outstanding as of June 6, 2003 was 142. EXPLANATORY NOTE RESTATEMENT OF PRIOR FINANCIAL INFORMATION As described in Note 12 to the financial statements contained in the Form 10-Q for the quarterly period ended October 31, 2003 filed by Whitehall Jewellers, Inc. (the "Company") with the Securities and Exchange Commission on December 22, 2003, the Company restated previously issued financial statements to record adjustments resulting from various accounting matters described below. The Company restated financial statements for the three-month periods ended April 30, 2003 and 2002, the three and six month periods ended July 31, 2003 and 2002 and the three-month and nine-month periods ended October 31, 2002. Adjustments to restate the financial statements are summarized into the following four 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. Software development costs and amortization The financial statements have been restated to capitalize certain costs associated with software development that were expensed in the six-months ended July 31, 2003, in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". In addition, the Company amortized certain capitalized software development costs prior to the project being placed in service and has reversed such amortization in the restated financial statements. C. Vendor advertising/promotion credits Certain vendor consideration, primarily related to co-op advertising and program sponsorships, was received in the six-months ended July 31, 2003, which should have reduced the carrying value of merchandise inventory, in accordance with EITF 02-16. The adjustments reflected in the Statement of Operations relate to reversing the reimbursements received and recording the benefit as an adjustment of the inventory 2 carrying value, which benefits cost of sales in the inventory turnover period. D. 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 to be read in conjunction with the Company's reports filed subsequent to June 6, 2003. Amended Items The Company hereby amends the following items, financial statements, exhibits or other portions of its Quarterly Report on Form 10-Q for the quarter ended April 30, 2003, as set forth herein: Part I - FINANCIAL INFORMATION Item 1. Financial Statements The financial information of the Company is amended to read in its entirety as set forth herein. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information set forth in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" is amended to read in its entirety as set forth herein. Item 3. Quantitative and Qualitative Disclosure About Market Risk The information set forth in "Item 3. Quantitative and Qualitative Disclosure About Market Risk" is amended to read in its entirety as set forth herein. Item 4. Controls and Procedures The information set forth in "Item 4. Controls and Procedures" is amended to read in its entirety as set forth herein. Part II - OTHER INFORMATION Item 5. Forward Looking Statements The information set forth in "Item 5. Forward Looking Statements" is amended to read in its entirety as set forth herein. Item 6(a). Exhibits The list of exhibits set forth by the Company is amended to read in its entirety as set forth herein. 3 PART I - FINANCIAL INFORMATION Item 1- Financial Statements Whitehall Jewellers, Inc. Statements of Operations for the three months ended April 30, 2003 and 2002 (unaudited) (in thousands, except per share data)
Three months ended ------------------ April 30, 2003 April 30, 2002 (Restated - (Restated - Note 12) Note 12) -------------- -------------- Net sales $ 69,149 $ 74,588 Cost of sales (including buying and occupancy expenses) 46,038 47,494 -------- -------- Gross profit 23,111 27,094 Selling, general and administrative expenses 26,770 25,627 -------- -------- (Loss) income from operations (3,659) 1,467 Interest expense 908 1,012 -------- -------- (Loss) income before income taxes (4,567) 455 Income tax (benefit) expense (1,780) 162 -------- -------- Net (loss) income $ (2,787) $ 293 ======== ======== Basic earnings per share: Net (loss) income $ (0.20) $ 0.02 ======== ======== Weighted average common shares and common share equivalents 14,206 14,667 ======== ======== Diluted earnings per share: Net (loss) income $ (0.20) $ 0.02 ======== ======== Weighted average common shares and common share equivalents 14,206 15,382 ======== ========
The accompanying notes are an integral part of the financial statements. 4 Whitehall Jewellers, Inc. Balance Sheets As of April 30, 2003, January 31, 2003 and April 30, 2002 (unaudited, in thousands, except share data)
