<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File number: 0-028176
Whitehall Jewellers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1433610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
155 No. Wacker, Chicago, IL. 60606
(Address of principal executive offices)
312/782-6800
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of the Registrant's common stock $.001 par value per share,
outstanding as of July 31, 1999 was 9,646,982 and the number of the Registrant's
Class B common stock $1.00 par value as of such date was 101.298.
<PAGE> 2
WHITEHALL JEWELLERS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 1999
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and six months
ended July 31, 1999 and 1998 (unaudited)
Balance Sheets - July 31, 1999, January 31, 1999 and July 31,
1998 (unaudited)
Statements of Cash Flows for the six months ended July 31,
1999 and 1998 (unaudited)
Notes to Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
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PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitehall Jewellers, Inc.
Statements of Operations
for the three months and six months ended July 31, 1999 and 1998
(unaudited)(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 31, 1999 July 31, 1998 July 31, 1999 July 31, 1998
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Net sales $ 65,886 $ 46,849 $ 124,821 $ 88,433
Cost of sales (including buying and occupancy
expenses) 39,263 28,087 75,211 53,532
----------------- ---------------- ----------------- ----------------
Gross profit 26,623 18,762 49,610 34,901
Selling, general and administrative expenses
21,543 15,188 41,373 29,381
----------------- ---------------- ----------------- ----------------
Income from operations 5,080 3,574 8,237 5,520
Interest expense 1,392 840 2,649 1,654
----------------- ---------------- ----------------- ----------------
Income before income taxes 3,688 2,734 5,588 3,866
Income tax expense 1,420 1,053 2,152 1,483
----------------- ---------------- ----------------- ----------------
Net income $ 2,268 $ 1,681 $ 3,436 $ 2,383
================= ================= ================ =================
Basic earnings per share:
Net income $ 0.24 $ 0.17 $ 0.35 $ 0.23
================= ================= ================ =================
Weighted average common share and common share
equivalents 9,636 10,181 9,764 10,176
================= ================= ================ =================
Diluted earnings per share:
Net income $ 0.23 $ 0.16 $ 0.34 $ 0.23
================= ================= ================ =================
Weighted average common share and common share
equivalents 9,961 10,385 9,994 10,395
================= ================= ================ =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Whitehall Jewellers, Inc.
Balance Sheets
(unaudited, in thousands)
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999 July 31, 1998
------------------ ------------------ ----------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net $ 2,285 $ 3,147 $ 1,604
Layaway receivables, net 4,087 3,514 3,088
Merchandise inventories 133,667 116,748 97,773
Other current assets 1,750 1,329 911
Deferred financing costs 362 143 252
Deferred income taxes, net 1,518 1,518 1,257
----------------- ------------------- -----------------
Total current assets 143,669 126,399 104,885
Property and equipment, net 41,733 34,304 27,148
Goodwill 6,317 6,448 ---
Deferred financing costs 1,129 1,529 491
Deferred income tax, net 926 926 1,953
------------------ ------------------ ----------------
Total assets $193,774 $169,606 $134,477
================= =================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Outstanding checks, net $ 3,300 $ 7,853 $ 1,878
Revolver loan 57,554 28,886 25,820
Term loan, current 2,750 2,750 1,500
Accounts payable 37,993 25,601 29,137
Accrued payroll 3,475 4,174 2,255
Income taxes --- 5,226 639
Other accrued expenses 14,129 13,431 11,388
----------------- ------------------- -----------------
Total current liabilities 119,201 87,921 72,617
Term loan 15,750 17,250 9,426
Subordinated debt 640 640 640
Other long-term liabilities 1,627 1,627 1,507
----------------- ------------------- -----------------
Total liabilities 137,218 107,438 84,190
Commitments and contingencies
Stockholders' equity:
Common stock 10 10 10
Class B common stock --- --- ---
Class C common stock --- --- ---
Class D common stock --- --- ---
Additional paid-in capital 60,270 60,008 60,006
Accumulated earnings (deficit) 5,586 2,150 (9,729)
----------------- ------------------- -----------------
65,866 62,168 50,287
----------------- ------------------- -----------------
Less:
Treasury stock, at cost (565,500 shares) (9,310) --- ---
----------------- ------------------- -----------------
Total stockholders' equity, net 56,556 62,168 50,287
----------------- ------------------- -----------------
Total liabilities and stockholders' equity $193,774 $ 169,606 $134,477
================= =================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements.
