<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: October 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 October 31, 1999 was 9,640,683 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 OCTOBER 31, 1999
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Operations for the three months and nine months ended
October 31, 1999 and 1998 (unaudited)
Balance Sheets - October 31, 1999 (unaudited), January 31, 1999
(audited) and October 31, 1998 (unaudited)
Statements of Cash Flows for the nine months ended October 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
2
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
Whitehall Jewellers, Inc.
Statements of Operations
for the three months and nine months ended
October 31, 1999 and 1998 (unaudited)(in
thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
October October October October
31, 1999 31, 1998 31, 1999 31, 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 62,933 $ 48,483 $ 187,754 $ 136,916
Cost of sales (including buying and occupancy
expenses) 37,894 29,453 113,105 82,985
--------- --------- ---------- ----------
Gross profit 25,039 19,030 74,649 53,931
Selling, general and administrative expenses
21,605 16,837 62,978 46,218
--------- --------- ---------- ----------
Income from operations 3,434 2,193 11,671 7,713
Interest expense 1,669 1,202 4,318 2,856
--------- --------- ---------- ----------
Income before income taxes 1,765 991 7,353 4,857
Income tax expense 680 382 2,832 1,865
--------- --------- ---------- ----------
Net income $ 1,085 $ 609 $ 4,521 $ 2,992
========= ========= ========= ==========
Basic earnings per share:
Net income $ 0.11 $ 0.06 $ 0.46 $ 0.29
========= ========= ========= ==========
Weighted average common share and common share
equivalents 9,651 10,189 9,726 $ 10,180
========= ========= ========= ==========
Diluted earnings per share:
Net income $ 0.11 $ 0.06 $ 0.45 $ 0.29
========= ========= ========== ===========
Weighted average common share and common share
equivalents 10,143 10,259 10,053 10,356
========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
Whitehall Jewellers, Inc.
Balance Sheets
as of October 31, 1999, January 31, 1999 and October 31, 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
(audited)
---------------- ---------------- ----------------
October 31, 1999 January 31, 1999 October 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Accounts receivable, net $ 3,020 $ 3,147 $ 1,817
Layaway receivables, net 5,061 3,514 3,201
Merchandise inventories 161,848 116,748 131,171
Other current assets 951 1,329 833
Prepaid taxes 1,671 --- 508
Deferred income taxes, net 1,518 1,518 1,257
Deferred financing costs 362 143 252
------------- ------------- -------------
Total current assets 174,431 126,399 139,039
Property and equipment, net 47,246 34,304 32,760
Goodwill 6,252 6,448 8,148
Deferred income tax, net 926 926 1,953
Deferred financing costs 1,038 1,529 425
------------- ------------- -------------
Total assets $ 229,893 $ 169,606 $ 182,325
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Outstanding checks, net $ 5,854 $ 7,853 $ 2,079
Revolver loans 64,129 28,886 43,862
Current portion of long-term debt 3,000 2,750 2,000
Accounts payable 60,492 25,601 47,724
Accrued payroll 3,697 4,174 1,873
Income taxes --- 5,226 ---
Other accrued expenses 17,454 13,431 13,736
------------- ------------- -------------
Total current liabilities 154,626 87,921 111,274
Term loan 15,500 17,250 18,000
Subordinated debt 640 640 640
Other long-term liabilities 2,085 1,627 1,513
------------- ------------- -------------
Total liabilities 172,851 107,438 131,427
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 60,358 60,008 60,008
Accumulated earnings (deficit) 6,671 2,150 (9,120)
------------- ------------- -------------
67,039 62,168 50,898
------------- ------------- -------------
Less:
Treasury stock, at cost (588,900
shares) (9,997) --- ---
------------- ------------ ------------
Total stockholders' equity, net 57,042 62,168 50,898
------------- ------------ ============
Total liabilities and
stockholders' equity $ 229,893 $ 169,606 $ 182,325
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
Whitehall Jewellers, Inc.