April 30, 2003 January 31, 2003 April 30, 2002 (Restated - (Restated - (Restated - Note 12) Note 12) Note 12) ----------------------------------------------------- ASSETS Current Assets: Cash $ 1,302 $ 2,048 $ 2,131 Accounts receivable, net 719 1,621 1,811 Merchandise inventories 205,020 196,694 174,931 Current income tax benefit 2,251 --- 403 Other current assets 2,281 1,470 1,341 Deferred financing costs 510 510 511 Deferred income taxes, net 2,638 2,627 2,741 --------- --------- --------- Total current assets 214,721 204,970 183,869 Property and equipment, net 63,655 61,634 64,097 Goodwill 5,662 5,662 5,662 Deferred financing costs 161 213 595 --------- --------- --------- Total assets $ 284,199 $ 272,479 $ 254,223 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Revolver loan $ 88,559 $ 94,490 $ 52,627 Current portion of long-term debt 3,640 4,500 5,500 Accounts payable 49,088 26,784 52,543 Customer deposits 3,635 3,454 4,077 Accrued payroll 4,583 3,282 4,313 Income taxes payable --- 3,303 --- Other accrued expenses 12,581 11,380 12,504 --------- --------- --------- Total current liabilities 162,086 147,193 131,564 Term loan --- --- 3,000 Subordinated debt --- 640 640 Deferred income taxes, net 3,753 3,607 1,901 Other long-term liabilities 3,216 3,138 2,784 --------- --------- --------- Total liabilities 169,055 154,578 139,889 Commitments and contingencies Stockholders' equity: Common stock 18 18 17 Class B common stock --- --- --- Additional paid-in capital 105,755 105,795 104,653 Accumulated earnings 45,238 48,025 38,624 --------- --------- --------- 151,011 153,838 143,294 Less: Treasury stock, at cost (3,817,742, 3,822,637 and 3,199,628 shares, respectively) (35,867) (35,937) (28,960) --------- --------- --------- Total stockholders' equity, net 115,144 117,901 114,334 --------- --------- --------- Total liabilities and stockholders' equity $ 284,199 $ 272,479 $ 254,223 ========= ========= =========
The accompanying notes are an integral part of the financial statements. 5 Whitehall Jewellers, Inc. Statements of Cash Flows for the three months ended April 30, 2003 and 2002 (unaudited, in thousands)
Three months ended ------------------ April 30, 2003 April 30, 2002 (Restated - (Restated - Note 12) Note 12) ----------------------------------- Cash flows from operating activities: Net (loss) income $ (2,787) $ 293 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization 2,919 2,744 Loss on disposition of assets 18 15 Changes in assets and liabilities: Decrease (increase) in accounts receivable, net 902 (622) (Increase) in merchandise inventories, net of gold consignment (8,326) (1,833) (Increase) in other current assets (811) (117) (Increase) in current income tax benefit (2,251) (403) Increase in deferred income taxes, net 135 177 Increase (decrease) in accounts payable 19,638 (10,022) (Decrease) in income taxes payable (3,303) (3,257) Increase in customer deposits 181 114 Increase (decrease) in accrued payroll 1,301 (1,957) Increase (decrease) in accrued liabilities 1,201 (820) Increase in other long-term liabilities 78 124 --------- --------- Net cash provided by (used in) operating activities 8,895 (15,564) Cash flows from investing activities: Capital expenditures (4,831) (2,814) --------- --------- Net cash (used in) investing activities (4,831) (2,814) Cash flows from financing activities: Borrowing on revolver loan 166,804 168,318 Repayment of revolver loan (172,735) (150,968) Outstanding checks increase 2,666 772 Repayment of term loan (1,500) (1,250) Financing costs (75) --- Proceeds from employee stock purchase plan 30 10 Proceeds from exercise of stock options --- 886 --------- --------- Net cash (used) in provided by financing activities (4,810) 17,768 --------- --------- Net change in cash and cash equivalents (746) (610) Cash and cash equivalents at beginning of period 2,048 2,741 --------- --------- Cash and cash equivalents at end of period $ 1,302 $ 2,131 ========= =========
The accompanying notes are an integral part of the financial statements. 6 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 385 stores as of April 30, 2003, located in 38 states, operating in regional or superregional shopping malls. The consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis for Presentation The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X. Consequently, they do not include all of the disclosures required under generally accepted accounting principles for complete financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented. For further information regarding the Company's accounting policies, refer to the financial statements and footnotes thereto included in the Whitehall Jewellers, Inc. Annual Report on Form 10-K/A for the fiscal year ended January 31, 2003. References in the following notes to years and quarters are references to fiscal years and fiscal quarters. Merchandise Inventories Merchandise inventories are stated principally at the lower of weighted average cost or market. 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 has recorded such merchandise vendor allowances as a reduction of inventory cost. The total amount of these allowances and other vendor consideration as of April 30, 2003, January 31, 2003 and April 30, 2002 was approximately $2,818,000, $3,254,000 and $551,000, respectively. 