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Whitehall Jewellers, Inc.
Statements of Cash Flows
for the six months ended July 31, 1999 and 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
Six months ended
----------------
July 31, July 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,436 $ 2,383
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,265 2,214
Loss on disposition of assets 15 159
Changes in assets and liabilities: 862 928
Decrease in accounts receivable, net (573) (452)
Increase in layaway receivables, net (16,919) (18,704)
Increase in merchandise inventories, net of gold consignment 106 85
Decrease in other current assets 12,392 12,612
Increase in accounts payable (5,754) 499
Increase in accrued liabilities --------- ---------
Net cash used in operating activities (3,170) (276)
Cash flows from investing activities:
Capital expenditures (10,397) (6,558)
--------- ---------
Net cash used in investing activities (10,397) (6,558)
Cash flows from financing activities:
Borrowing on revolver loan 163,993 269,516
Repayment of revolver loan (138,340) (260,537)
Repayment of term loan (1,500) (500)
Proceeds from gold consignment 3,015 5,984
Proceeds from exercise of stock options 262 101
Purchases of Treasury Stock (9,310) --
Decrease in outstanding checks, net (4,553) (7,730)
--------- ---------
Net cash provided by financing activities 13,567 6,834
--------- ---------
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
--------- ---------
Cash and cash equivalents at end of period $ -- $ --
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
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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 272 stores as of July
31, 1999, located in 31 states, operating in regional or superregional shopping
malls.
2. Acquisition
On September 10, 1998, the Company acquired substantially all of the
assets of 36 jewelry stores operating under the Jewel Box name from Carlyle &
Co. Jewelers and its affiliates, headquartered in Greensboro, North Carolina.
The stores are located in eight states in the Southeastern United States. The
Company purchased all associated inventory, accounts receivable and fixed assets
for approximately $22 million (including fees and other costs) in cash. The
Company financed the acquisition through a term loan and revolving credit
facility under its new Credit Agreement. In a related transaction, the Company
sold all of the acquired Jewel Box customer accounts receivable for cash to
BancOne, N.A.
The acquisition has been accounted for using the purchase method of
accounting, and, accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was approximately $6.6 million, and has been recorded as
goodwill which is being amortized on a straight-line basis over 25 years. The
amount of goodwill amortization in the second quarter of 1999 was $66,000.
The net purchase price was allocated as follows:
(in thousands)
Inventory $9,636
Accounts receivable 3,902
Other current assets 121
Fixed assets 1,861
Other accrued expenses (315)
Goodwill 6,555
- ------------------------------------
Purchase price $21,760
====================================
3. Summary of Significant Accounting Policies
Basis for Presentation
The accompanying Balance Sheet as of January 31, 1999 was derived from
the audited financial statements for the year ended January 31, 1999. The
accompanying unaudited Balance Sheets as of July 31, 1999 and 1998, the
Statements of Income for the three and six months ended July 31, 1999 and 1998
and the Statements of Cash Flows for the six months ended July 31, 1999 and 1998
have been prepared in accordance with generally accepted accounting principles
for interim financial information. The interim financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the results for the
interim periods presented. The interim financial statements should be read in
the context of the Financial Statements and footnotes thereto included in the
Whitehall Jewellers, Inc. Annual Report for the fiscal year ended January 31,
1999. References in the following notes to years and quarters are references to
fiscal years and fiscal quarters.
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4. Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful
accounts of $1,456,000, $1,027,000, and $844,000 as of July 31, 1999,
January 31, 1999 and July 31, 1998, respectively.
5. Inventory
As of July 31, 1999, January 31, 1999 and July 31, 1998, merchandising
inventories consist of:
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999 July 31, 1998
(in thousands)
<S> <C> <C> <C>
Raw Materials $ 5,661 $ 4,177 $ 5,638
Finished Goods 128,006 112,571 92,135
========================== ========================== ===========================
Inventory $ 133,667 $ 116,748 $ 97,773
========================== ========================== ===========================
</TABLE>
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 $3,964,000,
$3,948,000, and $1,449,000 as of July 31, 1999, January 31, 1999 and July 31,
1998, respectively. As of July 31, 1999, January 31, 1999 and July 31, 1998,
consignment inventories held by the Company that are not included in the balance
sheets total $43,370,000, $37,778,000, and $28,713,000, respectively.