Statements of Cash Flows
for the nine months ended October 31, 1999 and 1998
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended
----------------------------------
October October
31, 1999 31, 1999
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,521 $ 2,992
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,089 3,653
Loss on disposition of assets 89 124
Changes in assets and liabilities:
Decrease in accounts receivable, net 127 541
Increase in layaway receivables, net (1,547) (565)
Increase in merchandise inventories, net of
gold consignment (45,100) (43,499)
Decrease in other current assets 378 280
Increase in accounts payable 34,891 31,199
Increase in accrued liabilities (2,893) 1,234
-------------- -------------
Net cash used in operating activities (4,445) (4,041)
Cash flows from investing activities:
Capital expenditures (17,652) (11,763)
Purchase of assets --- (22,891)
Proceeds from assets sold --- 4,542
-------------- -------------
Net cash used in investing activities (17,652) (30,112)
Cash flows from financing activities:
Borrowing on revolver loan 232,694 181,701
Repayment of revolver loan (200,466) (154,680)
Proceeds from term loan --- 20,000
Repayment of term loan (1,500) (11,426)
Proceeds from gold consignment 3,015 5,984
Proceeds from exercise of stock options 350 103
Purchases of treasury stock (9,997)
Decrease in outstanding checks, net (1,999) (7,529)
-------------- -------------
Net cash provided by financing activities 22,097 34,153
-------------- -------------
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
<PAGE> 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 289 stores as of
October 31, 1999, located in 33 states, operating in regional or super-regional
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 $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 third 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
======================================================
6
<PAGE> 7
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 October 31, 1999 and 1998 and the
Statements of Operations for the three months and nine months ended October 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.
4. Accounts Receivables, Net
Accounts receivable are shown net of the allowance for doubtful
accounts of $1,579,000, $1,027,000 and $928,000 as of October 31, 1999, January
31, 1999 and October 31, 1998, respectively.
5. Inventory
As of October 31, 1999, January 31, 1999 and October 31, 1998,
merchandising inventories consist of:
October 31, 1999 January 31, 1999 October 31, 1998
(in thousands)
Raw Materials $7,300 $4,177 $ 6,278
Finished Goods 154,548 112,571 124,893
================= ================ ================
Inventory $161,848 $116,748 $ 131,171
================= ================ ================
Raw materials primarily consist of diamonds, precious gems,
semi-precious gems and gold. There was no work-in-progress as of October 31,
1999, January 31, 1999, or October 31, 1998. Included within finished goods
inventory are allowances for inventory shrink, scrap, and miscellaneous costs of
$3,559,000, $3,948,000 and $4,199,000 as of October 31, 1999, January 31, 1999
and October 31, 1998, respectively. As of October 31, 1999, January 31, 1999 and
October 31, 1998, consignment inventories held by the Company that are not
included in the balance sheets total $53,490,000, $37,778,000, and $37,665,000,
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 October 31,
1999, January 31, 1999 and October 31, 1998, respectively.
7
<PAGE> 8
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. Availability under the
revolver is based on amounts outstanding thereunder, including the value of
consigned gold which fluctuates based on current gold prices. Effective October
5, 1999 the revolving credit facility under the Credit Agreement was increased
to $100 million through December 31, 1999. Interest rates and commitment fees on
the unused facility float in a grid based on the Company's quarterly financial
performance.
Current interest rates for borrowings under this agreement are, at the
Company's option, Eurodollar rates plus 137.5 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 nine months ended October 31, 1999 and 1998 was
$2,386,000 and $1,493,000, reflecting a weighted average interest rate of 6.5%
and 7.3%, 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).
Current interest rates for these borrowings are, at the Company's option,
Eurodollar rates plus 187.5 basis 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 nine months ended October 31, 1999 and
1998 for these borrowings was $1,016,000 and $748,000 reflecting a weighted
average interest rate of 7.1% and 7.8%, 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, 19999, 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. A commitment fee of 50 basis
points per annum on the unused portion of the gold consignment facility is
payable monthly. The consignment fees totaled $489,000 at a weighted average
rate of 3.4% and $366,000 at a weighted average rate of 3.1% for the nine months
ended October 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.
8
<PAGE> 9
Subordinated Notes
- ------------------
Series C Senior Subordinated Notes due 2004 (the "Series C Notes")
totaling $640,000 aggregate principal amount outstanding as of October 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 $58,000 for the nine months ended
October 31, 1999 and 1998.
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 October 31, 1999 and 1998.