7 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. Goodwill Goodwill represents the excess of cost over the fair value of assets acquired in purchase business combinations. Under the Financial Accounting Standards Board Statement No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," goodwill and indefinite lived intangible assets are reviewed at least 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. Income Taxes Due to the seasonal nature of the business, the Company tends to generate a significant portion of its income in the fourth quarter. While the 39.0% effective tax rate currently estimated for the year is management's best estimate, to the extent that income is significantly more or less than expected, the Company's effective income tax rate for the remainder of fiscal year 2003 could vary significantly from that of the first quarter. Stock-Based Compensation The Financial Accounting Standards Board issued Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and Disclosure," during 2002. SFAS 148 amends Statement No. 123 ("SFAS 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 SFAS 148 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 for the three months ended April 30, 2003 and 2002, if the Company had applied the fair value recognition provisions of SFAS 123, as amended by SFAS 148, to stock-based employee compensation. 8
April 30, 2003 April 30, 2002 (Restated - (Restated - Note 12) Note 12) -------------- -------------- Net (loss) income, as reported $(2,787) $ 293 Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related tax effects 267 558 ------- ------- Pro forma net (loss) $(3,054) $ (265) ======= ======= Earnings per share: ======= ======= Basic-as reported $ (0.20) $ 0.02 ======= ======= Basic-pro forma $ (0.21) $ (0.02) ======= ======= ======= ======= Diluted-as reported $ (0.20) $ 0.02 ======= ======= Diluted-pro forma $ (0.21) $ (0.02) ======= =======
For purposes of the pro forma net income and earnings per share calculation in accordance with SFAS 123, for each option granted during the three months ended April 30, 2003 and 2002 the fair value is estimated using the Black-Scholes option-pricing model. The assumptions used are as follows:
April 30, 2003 April 30, 2002 -------------- -------------- Risk-free interest rate 3.0% 4.7% Dividend yield 0 0 Option life 5.5 years 5.5 years Volatility 61% 62%
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 Guarantees In November 2002, 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," an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. The Company has adopted the guidance of FIN 45 and has reflected the required disclosures in its financial statements commencing with the financials statements for the year ended January 31, 2003. 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 officers liability insurance policy that, under certain circumstances, 9 enables it to recover a portion of any future amounts paid. As a result of its insurance coverage, the Company believes the estimated fair value of these indemnification obligations is minimal. The Company had no liabilities recorded for these obligations as of April 30, 2003. 3. ACCOUNTS RECEIVABLE, NET As of April 30, 2003, January 31, 2003 and April 30, 2002, accounts receivable consisted of (in thousands):
April 30, 2003 January 31, 2003 April 30, 2002 -------------- ---------------- -------------- Accounts receivable $ 1,366 $ 2,165 $ 2,431 Less: allowance for doubtful accounts (647) (544) (620) -------- -------- -------- Accounts receivable, net $ 719 $ 1,621 $ 1,811 ======== ======== ========
4. INVENTORY As of April 30, 2003, January 31, 2003 and April 30, 2002, merchandising inventories consisted of (in thousands):
April 30, 2003 January 31, 2003 April 30, 2002 (Restated - (Restated - (Restated - Note 12) Note 12) Note 12) -------------- ---------------- -------------- Raw Materials $ 6,514 $ 7,657 $ 7,746 Finished Goods 198,506 189,037 167,185 -------- --------- -------- Inventory $205,020 $ 196,694 $174,931 ======== ========= ========
Raw materials primarily consist of diamonds, precious gems, semi-precious gems and gold. Included within finished goods inventory are allowances for inventory shrink, scrap, and miscellaneous costs of $3,396,000, $3,567,000 and $2,424,000 as of April 30, 2003, January 31, 2003 and April 30, 2002, respectively. As of April 30, 2003, January 31, 2003 and April 30, 2002, consignment inventories held by the Company that are not included in the balance sheets total $72,991,000, $74,924,000, and $80,967,000, respectively. In addition, gold consignments of $23,298,000 are not included in the Company's balance sheets as of April 30, 2002 (see Note 6, 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 approximately $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 6). 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 $300,000 of this increase in cost of sales is reflected in the three months ended April, 2003. This purchase 10 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 April 30, 2003, January 31, 2003 and April 30, 2003, the amounts included in inventory are $3,572,000, $3,364,000 and $3,328,000, respectively. 5. ACCOUNTS PAYABLE Accounts payable includes outstanding checks, which were $9,178,000, $6,512,000 and $7,912,000 as of April 30, 2003, January 31, 2003 and April 30, 2002, respectively. 6. 