In addition, gold consignments of $24,294,000, $21,279,000 and
$21,279,000 are not included in the Company's balance sheets as of July 31,
1999, January 31, 1999 and July 31, 1998, respectively.
6. Financing Arrangements
Effective September 10, 1998, the Company entered into an Amended and
Restated Revolving Credit, Term Loan and Gold Consignment Agreement (the "Credit
Agreement") with its bank group to provide for a total facility of $110.0
million through September 10, 2003. Beginning with the quarter ending January
31, 1999, interest rates and the commitment fee charged on the unused facility
float in a grid based upon the Company's quarterly financial performance.
Under this agreement, the banks have a security interest in
substantially all of the assets of the Company. The Credit Agreement contains
certain restrictions on capital expenditures, payment of dividends and
assumption of additional debt and requires the Company to maintain specified
minimum levels of certain financial measures, including fixed charge ratio and
certain balance sheet measures.
Revolver Loan
- -------------
The revolving loan facility under the Credit Agreement is available up
to a maximum of $90.0 million, including amounts borrowed under the gold
consignment facility, and is limited by a borrowing base computed based on the
value of the Company's inventory and accounts receivable. Interest rates and
commitment fees on the unused facility float in a grid based on the Company's
quarterly financial performance.
The interest rates for borrowings under this agreement are, at the
Company's option, Eurodollar rates plus 125 basis points or the banks' prime
rate. Interest is payable monthly for prime borrowings and upon maturity for
Eurodollar borrowings. The interest expense under the current and former
revolver facilities for the six months ended July 31, 1999 and 1998 was
$1,397,000 and $834,000, reflecting a weighted average interest rate of 6.1% and
7.2%, respectively.
Term Loans
- ----------
The term loan facility under the Credit Agreement is available up to a
maximum of $18.5 million (originally $20.0 million, less principal repayments).
The interest rates for these borrowings are, at the Company's option, Eurodollar
rates plus 175 basis
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points or the banks' prime rate plus 50 basis points. 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 in a
grid based on the Company's quarterly financial performance. The interest
expense for the current and former term loan facilities for the six months ended
July 31, 1999 and 1998 was $681,000 and $426,000 reflecting a weighted average
interest rate of 7.0% and 7.7% respectively.
Gold Consignment Facility
- -------------------------
During the second quarter of 1996, the Company sold and simultaneously
consigned a total of 39,000 troy ounces of gold for $15.3 million under a gold
consignment facility. During the second quarter of 1998, the Company sold and
simultaneously consigned an additional 20,000 troy ounces of gold for $6.0
million. On March 3, 1999, the Company sold and simultaneously consigned 10,500
troy ounces of gold for $3.0 million. 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 of 175 basis points over the rate set by the bank based on
the London Interbank Bullion Rates payable monthly. Consignment rates and
commitment fees on the unused portion of the gold consignment facility float in
a grid based upon the Company's quarterly financial performance. The consignment
fees totaled $311,000 at a weighted average rate of 3.1% and $234,000 at a
weighted average rate of 3.2% for the six months ended July 31, 1999 and 1998,
respectively. On September 10, 2003, the Company is required to repurchase
69,500 troy ounces of gold under this agreement at the prevailing gold rate in
effect on that date, or the facility will be renewed.
Subordinated Notes
- ------------------
Series C Senior Subordinated Notes due 2004 (the "Series C Notes") totaling
$640,000 aggregate principal amount outstanding as of July 31, 1999, bear
interest at 12.15% per annum payable in cash, with interest payments due
quarterly. In January 1998, $9,880,000 of the Series C Notes were redeemed at a
premium of $1,087,000. Interest expense was $39,000 for the six months ended
July 31, 1999 and 1998, respectively.