<TABLE>
<CAPTION>
Three months ended Nine months ended
(in thousands, except per share amounts)
October October October October
31, 1999 31, 1998 31, 1999 31, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings for basic and diluted EPS $ 1,085 $ 609 $ 4,521 $ 2,992
Weighted average shares for basic EPS 9,651 10,189 9,726 10,180
Incremental shares upon conversions:
Stock options 492 70 327 176
Weighted average shares for diluted EPS 10,143 10,259 10,053 10,356
</TABLE>
9
<PAGE> 10
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 October 31, 1999
- -----------------------------------------------------------------
Net sales for the third quarter of fiscal 1999 increased $14.5
million, or 29.8%, to $62.9 million. Comparable store sales, which includes the
Jewel Box store sales only for the month of October 1999, increased $3.6
million, or 8.0% in the third quarter of fiscal 1999. Sales from new stores
contributed $8.7 million to the overall sales increase. Sales from the acquired
stores contributed $1.7 million in increased sales. The total number of
merchandise units sold increased by approximately 17.4% in the third quarter of
fiscal 1999, while the average price per merchandise sale increased to $347 in
the third quarter of fiscal 1999 from $315 in the third quarter of fiscal 1998.
Comparable store sales increased in part due to the strong economic environment
for jewelry purchases, increased use of non-recourse credit and strong store
inventory assortments. The Company opened 18 new stores and closed one store in
the third quarter of fiscal 1999 increasing the number of stores opened to 289
as of October 31, 1999 compared to 244 as of October 31, 1998.
Gross profit increased $6.0 million to $25.0 million in the third
quarter of fiscal 1999 compared to the third quarter of fiscal 1998. Gross
profit as a percentage of sales increased to 39.8% in the third quarter of
fiscal 1999 compared to 39.3% in the third quarter of fiscal 1998. This increase
is attributable to higher merchandise margins in diamond and semi-precious
categories that were partially offset by slightly increased occupancy and buying
costs.
Selling, general and administrative expenses increased $4.8 million,
or 28.3%, to $21.6 million in the third quarter of fiscal 1999 from $16.8
million in the third quarter of fiscal 1998. As a percentage of net sales,
selling, general and administrative expenses decreased to 34.3% from 34.7% in
the prior year quarter. The dollar increase primarily relates to higher payroll
expenses of $3.1 million, higher other expenses of $1.2 million, and higher
credit costs of $0.3 million. Credit sales as a percentage of net sales
increased to 46.7% in the third quarter of fiscal 1999 from 42.9% in the third
quarter of fiscal 1998, primarily as a result of increased sales through
secondary credit programs and increased promotions.
Interest expense increased $0.5 million to $1.7 million in the third
quarter of fiscal 1999 from $1.2 million in the third quarter of fiscal 1998.
This increase was attributable to the impact of higher average borrowings due to
store expansion, working capital needs and the Company's stock repurchase
program, that were partially offset by reduced interest rates.
Income tax expense increased approximately $0.3 million to $0.7
million in the third quarter of fiscal 1999 from $0.4 million in the prior
period, reflecting an effective annual tax rate of 38.5% in both periods.
Results of Operations for the Nine months Ended October 31, 1999
- ----------------------------------------------------------------
Net sales for the nine months ended October 31, 1999 increased $50.8
million, or 37.1%, to $187.8 million. Comparable store sales, which includes the
Jewel Box store sales for the first six months of fiscal 1999 and the month of
October 1999, increased $15.0 million or 10.9% in the first nine months of
fiscal 1999. Sales from new stores contributed $25.9 million to the overall
sales increase. Sales from the acquired stores contributed $12.2 million in
increased sales. These sales increases were partially offset by lost sales of
$1.6 million related to store closings. The total number of merchandise units
sold increased by approximately 29.3% for the first nine months of fiscal 1999,
while the average price per merchandise sale increased to $315 in the first nine
months of fiscal 1999 from $296 in the first nine months of fiscal 1998.
Comparable store sales increased in part due to the strong economic environment
for jewelry purchases, increased use of non-recourse credit, marketing programs,
strong store inventory assortments and the contribution from acquired jewelry
stores. The Company opened 41 new stores and closed two stores in the first nine
10
<PAGE> 11
months of fiscal 1999 increasing the number of stores opened to 289 as of
October 31, 1999 compared to 244 as of October 31, 1998.
Gross profit increased $20.7 million to $74.6 million in the first
nine months of fiscal 1999 compared to the first nine months of fiscal 1998.
Gross profit as a percentage of sales increased to 39.8% in the first nine
months of fiscal 1999 compared to 39.4% compared to the same period of fiscal
1998. This increase primarily resulted from higher merchandise margins and lower
buying expenses as a percentage of sales.
Selling, general and administrative expenses increased $16.8 million,
or 36.3%, to $63.0 million in the first nine months of fiscal 1999 from $46.2
million in the prior period. As a percentage of net sales, selling, general and
administrative expenses decreased to 33.5% from 33.8% in the prior year period.