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 which provides for a total facility of $166.5 million through June 30, 2004. Interest rates and the commitment fee charged on the unused portion of the facility float based upon the Company's quarterly financial performance. Under the 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 April 30, 2003, the most restrictive financial covenant was total funded debt to earnings before interest, taxes, depreciation and amortization as defined in the Credit 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 Agreement, 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, if any, consigned 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 there under, including the value of consigned gold which fluctuates based on gold prices. Interest rates and commitment fees on the unused facility float based on the Company's quarterly financial performance. The interest rates for borrowings under this agreement are, at the Company's option, based on Eurodollar rates or the banks' prime rate. Interest is payable monthly for prime borrowings and upon maturity for Eurodollar borrowings. 11 Term Loans The term loan under the Credit Agreement is available up to a maximum of $3.0 million ($16.5 million, less principal repayments). The interest rates for these borrowings are, at the Company's option, based on Eurodollar rates or the banks' prime rate. Interest is payable monthly for prime borrowings and upon maturity for Eurodollar borrowings. Interest rates and the commitment fee charged on the unused facility float based on the Company's quarterly financial performance. Gold Consignment Facility 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 a 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 consignment facility at the current market price for gold on that date. As of April 30, 2002, the Company sold and simultaneously consigned 66,500 troy ounces of gold for $23.3 million under the gold consignment facility. The facility provides for the sale of a maximum 115,000 troy ounces or $40.0 million. Under the agreement, the Company pays consignment fees based on the London Interbank Bullion Rates payable monthly. Consignment rates and commitment fees on the unused portion of the gold consignment facility float based upon the Company's quarterly financial performance. 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. 12 7. DILUTIVE SHARES THAT WERE OUTSTANDING DURING THE PERIOD The following table summarizes the reconciliation of the numerators and denominators for the basic and diluted earnings per share ("EPS") computations at April 30, 2003 and 2002.
Three months ended April 30, 2003 April 30, 2002 (Restated - (Restated - Note 12) Note 12) -------------- --------------- (in thousands, except share amounts) Net (loss) income $ (2,787) $ 293 Weighted average shares for basic EPS 14,206 14,667 Incremental shares upon conversions: Stock options ---- 715 Weighted average shares for diluted EPS 14,206 15,382
Stock options excluded from the calculation of diluted earnings per share for the three months ended April 30, 2003 and 2002, were 2,434,263, and 362,845 respectively, due to their antidilutive effect on the calculations. 8. RECLASSIFICATION Certain Balance Sheet amounts from prior periods were reclassified to conform to the current year presentation. These reclassifications had no impact on earnings. 9. COMMITMENT AND CONTINGENCIES The Company entered into a three-year purchase agreement with one of its merchandise inventory vendors in February 2003. Under the terms of the agreement, the Company is committed to future minimum purchases of $16,000,000 in 2003, and $8,000,000 for each of the next two calendar years but only to the extent the Company returns and the vendor accepts merchandise inventory from the Company in specified proportions to the purchase commitment. In exchange for this purchase agreement, the vendor agreed to accept from the Company $5,000,000 of merchandise inventory, some of which was damaged. As of April 30, 2003, the Company had purchased approximately $4,500,000 and returned approximately $2,800,000 of merchandise inventory under this agreement. 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. 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, 13 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. See Note 10, Subsequent Events. The Company is subject to other claims and litigation in the normal course of business. It is the opinion of management that additional liabilities, if any, resulting from these other claims and litigation are not expected to have a material adverse effect on the Company's financial condition or results of operations. 10. SUBSEQUENT EVENTS The Company has received and accepted a proposal from LaSalle Bank, N.A. and ABN/AMRO Bank N.V. to lead a transaction that will refinance the Company's credit facility. The proposed facility would be a revolving credit and gold consignment agreement totaling $125 million. The Company expects this facility will be in place in the second quarter resulting in a charge for unamortized deferred financing fees of approximately $550,000 at that time. Effective July 29, 2003, the Company entered into a Second Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement with certain members of its prior bank group, with LaSalle Bank, N.A. and ABN/AMRO Bank as the lead agent, which provides for a total facility of up to $125.0 million through July 28, 2007. 