-----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, CbL9pLD+om79RDqFw4b7VErNzG2ALWBMN2zpY5xibpIeB5SO/lezXmDj8ZNeIHWk KlNpRWdS0ECP8lOXC7mNVQ== 0000950137-00-001909.txt : 20000428 0000950137-00-001909.hdr.sgml : 20000428 ACCESSION NUMBER: 0000950137-00-001909 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000131 FILED AS OF DATE: 20000427 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-K405 SEC ACT: SEC FILE NUMBER: 001-15615 FILM NUMBER: 610596 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-K405 1 FORM 10-K405 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-028176 WHITEHALL JEWELLERS, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 36-1433610 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 155 N. WACKER DR., STE. 500, CHICAGO, IL 60606 (Address of principal executive offices, including zip code) (312) 782-6800 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.001 PER SHARE, INCLUDING ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 11, 2000 was $317,626,494 based on the closing price of $21.375 of the registrant's common stock on the New York Stock Exchange. This calculation does not reflect a determination that persons are affiliates for any other purposes. Number of shares of Common Stock outstanding as of April 11, 2000: 16,842,697 Number of shares of Class B Common Stock outstanding as of April 11, 2000: 151.973 Documents Incorporated by Reference: Part II - Portions of the registrant's annual report to stockholders for the registrant's fiscal year ended January 31, 2000 (the "1999 Annual Report"), as indicated herein. Part III - Portions of the registrant's definitive proxy statement to be distributed in conjunction with registrant's annual stockholders' meeting to be held in 2000 (the "Proxy Statement"), as indicated herein. ================================================================================ 2 PART I As used herein, references to "Whitehall Jewellers", "we", "us", and "our" refer to Whitehall Jewellers, Inc. All statements, trend analysis and other information contained in this release relative to markets for our products, trends in ours operations or financial results, plans, expectations, estimates and beliefs, 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 our store expansion strategy and associated occupancy costs, and access to funds for new store openings; (2) the seasonality of our business; (3) economic conditions, the retail sales environment and our ability to execute our business strategy and the related effects on comparable store sales and other results; (4) the extent and success of our marketing and promotional programs; (5) the extent to which we are 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) our ability to maintain adequate information systems capacity and infrastructure; (10) our leverage and cost of funds; (11) our ability to maintain adequate loss prevention measures; (12) fluctuations in raw material prices including diamond, gem and gold prices; (13) the extent and results of our E-commerce strategies and those of others; (14) regulation affecting the industry generally, including regulation of marketing practices; (15) the successful integration of acquired locations and assets into our existing operations; (16) timely "Year 2000" compliance by us and by third party suppliers and service provider; and (17) the risk factors listed from time to time in our filings with the Securities and Exchange Commission. ITEM 1. BUSINESS THE COMPANY Founded in 1895, we are a leading, national specialty retailer of fine jewelry (based on number of stores) offering an in-depth selection in the following key categories: diamond, gold, precious and semi-precious jewelry. Our target customers are middle to upper-middle income women over 25 years old. As of April 11, 2000, we operated 310 mall based stores in 34 states under the established brand names of Whitehall Co. Jewellers (253 stores), Lundstrom Jewelers (55 stores) and Marks Bros. Jewelers (2 stores). Our small but flexible store format, averaging approximately 880 square feet, and our strong sales culture contribute to our highly productive stores which averaged annual sales of approximately $1.2 million per store in fiscal 1999. Our merchandising and marketing expertise, including the use of non- recourse credit, have also contributed to our 25 consecutive quarters of positive comparable store sales growth through January 31, 2000. We have approximately doubled our store base since 1995 through organic growth, the 1998 acquisition of 36 Jewel Box stores and opportunistic acquisitions of real estate leases through the strategic purchase of single or multiple retail locations (both jewelry and other formats). This store growth, combined with an average 8.1% comparable store sales increase over the past five years, produced total sales of $315.4 million in fiscal 1999, resulting in a compound annual rate of growth in sales of 19.2% since fiscal 1995. Due to our operating efficiencies during the same period, operating income grew at a compound annual rate of 19.3% to $37.3 million in fiscal 1999, reflecting an operating margin of 11.8%. In fiscal 1999, we opened 46 new stores and closed six stores as compared