7. Dilutive Shares That Were Outstanding During the Period
The following table summarizes the reconciliation of the numerators and
denominators, as required by SFAS No. 128, for the basic and diluted EPS
computations at July 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Six Months Ended
July 31, 1999 July 31, 1998 July 31, 1999 July 31, 1998
----------------- ----------------- ---------------- ----------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net earnings for basic and diluted EPS $ 2,268 $ 1,681 $ 3,436 $ 2,383
Weighted average shares for basic EPS 9,636 10,181 9,764 10,176
Incremental shares upon conversions:
Stock options 325 204 230 219
Weighted average shares for diluted EPS 9,961 10,385 9,994 10,395
</TABLE>
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<PAGE> 9
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations for the Three Months Ended July 31, 1999
- --------------------------------------------------------------
Net sales for the second quarter of fiscal 1999 increased $19.0 million, or
40.6%, to $65.9 million. Comparable store sales increased $6.0 million, or
12.3%, in the second quarter of fiscal 1999. Sales for the Jewel Box stores
(purchased in September 1998) contributed approximately 0.6% of the comparable
store sales increase in the second quarter of fiscal 1999. The Jewel Box stores
posted a 17.8% comparable store sales increase during the second quarter. Sales
from new stores contributed $8.8 million to the overall sales increase. Sales
from the acquired stores contributed $5.0 million in increased sales. The total
number of merchandise units sold increased by approximately 31.3% in the second
quarter of fiscal 1999, while the average price per merchandise sale increased
to $302 in fiscal 1999 from $281 in fiscal 1998. Comparable store sales
increased in part due to the strong economic environment for jewelry purchases,
increased use of non-recourse credit, enhanced marketing programs, strong store
inventory assortments and the contribution from acquired jewelry stores. The
Company opened 10 new stores in the second quarter of fiscal 1999 increasing the
number of stores open to 272 as of July 31, 1999 compared to 207 as of July 31,
1998.
Gross profit increased $7.9 million to $26.6 million in the second quarter
of fiscal 1999. Gross profit as a percentage of sales increased to 40.4% in the
second quarter of fiscal 1999 from 40.0% compared to the second quarter of
fiscal 1998. This increase primarily resulted from higher merchandise margins,
and lower occupancy and buying expenses as a percentage of sales.
Selling, general and administrative expenses increased $6.4 million, or
41.8%, to $21.5 million in the second quarter of fiscal 1999 from $15.2 million
in the prior period. New stores opened and expenses associated with the
Company's Year 2000 project contributed to the increase. As a percentage of net
sales, selling, general and administrative expenses increased to 32.7% in the
second quarter of fiscal 1999 from 32.4% in the second quarter of fiscal 1998.
The dollar increase primarily relates to higher payroll expenses of $4.0
million, higher other expenses of $1.8 million, and higher credit costs of $0.5
million. Credit sales as a percentage of net sales increased to 42.6% in the
second quarter of fiscal 1999 from 39.4% in the second quarter of fiscal 1998,
primarily as a result of increased sales through secondary credit programs and
increased promotions.
Interest expense increased approximately $0.6 million to $1.4 million in
the second quarter of fiscal 1999 from $0.8 million in the second quarter of
fiscal 1998. The impact of higher average borrowings was partially offset by
reduced interest rates.
Income tax expense increased approximately $0.4 million to $1.4 million in
the second quarter of fiscal 1999 from $1.0 million in the prior period,
reflected an effective annual tax rate of 38.5% in both periods.
Results of Operations for the Six Months Ended July 31, 1999
- ------------------------------------------------------------
Net sales for the six months ended July 31, 1999 increased $36.4
million, or 41.1%, to $124.8 million. Comparable store sales increased $11.3
million, or 12.3%, in the first six months of fiscal 1999. Sales for the Jewel
Box stores (purchased in September 1998) contributed approximately 1.0% of the
comparable store sales increase for the first six months of fiscal 1999. The
Jewel Box stores posted a 20.9% comparable store sales increase for the six
months ended July 31, 1999. Sales from new stores contributed $16.8 million to
the overall sales increase. Sales from the acquired stores contributed $9.3
million in increased sales. The total number of merchandise units sold increased
by approximately 35.3% in the first half of fiscal 1999, while the average price
per merchandise sale increased to $301 in fiscal 1999 from $286 in fiscal 1998.
Comparable store sales increased in part due to the strong economic environment
for jewelry purchases, increased use of non-recourse credit, enhanced marketing
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programs, strong store inventory assortments and the contribution from acquired
jewelry stores. The Company opened 23 new stores and closed one store in the
first six months of fiscal 1999 increasing the number of stores open to 272 as
of July 31, 1999 compared to 207 as of July 31, 1998.
Gross profit increased $14.7 million to $49.6 million in the first six
months of fiscal 1999. Gross profit as a percentage of sales increased to 39.7%
in the first six months of fiscal 1999 from 39.5% compared to the same period of
fiscal 1998. This increase primarily resulted from higher merchandise margins,
and lower occupancy and buying expenses as a percentage of sales.