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 14 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 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. 15 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 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, 2002 and January 31, 2003. 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. 16 11. RELATED PARTY TRANSACTIONS The Company operates a program under which executive officers and directors are permitted to purchase most Company merchandise at approximately ten percent above the Company's cost. For the first three months of fiscal 2003, such purchases by executive officers and directors totaled approximately $26,000. 12. RESTATEMENT The accompanying interim financial statements for the three-month interim periods ended April 30, 2003 and 2002 have been restated. Adjustments to restate the financial statements are summarized into the following four 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. Software development costs and amortization The financial statements have been restated to capitalize certain costs associated with software development that were expensed in the six-months ended July 31, 2003, in accordance with Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". In addition, the Company amortized certain capitalized software development costs prior to the project being placed in service and has reversed such amortization in the restated financial statements. C. Vendor advertising/promotion credits Certain vendor consideration, primarily related to co-op advertising and program sponsorships, was received in the six-months ended July 31, 2003, which should have reduced the carrying value of merchandise inventory, in accordance with EITF 02-16. The adjustments reflected in the Statement of Operations relate to reversing the reimbursements received and recording the benefit as an adjustment of the inventory carrying value, which benefits cost of sales in the inventory turnover period. 17 D. 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-month interim periods ended April 30, 2003 and 2002 (unaudited, in thousands, except per share data):
Three months ended Three months ended April 30, 2003 April 30, 2002 As previously As previously reported Restated reported Restated ------------- -------- ------------- -------- Cost of sales (including buying and occupancy expenses) $ 46,052 $ 46,038 $ 47,376 $ 47,494 Gross profit 23,097 23,111 27,212 27,094 Selling, general and administrative expenses 26,692 26,770 25,627 25,627 (Loss) income from operations (3,595) (3,659) 1,585 1,467 (Loss) income before income taxes (4,503) (4,567) 573 455 Income tax (benefit) expense (1,755) (1,780) 204 162 Net (loss) income (2,748) (2,787) 369 293 Earnings per share: Basic $ (0.19) $ (0.20) $ 0.03 $ 0.02 Diluted $ (0.19) $ (0.20) $ 0.02 $ 0.02
18 The following table sets forth the effects of the restatement adjustments discussed above on the restated components of the Balance Sheets at April 30, 2003, January 31, 2003 and April 30, 2002 (unaudited, in thousands):
BALANCE SHEETS - ------------------------------------------------------------------------------------------------------------------------ April 30, 2003 January 31, 2003 April 30, 2002 As As As previously previously previously reported Restated Restated Restated reported Restated ---------- -------- ---------- --------- ---------- --------- Merchandise inventories $ 206,276 205,020 $ 197,859 $ 196,694 $ 175,882 $ 174,931 Current income tax benefit 2,293 2,251 -- -- 438 403 Deferred income taxes, net 2,158 2,638 2,172 2,627 2,370 2,741 Total current assets 215,307 214,721 205,680 204,970 184,252 183,869 Total assets 284,758 284,199 273,189 272,479 254,606 254,223 Income taxes payable 3,261 3,303 Total current liabilities 147,151 147,193 Total liabilities 154,536 154,578 Accumulated earnings 46,029 45,238 48,777 48,025 39,239 38,624 Total stockholders' equity, net 115,935 115,144 118,653 117,901 114,949 114,334 Total liabilities and stockholders' equity 284,758 284,199 273,189 272,479 254,606 254,223
The following table sets forth the effects of the restatement adjustments discussed above on the Statement of Operations for the three months ended April 30, 2003 and 2002 (unaudited, in thousands, except per share data):
Three months Three months ended ended April 30, 2003 April 30, 2002 -------------- -------------- Net (loss) income As previously reported $ (2,748) $ 369 Reduced/(additional) expense: Merchandise inventory valuation adjustments (4) (118) Software development costs and amortization 27 -- Vendor advertising/promotion credits (87) -- Tax effects of items above 25 42 --------- -------- As restated $ (2,787) $ 293 ========= ======== Basic (loss) income per share As previously reported $ (0.19) $ 0.03 As restated $ (0.20) $ 0.02 Weighted average common Shares 14,206 14,667 Diluted (loss) income per share As previously reported $ (0.19) $ 0.02 As restated $ (0.20) $ 0.02 Weighted average common shares and common share equivalents 14,206 15,382