to fiscal 1998, when we opened 70 stores (which includes the 36 Jewel Box stores) and closed or sold 11 stores. We have recently accelerated our growth strategy by increasing our planned new store openings in fiscal 2000 from 50 to 62 new stores and increasing our planned new store openings in fiscal 2000, 2001 and -2- 3 2002 combined to 200. OPERATING STRATEGIES The principal elements of our operating strategy that contribute to our ability to open profitable new stores, drive comparable store sales, increase store productivity, and improve operating margins are as follows: Small, Flexible Store Format. We believe that we have a competitive advantage in obtaining high traffic, "center court" locations in desirable regional and super-regional malls due principally to: o our small average store size of approximately 880 square feet, which, while considerably smaller than the average store size of many of our mall-based competitors, generates comparable sales volumes; o our ability to adapt our store design to various sizes and configurations; and o our high average sales per square foot (approximately $1,319 for the 12 months ended January 31, 2000). Our stores are located in high visibility mall locations and provide our customers with a comfortable and inviting shopping environment. The stores' open, attractive design appeals to customers, while facilitating foot traffic and enhancing sales opportunities for us. In addition, the stores' small flexible format (which lowers our fixed occupancy costs) and high productivity are desirable to mall owners. In addition, we have followed a disciplined and systematic approach when evaluating new store opportunities. We select locations for our stores based on an evaluation of individual site economics and market conditions. Because of our flexible store format and our reputation among mall developers as a strong tenant, we have historically received more offers for attractive new store sites than we can accept. We are, and have been, opportunistic in acquiring other retail formats in a single store or multiple store acquisition. We believe that real estate is key to our business and site selection is a core competency of our management team. Attractive Store Operating Model. Our store model has proven to be very attractive across brands, mall locations and in both new and existing markets. New stores opened in fiscal 1998 (excluding the acquired Jewel Box stores) performed at approximately 90% of mature store sales in their first year of operation. Based on our experience with recent store openings, we estimate that the average net investment to open a new store is approximately $650,000, which includes capital expenditures and initial inventory, net of payables. During their first full 12 months of operations, our new stores opened in fiscal 1998 generated average net sales of approximately $1,050,000 and store-level operating cash flow (defined as income from operations plus depreciation and amortization) of approximately $176,000, or approximately 16.8% of net sales. Consistent Brand Imaging. We reinforce the upscale, trustworthy image of our store brand names, Whitehall Jewellers and Lundstrom Jewelers, with consistent merchandise selection and price points, store layout and fixtures, packaging, marketing and promotions. Whitehall Co. Jewellers is our primary trademark and is positioned to be somewhat more upscale than the average mall-based jewelry store. Additionally, having two strong brands allows us to enter a given mall with multiple locations, leverage our infrastructure within a given region and increase the number of potential store sites available to us. -3- 4 Differentiated Merchandising. We offer an in-depth selection of high-quality merchandise in several key categories of fine jewelry: diamond, gold, precious and semi-precious jewelry. This "key category" focus is oriented toward our target customer, the middle to upper-middle income woman over 25 years old. Within these categories, we augment our selection with consignment items which reflect more fashion forward themes, providing increased selection while minimizing our inventory risk. We are continuously expanding our merchandise assortment in higher price points. For example, in fiscal 1999 more than one-quarter of our overall sales resulted from purchases of items priced at or above $1,500. Unlike many of our competitors, we carry only a limited selection of watches and virtually no costume jewelry or gift merchandise. Motivated, Sales-Oriented Store Personnel. We believe that the quality of our sales personnel is critical to our success and represents a significant competitive advantage. To assist our sales personnel in their selling efforts, our sales personnel are authorized to discount prices within specifically developed guidelines. Compensation and bonus programs reinforce sales and margin goals on a daily, weekly and monthly basis. We continually seek to enhance the selling skills of our sales associates through recruitment of experienced sales personnel and extensive, ongoing training programs. Many non-sale activities are centralized, allowing sales personnel to focus on our customers. Absence of Recourse Credit Risk. We operate based