The dollar increase primarily relates to higher payroll expenses of $11.3
million, higher other expenses of $4.1 million, and higher credit costs of $1.3
million. Credit sales as a percentage of net sales increased to 43.5% in the
first nine months of fiscal 1999 from 40.7% in the first nine months of fiscal
1998, primarily as a result of increased sales through secondary credit programs
and increased promotions.
Interest expense increased $1.5 million to $4.3 million in the first
nine months of fiscal 1999 from $2.8 million in the first nine months of fiscal
1998. This increase was attributable to the impact of higher average borrowings
due to store expansion, working capital needs and the Company's stock repurchase
program that were partially offset by reduced interest rates.
Income tax expense increased approximately $1.0 million to $2.8
million in the first nine months of fiscal 1999 from $1.8 million in the prior
period, reflecting an effective annual tax rate of 38.5% in both periods.
11
<PAGE> 12
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 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.
The Company has effectively completed the repurchase program. As of October 31,
1999, the Company has repurchased 588,900 shares at a total cost of
approximately $10.0 million. The program has been financed using the Company's
revolving credit facility.
The Company's cash flow used in operating activities increased to $4.4
million in the nine months ended October 31, 1999 from $4.0 million used in
operating activities in the nine months ended October 31, 1998. Higher income
from operations together with increases in accounts payable ($34.9 million) and
higher depreciation and amortization ($5.1 million) were offset by increases in
merchandise inventories ($45.1 million), by an increase in accrued liabilities
($2.9 million) and by an increase in layaway receivables ($1.5 million). The
increase in merchandise inventories primarily related to inventory for new store
openings and an increase in inventories in advance of the Christmas selling
season. In the first nine months of 1999, the primary sources of the Company's
liquidity included a $32.2 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 $2.0 million in outstanding checks. The
Company utilized cash in the first nine months of fiscal 1999 primarily to fund
capital expenditures of $17.7 million, primarily related to the opening of 41
new stores in the first nine months of 1999, to fund the purchase of the
Company's Common Stock ($10.0 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.
12
<PAGE> 13
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
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. In the second and third quarters of
1999, "Year 2000" compliant versions of these operating systems were installed
and tested. 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 complete. With respect to systems that the Company is not upgrading,
the Company believes that the renovation of these systems is substantially
complete.
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 has
continued to use its reasonable efforts to communicate 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.
The Company has developed 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
$1.1 million.
Although there can be no assurance that unanticipated events will not
occur, or that the Company has identified and adequately addressed all "Year
2000" issues, the Company believes that the systems upgrades, replacements and
renovations have been 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. If
unanticipated "Year 2000" issues arise that the Company has failed to adequately
address, this could have a material adverse impact on the Company's business,
financial condition or results of operations.
13
<PAGE> 14
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
Company's leverage and cost of funds; (12) the Company's ability to maintain
adequate loss prevention measures; (13) fluctuations in raw material prices
including diamond, gem and gold prices; (14) the extent and results of the
Company's E-commerce strategies and those of others; (15) regulation; (16) the
successful integration of acquired locations and assets into the Company's
existing operations; and, (17) the risk factors listed from time to time in the
Company's filings with the Securities and Exchange Commission.
14
<PAGE> 15
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule (SEC/EDGAR only)
(b) Reports on Form 8-K
On December 14, 1999, the Company filed a Report on Form 8-K (dated
December 14, 1999) with the Securities and Exchange Commission
reporting the issuance of a press release on that date announcing that
the Company's Board of Directors had declared a three-for-two common
stock split to be effected by a 50% dividend on the Company's Common
Stock and Class B Common Stock.
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: December 15, 1999 By: /s/ John R. Desjardins
--------------------------------
John R. Desjardins
Executive Vice President -
Finance and Administration
(principal financial officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 8,081
<ALLOWANCES> 1,579
<INVENTORY> 161,848
<CURRENT-ASSETS> 174,431
<PP&E> 74,706
<DEPRECIATION> (27,460)
<TOTAL-ASSETS> 229,893
<CURRENT-LIABILITIES> 154,626
<BONDS> 16,140
0
0
<COMMON> 10
<OTHER-SE> 57,042
<TOTAL-LIABILITY-AND-EQUITY> 57,052
<SALES> 187,754
<TOTAL-REVENUES> 187,754
<CGS> 113,105
<TOTAL-COSTS> 113,105
<OTHER-EXPENSES> 62,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,318
<INCOME-PRETAX> 7,353
<INCOME-TAX> 2,832
<INCOME-CONTINUING> 4,521
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,521
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.45
</TABLE>