19 PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 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 12 to the financial statements. In connection with the process, the Company restated its financial statements for the three-month periods ended April 30, 2003 and 2002. Accordingly, the financial statements included in Management's Discussion and Analysis are discussed as adjusted by the restatement of prior periods discussed in Note 12. . Results of Operations Net sales for the first quarter of fiscal 2003 decreased $5.4 million, or 7.3%, to $69.1 million from $74.6 million in the first quarter of fiscal 2002. New store sales accounted for an increase in sales of $2.4 million. Comparable store sales decreased $6.3 million, or 8.7%, in the first quarter of fiscal 2003 from the first quarter of fiscal 2002. These sales changes were impacted by a sales decrease of $1.5 million related to closed stores. Comparable store sales were significantly affected by the economy and, more particularly, a dramatic sales drop off in late February and throughout March which management believes related in large measure to the War in Iraq and the heightened concerns about terrorism. The total number of merchandise units sold increased by approximately 9.8% in the first quarter of fiscal 2003 from the first quarter of fiscal 2002, while the average price per merchandise sale decreased to $277 in the first quarter of fiscal 2003 from $309 in the first quarter of fiscal 2002. Credit sales as a percentage of net sales remained constant at 40.5% in the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002. The Company opened 16 new stores and closed one store in the first quarter of fiscal 2003, increasing the number of stores to 385 as of April 30, 2003 compared to 373 as of April 30, 2002. Gross profit decreased $4.0 million, or 14.7%, to $23.1 million from $27.1 million in the first quarter of fiscal 2003 compared to the same period in fiscal 2002. Gross profit as a percentage of sales decreased to 33.4% in the first quarter of fiscal 2003 compared to 36.3% in the first quarter of fiscal 2002. The decrease in gross profit rate was driven by price promotions, principally on diamond merchandise, and the de-leveraging of occupancy and buying expenses as a result of lower sales. The decrease was partially offset by the cost of goods sold impact of the turnover of benefit from vendor discounts and co-op allowances recorded in compliance with the adoption of EITF 02-16. Due to the adjustments resulting from the restatement, for the first quarter of fiscal 2003, gross profit as a percent of net sales remained unchanged at 33.4%, and for the first quarter of fiscal 2002, gross profit as a percent of net sales decreased twenty basis points to 36.3% from 36.5%. Selling, general and administrative expenses increased $1.2 million, or 4.5%, to $26.8 million from $25.6 million in the first quarter of fiscal 2003 compared to the same period in fiscal 2002. Selling, general and administrative expense as a percent of sales increased to 38.7% versus 34.4% in first quarter 2002. The dollar increase primarily related to higher other expense ($0.4 million), higher advertising expense ($0.3 million) and higher personnel expense ($0.5 million) which were partially offset by lower credit expense ($0.1 million). The increase in other expenses is primarily due to the increase in the number of stores and increases in professional fees, but was partially offset by lower expenses in existing stores resulting from centralized control of the consumption of supplies and services along with reductions in negotiated rates for those items. Advertising expense increased due to a new promotional initiative in April 2003. Payroll costs increased 20 primarily due to the increased number of stores, but were offset by expense reductions to reduce payroll hours and control labor rates in existing stores. Due to the adjustments resulting from the restatement, selling, general and administrative expenses as a percent of net sales increased ten basis points to 38.7% from 38.6% Interest expense decreased approximately $0.1 million to $0.9 million in the first quarter of fiscal 2003 from $1.0 million in the first quarter of fiscal 2002. The decrease resulted from lower interest rates partially offset by higher average borrowings. Income tax benefit of $1.8 million in the first quarter of 2003 compared to an income tax expense of $0.2 million in the first quarter of 2002, reflects an expected annual effective tax rate of 39.0% for fiscal 2003. The Company's annual effective tax rate was 38.1% for fiscal 2002. The expected increase in effective annual tax rate for fiscal 2003 reflects statutory changes in a number of states in which the Company operates stores. Net loss of $2.8 million in the first quarter of fiscal 2003, compared to net income of $0.3 million in the first quarter of fiscal 2002, primarily resulted from the factors discussed individually above. Liquidity and Capital