upon a "no credit risk" policy. When purchasing on credit, customers must use their personal credit cards, our private label credit cards (which are available through a third party and are non-recourse to us), or other non-recourse third party credit arrangements. Our strict policy eliminates credit risk associated with a customer's failure to pay. This policy also distinguishes us from most of our competitors, which not only bear such credit risk, but also rely on finance income in addition to merchandise sales. In cooperation with providers of non-recourse credit under private label programs, we offer our customers competitive, interest-free terms and other attractive offerings in the promotion of our jewelry. Strict Operating Controls. Our management team exercises significant control over many non-sale aspects of our store operations, including site selection, purchasing, store development, financial reporting and sales training. We believe that this commitment to operational control enables us to: o operate substantially all of our stores on a profitable basis; o identify opportunities to improve productivity quickly; and o react quickly to shifts in product pricing and consumer purchasing trends. Emphasis on Risk Management. One of our management's strengths is our disciplined approach to the core elements of our business model. While we continue to evolve, there are three principal operating strategies that are designed to mitigate risk to our business: our small, flexible store format, our non-recourse credit policy and our use of consignment inventory. Our unique store format, which averages approximately 880 square feet, is smaller than that of many of our mall-based competitors. This usually means that we are not competing with these competitors for the same location in a mall, which often gives us more location opportunities. It also means that our rents are lower, not only because of reduced competition for space, but also because a smaller store means lower fixed occupancy costs. Secondly, we have limited credit risk. Unlike most of our competitors, we utilize a non-recourse, private label credit card program. As a result, we eliminate our credit risk associated with a customer's failure to pay. Lastly, we utilize consignment inventory on a selective basis, reducing our exposure to changes in fashion trends and inventory obsolescence. Experienced Management Team. Our five person executive management team has on average 18 -4- 5 years of retail industry experience and an average of 15 years of experience with Whitehall Jewellers. In addition, this group has a combined beneficial interest in the company in excess of 17.3% of our common stock. We also have an experienced middle management team. We are focused on identifying, recruiting and retaining highly skilled and experienced individuals at every level of our organization. We believe that this strategy will continuously provide a substantial depth of management in our organization. We also believe the opportunity for advancement within the organization helps us attract, develop and retain skilled employees. GROWTH STRATEGIES We have achieved comparable store sales increases of 4.8%, 5.8% and 11.0% in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. We believe that we will continue to have significant opportunities to increase sales and profits through continued execution of our store expansion strategy, continued comparable store sales gains and continued focus on strict operating controls. The key elements of our growth strategy are as follows: Accelerate New Store Growth. In fiscal 1997 and fiscal 1998, we opened a total of 64 stores and acquired 36 stores through the acquisition of the Jewel Box chain. In fiscal 1999, we opened 46 new stores. During this growth period we entered 20 new markets, including eight new states. Based on our successful track record of opening and/or converting these new stores and our solid infrastructure to support our expansion strategy, we believe we are well positioned for accelerated growth over the next several years. As of January 31, 2000, we had already identified substantially all of the 62 sites we intend to select for fiscal 2000, and we had reached understandings with respect to 54 of these stores. We anticipate that, in the near term, approximately 80% of new stores each year will be in existing markets and 20% will be in new markets. We believe that our Whitehall Jewellers and Lundstrom Jewelers stores are highly portable store concepts that achieve strong cash returns on investment and can operate successfully in a wide variety of geographic and demographic markets. Because of this, we believe that there is the potential to double our store base within our existing markets. Additionally, we opened our first store in an outlet mall in fiscal 1999. Based upon that store's initial performance, we expect to open additional stores in outlet malls. In addition, we expect to continue to evaluate acquisition opportunities as they arise as an element of our growth strategy. Refine Merchandising Initiatives. We continue to refine our merchandise mix and improve the quality of our product offerings, resulting in an increase in the number of customer