Selling, general and administrative expenses increased $12.0 million, or
40.8%, to $41.4 million for the first six months of fiscal 1999 from $29.4
million in the prior period. New stores opened and other operating expenses,
including those expenses associated with the Company's Year 2000 project,
contributed to the increase. As a percentage of net sales, selling, general and
administrative expenses decreased to 33.1% in the first half of fiscal 1999 from
33.2% in the first half of fiscal 1998. The dollar increase primarily relates to
higher payroll expenses of $8.0 million, higher other expenses of $2.9 million,
increased credit expense of approximately $0.7 million and higher advertising
costs of $0.6 million. Credit sales as a percentage of net sales increased to
41.9% in the first half of fiscal 1999 from 38.6% in the first half of fiscal
1998, primarily as a result of increased sales through secondary credit
programs.
Interest expense increased approximately $0.9 million to $2.6 million in
the first six months of fiscal 1999 from $1.7 million in the first six months of
fiscal 1998. The impact of higher average borrowings was partially offset by
reduced interest rates.
Income tax expense increased approximately $0.7 million to $2.2 million in
the first half of fiscal 1999 from $1.5 million in the prior period, reflected
an effective annual tax rate of 38.5% and 38.4% for the six months ended July
31, 1999 and 1998, respectively.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements consist principally of funding
increases in inventory at existing stores, capital expenditures and acquisitions
of new stores and working capital (primarily inventory) associated with the
Company's new stores. The Company's primary sources of liquidity have
historically been bank borrowings under the Company's revolver and cash flow
from operations.
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.
On February 19, 1999, the Company announced that its Board of Directors
had authorized the repurchase of up to $10.0 million of its Common Stock. The
repurchase program authorizes the Company to purchase shares over an 18-month
period in the open market or through privately negotiated transactions. To date,
the Company has repurchased 565,500 shares at a total cost of approximately $9.3
million. The program has been financed using the Company's revolving credit
facility.
The Company's cash flow used in operating activities increased to $3.2
million in the six months ended July 31, 1999 from $0.3 million used in
operating activities in the six months ended July 31, 1998. Higher income from
operations together with increases in accounts payable ($12.4 million), higher
depreciation and amortization ($3.3 million) and reduced accounts receivable
($0.9 million) were offset by increases in merchandise inventories ($16.9
million) and by a decrease in accrued liabilities ($5.8 million). The increase
in merchandise inventories primarily related to inventory for new store
openings, including anticipated store openings in the third quarter of fiscal
1999 and completed new store openings in the first half of fiscal 1999. In the
first half of 1999, the primary sources of the Company's liquidity included a
$25.7 million net increase in the amount outstanding under the Company's
revolver, proceeds of $3.0 million from gold consignment, partially offset by a
decrease of $4.6 million in outstanding checks. The Company utilized cash in the
first six half of fiscal 1999
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primarily to fund capital expenditures of $10.4 million, primarily related to
the opening of 23 new stores in the first half of 1999, to fund the purchase of
the Company's Common Stock ($9.3 million) 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.
Year 2000
- ---------
The "Year 2000" problem concerns the inability of information systems
to properly recognize and process date-sensitive information beyond January 1,
2000. Like many companies, "Year 2000" computer hardware and software failures
of internal systems and/or of third party systems could have a significant,
adverse impact on all aspects of the Company's operations. Because of the range
of possible issues and the large number of variables involved, it is impossible
to quantify the potential cost of problems should the Company's remediation
efforts or the efforts of third parties with whom the Company does business not
be successful. The Company recognizes the need to address this problem in order
to minimize the effects of the "Year 2000" issue on its operations and its
relationships with vendors and other third parties. The Company is using both
internal and external resources to complete its "Year 2000" project.
The Company operates exclusively in one business segment, specialty
retail jewelry. All stores are located within the United States. The Company's
two principle mission-critical systems applications are the point-of-sale
("POS") terminals and software which controls store transaction processing, and
the centrally maintained information systems infrastructure which controls
financial, merchandising and administrative systems.
All stores use the same POS software which is licensed from a
third-party vendor. In the fall of 1998, a "Year 2000" compliant version of the
POS software was installed at all stores. Testing of the new software is
substantially complete. The Company has replaced all of its POS desktop
terminals with "Year 2000" compliant terminals.