Resources The Company's cash requirements consist principally of funding inventory at existing stores, capital expenditures and working capital (primarily inventory) associated with the Company's new stores. The Company's primary sources of liquidity have been cash flow from operations and bank borrowings under the Company's revolver. The Company's inventory levels and working capital requirements have historically been highest in advance of the Christmas season. The Company has funded these seasonal working capital needs through borrowings under the Company's revolver and increases in trade payables and accrued expenses. As of April 30, 2003, the maximum availability under the credit facility was $37.9 million based on the borrowing base formula. The credit facility covenants also require the Company to attain certain operating results. The Company's cash flow provided by operating activities was $8.9 million in the first quarter of 2003 compared to $15.6 million used in operating activities in the first quarter of fiscal 2002. Depreciation and amortization ($2.9 million) and increases in accounts payable ($19.6 million), outstanding checks ($2.7 million), accrued payroll ($1.3 million), accrued liabilities ($1.2 million) and decreases in accounts receivable ($0.9 million) were partially offset by increases in merchandise inventories ($8.3 million) and current income tax benefit ($2.3 million) and a decrease in income taxes payable ($3.3 million) and loss from operations ($2.8 million). The increase in accounts payable in fiscal 2003 reflects the impact of timing of vendor payments resulting from the Company's strategy to pay certain accounts payable in advance in the fourth quarter of fiscal 2002 in order to earn additional cash discounts. The increase in merchandise inventories primarily related to inventory for new store openings, including anticipated store openings in the second quarter of fiscal 2003 and the 16 completed new store openings in the first quarter of fiscal 2003. The Company utilized cash in the first quarter of 2003 primarily to pay down revolver borrowings of $5.9 million, to fund capital expenditures of $4.8 million, primarily related to the opening of 16 new stores in the first quarter of 2003, and to repay a portion of the term loan ($1.5 million). Management expects that cash flow from operating activities and funds available under its revolving credit facility should be sufficient to support the Company's current new store expansion program and seasonal working capital needs for the foreseeable future. 21 Contractual Obligations and Contingencies The Company disclosed contractual obligations in the Management's Discussion and Analysis of Financial Conditions and Results of Operations in the Form 10-K/A filing for the fiscal year ended January 31, 2003. Refer to Notes 9 and 10 of the April 30, 2003 financial statements filed in this Form 10-Q/A with respect to commitments and contingencies. 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 and Managements Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K/A filing for the year ended January 31, 2003. 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. Due to the seasonal nature of the business, the Company tends to generate nearly all of its income in the fourth quarter. While the 39% effective tax rate currently estimated for the year is management's best estimate, to the extent that income is significantly more or less than expected, the Company's effective income tax rate for the fourth quarter and the full year could vary significantly from that of the previous quarters. Merchandise inventories are stated principally at the lower of weighted average cost or market. Cost is reduced to reflect certain allowances and discounts received from vendors. Periodic payments from vendors in the form of buydowns, volume or other purchase discounts that are evidenced by signed agreements are reflected in the carrying value of the inventory when earned and as a component of cost of sales, buying and occupancy 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 vendors specify 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 ("EITF") 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 vendor allowances to be classified as a reduction to cost of sales 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. 22 Transactions with Affiliates and Related Parties The Company operates a program under which executive officers and directors are permitted to purchase most Company merchandise at approximately ten percent above the Company's cost. For the first three months of fiscal 2003, such purchases by executive officers and directors totaled approximately $26,000. Inflation Management believes that inflation generally has not had a material effect on the Company's results of operations. 