transactions and the average transaction value per customer. We intend to continually apply these practices, by increasing the quality, selection and price points of our core items -- diamonds, gold, precious and semi-precious jewelry. We are enhancing these initiatives with new store fixtures and merchandise packaging. Enhance Sales and Marketing Initiatives. We use direct marketing and in-store promotions and intend to use our new website in our marketing process to drive comparable store sales. We plan to leverage our customer file of over one million names with additional direct mailing initiatives. For example, we increased our mailing for Valentine's Day this year to 300,000 mailings versus 30,000 mailings in fiscal 1999. In addition, in the first half of fiscal 2000, we plan to launch e-commerce capabilities to complement our store-based operations. -5- 6 STORE OPERATIONS Site Selection. We are very strict in our site selection methodology. Our stores average approximately 880 square feet and our layout is flexible enough to adapt to each location. We typically locate our stores in high traffic, "center court" locations in desirable regional and super-regional malls throughout the United States. We select locations for stores based on our evaluation of individual site economics and market conditions. When deciding to enter a new market, we evaluate a number of criteria including the following: o current and future size, demographic make-up and growth potential of the market; o total store sales potential; o ability to leverage existing infrastructure, personnel, brand awareness, marketing and advertising dollars; and o the size, strength and merchandising philosophy of existing and potential competitors in the marketplace. In choosing specific sites within a given mall, in a new or existing market, we apply site selection criteria taking into account numerous factors including the following: o size of space; o store visibility; o traffic patterns; o real estate costs; o store locations of our competitors; and o overall retail potential. Store Layout. Our stores are located in high visibility locations and provide our customers with a comfortable and inviting shopping environment. Nearly all of the stores have an open entrance rather than the more traditional single-doorway entrance. Stores are brightly-lit and generally are designed to have display cases situated along the lease line. By formatting the stores in this "customer-friendly" manner and without a formal entryway, a casual mall shopper comes in very close contact with the store's merchandise and personnel without the natural apprehension many have upon "entering" a fine jewelry store. We are introducing a new, more elegant look for our Whitehall stores beginning in fiscal 2000 to further reinforce the quality and the trustworthiness of our Whitehall brand image. Our new concept is intended to enhance the upscale image of our stores and includes initiatives such as adding new store fixtures and new merchandise packaging. All new Whitehall stores and fully renovated Whitehall stores will reflect the new concept. Store Management. Each of our stores is operated under the direction of a store manager who is responsible for management of all store-level operations, including sales and most personnel matters. Many non-sales related administrative functions are performed at our corporate office in Chicago. A significant portion of the compensation of store managers is based on incentives which focus on sales productivity. The store managers are assisted by a staff that usually includes an assistant manager and -6- 7 four to eight sales associates, depending upon store operating hours and anticipated sales volume. We have approximately 45 supervisors who concentrate their efforts on store-focused sales strategies. Each supervisor is based in one store, but spends most of his or her time visiting other stores. Our senior officers spend a substantial percentage of their time visiting stores to reinforce the close communication between senior executives and store personnel. Operating Cost Controls. Our store operations are designed to maintain low operating costs at the store level. Our small average store size reduces fixed costs, and the lack of recourse credit eliminates the need for most overhead expenses normally associated with credit operations. We also seek to reduce store-level operating costs through efficient sales staff utilization. To assist store personnel in their selling efforts, many of the administrative functions normally performed at the store level are performed at the corporate level. Due to computerization, more efficient use of personnel, and the elimination of certain non-essential functions, we reduced central overhead as a percentage of net sales from 6.0% in fiscal 1994 ($6.4 million) to 5.8% in fiscal 1999 ($18.2 million). During that period, our sales increased by over 195% and the number of stores increased by approximately 121%. Store Employee Compensation. We seek to hire experienced sales personnel and motivate our store employees by linking a substantial percentage of employee compensation to individual and store sales performance, as well as by offering opportunities