The Company's financial management, information technology,
merchandising and other administrative functions operate centrally from the
Company's corporate office. The Company uses a mid-range computing platform
which is complemented by various networks. The operating systems and hardware
platforms were upgraded, tested and the Company believes are currently "Year
2000" compliant. The replacement or upgrading and testing of financial
management and various customized software packages is substantially complete.
With respect to systems that the Company is not upgrading, the Company is
currently renovating those systems to be "Year 2000" compliant.
The Company is developing contingency plans to address unforeseen
system or environmental failures due to the "Year 2000" issue. The major focus
of these plans is to have documented procedures to (1)handle the
mission-critical functions and (2)to define the business tactics to identify and
manage certain problems which may occur as a result of the "Year 2000" issue in
as non-disruptive a manner as possible. The Company does not expect to be able
to develop feasible contingency plans to address all "Year 2000" related
failures; and contingency plans which are developed will only mitigate the
impact of "Year 2000" failures.
The Company's total costs for making its mission-critical systems "Year
2000" compliant are not expected to be material to the Company's financial
condition. The total cost of the "Year 2000" project is expected to approximate
$1.2 million. To date, the total amount expended on the project is approximately
$1 million.
The Company believes that the systems upgrades, replacements and
renovations will be made on a timely basis, and that the "Year 2000" issue with
respect to the Company's internal systems will not pose significant operational
problems or result in costs that have a material adverse impact on the Company's
business, financial condition or results of operations. A failure by the Company
to timely address the "Year 2000" issue, or a failure by the Company to maintain
adequate information systems capacity and infrastructure as it upgrades,
replaces and renovates its information systems,
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<PAGE> 12
could have a material adverse impact on the Company's business, financial
condition or results of operations.
In addition to the Company's internal systems, certain systems of third
party suppliers and service providers which are not currently "Year 2000"
compliant could adversely impact the Company's operations. The Company has
confirmed with its primary lenders and private-label and other credit suppliers
that their systems are, or will on a timely basis be, "Year 2000" compliant. In
addition, certain key vendors and service providers have confirmed orally that
they are implementing plans to address the "Year 2000" issue. The Company will
continue communicating with its key suppliers and key service providers to
monitor their plans to address, and progress in addressing, the "Year 2000"
issue and to evaluate any impact on the Company. However, there can be no
assurance that the systems of third parties with whom the Company does business
will be converted timely. A failure by any such third party to timely address
the "Year 2000" issue could have a material adverse impact on the Company's
business, financial condition or results of operations.
Inflation
---------
Management believes that inflation generally has not had a material
effect on results of its operations.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
This information is set forth in the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1999, and is incorporated herein by
reference. There have been no material changes to the Company's market risk
during the six months ended July 31, 1999.
12
<PAGE> 13
PART II - OTHER INFORMATION
Item 5 - Other Information
Forward-Looking Statements
- --------------------------
All statements, trend analysis and other information contained in this
report relative to markets for the Company's products and trends in the
Company's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend"
and other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things: (1) the extent and results of the Company's store expansion
strategy and associated occupancy costs; (2) the seasonality of the Company's
business; (3) economic conditions, the retail sales environment and the
Company's ability to execute its business strategy and the related effects on
comparable store sales and other results; (4) the extent and success of the
Company's marketing and promotional programs; (5) the extent to which the
Company is able to retain and attract key personnel as well as personnel costs;
(6) competition; (7) the availability and cost of consumer credit; (8)
relationships with suppliers; (9) timely "Year 2000" compliance by the Company
and third party suppliers and service providers; (10) the Company's ability to
maintain adequate information systems capacity and infrastructure; (11) the
efficient and successful integration of the Jewel Box locations and assets into
the Company's existing operations; (12) the Company's leverage and cost of
funds; (13) the Company's ability to maintain adequate loss prevention measures;
(14) fluctuations in raw material prices including diamond, gem and gold prices;
(15) regulation; and (16) the risk factors listed from time to time in the
Company's filings with the Securities and Exchange Commission.
Item 6 - Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule (SEC/EDGAR only)
(b) Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities and 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: September 15, 1999 By: /s/John R. Desjardins
---------------------
John R. Desjardins
Executive Vice President -
Finance and Administration
(principal financial officer)
13
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