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 by a Customer for Certain Consideration Received from a Vendor 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 buy downs, 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 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 has recorded such merchandise vendor allowances as a reduction of inventory cost. The total amount of these allowances and other vendor consideration earned as of April 30, 2003, January 31, 2003, and April 30, 2002 was approximately $2,818,000, $3,254,000 and $551,000, respectively. Accounting for Stock-Based Compensation The Financial Accounting Standards Board issued Statement No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation-Transition and Disclosure," during 2002. SFAS 148 amends Statement 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 23 method used on reported results. The Company adopted the disclosure requirements of SFAS 148 as of January 31, 2003. Accounting for Guarantees In November 2002, 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," an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34. The Company has adopted the guidance of FIN 45 and has reflected the required disclosures in its financial statements commencing with the financial statements for the year ended January 31, 2003. Under its bylaws, the Company has agreed to indemnify its officer 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 had no liabilities recorded for these obligations as of April 30, 2003. Item 3. Quantitative and Qualitative Disclosure About Market Risk Interest Rate Risk The Company's exposure to changes in interest rates relates primarily to its borrowing activities to fund business operations. The Company principally uses floating rate borrowings under its revolving credit and term loan facilities. The Company's private label credit card provider charges the Company varying discount rates for its customers' credit program purchases. These discount rates are sensitive to significant changes in interest rates. The Company currently does not use derivative financial instruments to protect itself from fluctuations in interest rates. 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. Item 4. - 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 April 30, 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 April 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 24 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 three-month period ended April 30, 2003 and 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. 25 PART II - OTHER INFORMATION Item 5. Forward Looking Statements 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. 26 Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description - ----------- ----------- 10.1 2003 Special Bonus Program (previously filed) 31.1 Certification of the Chief Executive Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934. 31.2 Certification of the Chief Financial Officer pursuant to Rule 13a - 14(a) of the Securities Exchange Act of 1934. 32.1 Certification of the Chief Executive Officer pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 33.2 Certification of the Chief Financial Officer pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WHITEHALL JEWELLERS, INC. (Registrant) Date: January 21, 2004 By: /s/ John R. Desjardins ---------------------------- John R. Desjardins Executive Vice President; Chief Financial Officer and Treasurer (Duly authorized officer and principal financial officer) 28 EX-31.1 3 c82195a1exv31w1.txt CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) Exhibit 31.1 Certificate Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 I, Hugh M. Patinkin, Chief Executive Officer of Whitehall Jewellers, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Whitehall Jewellers, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [reserved] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 21, 2004 /s/ Hugh M. Patinkin ------------------------ Name: Hugh M. Patinkin Title: Chief Executive Officer EX-31.2 4 c82195a1exv31w2.txt CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) Exhibit 31.2 Certificate Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 I, John R. Desjardins, Chief Financial Officer of Whitehall Jewellers, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q/A of Whitehall Jewellers, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [reserved] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 21, 2004 /s/ John R. Desjardins -------------------------------- Name: John R. Desjardins Executive Vice President - Chief Financial Officer and Treasurer EX-32.1 5 c82195a1exv32w1.txt CERTIFICATION OF CEO PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Whitehall Jewellers, Inc. (the "Company") on Form 10-Q/A for the period ended April 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Hugh M. Patinkin ----------------------------- Hugh M. Patinkin Chief Executive Officer January 21, 2004 EX-32.2 6 c82195a1exv32w2.txt CERTIFICATION OF CFO PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATE PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Whitehall Jewellers, Inc. (the "Company") on Form 10-Q/A for the period ended April 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John R. Desjardins ------------------------------ John R. Desjardins Executive Vice President, Chief Financial Officer January 21, 2004 -----END PRIVACY-ENHANCED MESSAGE-----