for promotion within the company. Employee Training. We believe that providing knowledgeable and responsive customer service is critical to our success and, accordingly, have developed and implemented extensive employee training programs. In addition to training during the first weeks of employment and continuous on-the-job training provided by management, we have several training videos to supplement our written training materials for sales associates. Store managers complete a manager training and development program. MERCHANDISING We believe that an important element of our success is a focused merchandising strategy that reflects our upscale customer orientation and small store format. We seek to provide a deep assortment of items across a broad range of price points in our key product categories: diamonds (such as diamond jewelry, diamond solitaires and bridal), gold, and precious and semi-precious jewelry. Unlike many of our competitors, we carry only a limited selection of watches and virtually no costume jewelry or gift merchandise. Each store offers approximately 2,500 individual items, including approximately 600 core jewelry items, which accounted for approximately 37% of net sales for fiscal 1999. In addition, we have expanded our merchandise assortment in higher price points. Our average price per merchandise sale has increased from $255 in fiscal 1996 to $273 in fiscal 1997 to $286 in fiscal 1998 and to $303 in fiscal 1999. Consistent with many fine jewelry retailers, a substantial portion of our sales are made at prices discounted from listed reference prices. The methodology for achieving these discounts is carefully studied and maintained. -7- 8 The following table sets forth our percentage of total merchandise sales by category for the following periods: FISCAL YEAR ENDED JANUARY 31, -------------------------------------- 1996 1997 1998 1999 2000 ------- ------- ------- ------- ------ Diamonds...................... 57.6% 57.5% 61.3% 59.9% 60.3% Gold.......................... 25.2 25.4 21.2 20.3 20.2 Precious/Semi-Precious........ 14.6 14.8 15.5 17.7 17.4 Watches....................... 2.1 2.1 2.0 2.1 2.1 Other......................... 0.5 0.2 -- -- -- ----- ------ ----- ----- ----- Total............... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ====== ===== ===== ===== All stores carry our core items. We also customize the merchandising of our stores based upon each store's sales volume, individual market preferences and historical selling patterns. We continually test new items in our stores and monitor their sales performance to identify additional sales opportunities. Along with our broad product assortment, we also provide jewelry repair services to our customers (sales from which represented 3.3% of fiscal 1999 net sales). Actual repair work is performed by jewelers under independent contract in many of our stores. ADVERTISING AND PROMOTIONS The key elements of our advertising strategy include in-store and point-of-sale marketing, direct mail campaigns and radio advertising campaigns. We believe that the quality of our customer database, which currently consists of over one million customers, has allowed us to develop efficient advertising, marketing and promotional campaigns. We have conducted holiday season radio campaigns in certain markets, and we continuously test various direct mail campaigns as part of our advertising initiatives. Frequent special promotions such as diamond remount events, "Vice President's Day Events," and similar promotions are designed to increase traffic through our stores and generate an urgency for customers to make purchases. These events vary from year to year and among stores. Publicized events are an important part of our marketing efforts, and we generate a significant portion of our revenues during such events. In fiscal 1999, we upgraded the signage and sign fixtures in all our stores in order to facilitate a more upscale look for our in-store and point-of sale signage. In addition, we expanded our holiday radio advertising program by over 30% and our direct marketing program mailings by over 60% from fiscal 1998. We also plan to increase our use of media advertising programs in fiscal 2000. In addition, we intend to significantly expand our direct mail programs in fiscal 2000. For example, we delivered over 300,000 direct mail fliers in connection with Valentines Day in fiscal 2000, as compared to 30,000 in fiscal 1999. We generally offer a 30-day return policy. For certain sales, however, store personnel may choose from a variety of return or exchange options to offer the customer, including, among others, a 30-day return policy or a 90-day exchange policy. We also offer a layaway program that enables our customers to hold an item at our stores and pay for it over a one-year period without interest charges. The customer is required to make an initial deposit to establish the layaway and is required to make monthly payments. We retain possession of merchandise placed in layaway until the customer has made all required payments. -8- 9 CREDIT We operate based upon a "no credit risk" policy. When purchasing on credit, customers must use their personal credit cards (e.g., Visa, MasterCard, American Express and others), our private label credit cards, which are available through a third party and are non-recourse to us, or other non-recourse third party credit arrangements. Because our credit programs are non-recourse to us, we have no customer credit risk for non-payment by the customer associated with the sale. At the same time, we believe that our ability to offer credit through our "private label" credit cards and other non-recourse arrangements is attractive to many customers, including those who prefer not to have their jewelry purchases count towards their credit limits on their personal third party credit cards. We encourage sales on our private label credit card or other non-recourse third-party credit arrangements because customer purchases on this type of credit tend to generate higher average sales. In fiscal 1999, our average credit sale was approximately $818, versus approximately $103 for a purchase paid for with cash or by check. We believe that our success in building our non-recourse credit sales has been a significant factor in our improvement in comparable store sales. Our success in this area has also helped us expand our customer database since approximately 40% of our sales are generated from sales to customers who use private label credit cards. Our credit strategy and our focus on a more upscale clientele are interrelated. A substantial portion of the users of private label credit offered by most jewelers tend to be customers with more limited financial resources or a weaker credit history. In contrast, our adherence to a "no credit risk" policy limits our sales to such individuals. Thus, we have historically oriented our merchandising programs to appeal to a more affluent, less credit-reliant consumer. We have established our private label program through Bank One (and other non-recourse credit purveyors), whereby customers may apply for instant credit on merchandise purchases. In late 1998, Bank One and G.E. Capital Corporation formed a private label credit joint venture called Monogram Credit Services, L.L.C. In January 1999, we consented to have our contract with Bank One assigned to Monogram Credit Services. Under these credit programs, the credit purveyors have no recourse against us based on the customer's failure to pay; recourse against us is restricted to those limited cases where the receivable itself is defective (such as incorrectly completed documentation or certain situations involving customer fraud). Our expense related to these limited cases was less than 0.5% of sales during fiscal 1999. Our credit card discount expense for both fiscal 1998 and fiscal 1999 represented 3.0% of credit sales for those years. In general, our credit card discount expense is higher for our private label programs than for personal credit cards, such as Visa and MasterCard. Pursuant to our relationship with Monogram Credit Services, the joint venture provides credit to our customers using its own credit criteria and policies. We pay a fee to Monogram Credit Services based primarily upon the volume of credit so extended. We have similar non-recourse arrangements with other credit purveyors, which we use in addition to the Monogram Credit Services program to assist customers in financing their purchases. In addition, we utilize a check authorization company which guarantees payments on transactions involving certain personal checks. During the third quarter of fiscal 1997, we introduced a "One-Year No-Interest" program through a non-recourse agreement with Bank One. Under this program, Bank One offered customers a financing arrangement with no interest for one year, for which we paid Bank One a significantly higher fee than we pay under its standard program. We used this program throughout fiscal 1998 and fiscal 1999 and feel the use of this program contributed to an increase in comparable store sales. We continue to offer this program through Monogram Credit Services. This program enables us to offer our customers competitive, interest-free terms and other attractive promotions despite our "no credit risk" policy. -9- 10 E-COMMERCE We intend to capitalize on the Whitehall Jewellers name and national reputation by establishing a whitehalljewellers.com e-commerce site to complement our store-based operations and provide us with an additional channel to reach our customers. We expect to introduce this e-commerce site in the first half of 2000. A recent study conducted on our behalf determined that 87% of jewelry consumers prefer to buy from a jewelry e-commerce site associated with a retail jewelry chain rather than a stand-alone Internet jeweler. More specifically, consumers cited trustworthiness and reputation, followed by the ability to use the store to pickup and return merchandise, to handle repairs, and to resolve problems as the primary advantages a national retail based Internet jewelry retailer has over a stand-alone Internet jeweler. Given these consumer preferences, our strategy is to develop an e-commerce site that enhances our store-based operation and leverages our existing infrastructure and capabilities including merchandising, buying and sales and marketing expertise, fulfillment capabilities, existing supplier relationships and credit programs. In addition, we plan to outsource our website customer service functions to a third party who will provide us with dedicated sales personnel to focus on meeting all of our Internet customer needs, including responses to questions and information requests. We have hired a nationally recognized Internet and e-commerce site development firm with significant experience in specialty retailing, to develop and design our site. We do not expect to incur significant costs in connection with this initiative, as much of the required technology and systems will utilize our existing infrastructure. We anticipate the total cost to develop our site will be approximately $2.0 million through fiscal 2000, the majority of which will be funded with cash flow from operations. We intend to promote our site through our existing in-store promotions and direct mail programs, as well as by offering on-line shopping discounts and product guarantees to encourage sales. The "look and feel" of our site is planned to mirror our retail stores and emphasize quality. Our site will permit customers to search for merchandise and information and browse by item, content and event. In addition, our site is expected to allow the user to accumulate and compare the items they have selected. We also have the ability to set up a website for our Lundstrom Jewelers brand for a minimal additional cost by utilizing our existing whitehalljewellers.com infrastructure. We believe that because of our brand name and reputation, we will have the ability to combine the convenience of an e-commerce site with the service, inventory and reputation that only national retail jewelry chains can provide. PURCHASING We do not manufacture our merchandise. We purchase substantially all of our inventory, including loose gems, directly from leading suppliers located in the United States and abroad. We purchase merchandise from approximately 180 vendors, primarily in the United States, Israel, Italy and the Far East, who supply various jewelry products under U.S. dollar-denominated agreements. During fiscal 1998, our largest supplier and five largest suppliers accounted for approximately 11% and 34%, respectively, of the merchandise we purchased. During fiscal 1999, our largest supplier and five largest suppliers accounted for approximately 12% and 39%, respectively, of the merchandise we purchased. We also have certain subcontracting arrangements with jewelry finishers to set loose diamonds and gemstones into rings and other jewelry, using styles established by us or by other companies. We believe that the relationships we have established with our suppliers and subcontractors are good. We have not experienced any difficulty in obtaining satisfactory sources of supply and believe that adequate alternative sources of supply exist for substantially all types of merchandise sold in our stores. However, the loss of one or more of our major suppliers, particularly at certain critical times during the year, could have a material adverse effect on us. We maintain a strict quality assurance program, with almost all shipments from suppliers being counted or weighed and visually inspected upon receipt at our headquarters in Chicago, Illinois. -10- 11 During fiscal 1999, our average net monthly investment in inventory (i.e., the total cost of inventory owned and paid for) was approximately 66% of the total cost of our on-hand merchandise with the remaining percentage being trade payables and consignment inventory. For example, during fiscal 1999, the average amount of consignment merchandise per store was approximately $175,000. Our vendor relationships for non-consignment inventory are often granted exchange privileges which permit us to return or exchange certain unsold merchandise for new products at any time. In summary, our relationships with vendors encourage their participation in, and responsibility for, merchandise turnover and profitability. These arrangements also permit us to have more merchandise available for sale in stores and reduce somewhat our exposure to changes in fashion trends and inventory obsolescence. As participants in the jewelry industry, we are affected by general industry-wide fluctuations in the prices of diamonds and gold and, to a lesser extent, other precious and semi-precious metals and stones. During fiscal 1999, diamonds, gold, precious and semi-precious jewelry accounted for approximately 98% of our net merchandise sales. The supply and price of diamonds in the principal world markets are significantly influenced by a single entity, the Central Selling Organization, a marketing arm of DeBeers Consolidated Mines Ltd. of South Africa. The Central Selling Organization has traditionally controlled the marketing of a substantial majority of the world's supply of diamonds and sells rough diamonds to worldwide diamond cutters from its London office in quantities and at prices determined in its sole discretion. The availability of diamonds to the Central Selling Organization and our suppliers is to some extent dependent on the political situation in diamond producing countries, such as South Africa, Botswana, Zaire, republics of the former Soviet Union and Australia, and on continuation of the prevailing supply and marketing arrangements for raw diamonds. Until alternate sources could be developed, any sustained interruption in the supply of diamonds or any oversupply from the producing countries could adversely affect us and the retail jewelry industry as a whole. We are constantly altering the mix of our products and we have increased the percentage of higher priced items in our stores. Higher priced jewelry items tend to have a slower rate of turnover, thereby increasing the risks to us associated with price fluctuations and changes in fashion trends. INVENTORY LOSS PREVENTION We undertake substantial efforts to safeguard our jewelry inventory from loss and theft, including the use of security alarm systems and safes at each store and the taking of daily inventory of higher value items. In addition, our inventory management and control system, which tracks each item in our inventory, provides a further check against loss or theft. During fiscal 1999, in-store inventory shrinkage amounted to approximately 1.0% of sales. We have a full-time manager who directs our loss prevention department. We maintain insurance (subject to certain deductibles) covering the risk of loss of merchandise in transit, on store premises (and in our distribution facility whether owned or on consignment) in amounts that we believe are reasonable and adequate for the types and amounts of merchandise that we carry. MANAGEMENT INFORMATION SYSTEMS We utilize customized management information systems throughout our business to facilitate the design and implementation of selling strategies and as an integral part of our financial and other operational controls. Our management information system utilizes IBM AS400 systems as its foundation. The system incorporates point-of-sale computers in our stores with a merchandise management and purchase order management system and utilizes software specifically designed for the jewelry industry, which we have customized extensively to meet our needs. Our website will utilize a majority of our existing technology infrastructure. The information system has been upgraded to support our current needs but further upgrading is necessary to support our growth. -11- 12 We use the management information system to track each individual item of merchandise from receipt to ultimate sale or return to the vendor. As a result, management can closely monitor inventory by location, sales, gross margin, inventory levels and turnover statistics, reallocating inventory among stores when beneficial. This system also enables management to review each store's and each employee's productivity and performance. Based on the sales data, we tailor each store's inventory composition and plan our purchasing requirements accordingly. The system enables us to manage our inventory at the store level, including the automatic replenishment of merchandise generally twice a week. The system also automatically provides a daily reconciliation of each store's transactions for prompt investigation of discrepancies. The point-of-sale computers are polled nightly by the headquarters system and updated data is available at the beginning of the following day for use by central office and store supervisory personnel, and for transfer into our accounting, merchandising, and other management information systems. We have implemented, through our point-of-sale system, the ability to capture and retain selected customer data from each sale (name, address, phone, birthday, anniversaries, historical purchases, etc.). Our store managers and sales associates often use this data in their efforts to contact customers and anticipate and facilitate future add-on purchases by our customers. We believe that additional sales volume can be achieved by utilizing such programming initiatives. We use the customer data in our direct marketing promotional campaigns. The point of sale systems also track required inspection dates for customers with diamond warranties. Sales associates are prompted by the system to contact these customers to remind them of the required in-store inspection. COMPETITION The jewelry business is fragmented and highly competitive. We compete with national and regional jewelry chains and local independently owned jewelry stores, especially those that operate in malls, as well as with department stores, catalog showrooms, discounters, direct mail suppliers, televised home shopping networks and Internet commerce. Certain of our competitors are substantially larger and have greater financial resources than us and can take advantage of national advertising programs. We also believe that we compete for consumers' discretionary spending dollars with retailers that offer merchandise other than jewelry. We believe that the primary competitive factors affecting our operations are store location and atmosphere, quality of sales personnel and service, breadth and depth of merchandise offered, pricing, credit and reputation. We emphasize our merchandise selection, sales personnel, store location and design and pricing in competing in our target market, which is relatively less credit sensitive. Direct marketing of fine jewelry, including marketing of jewelry via the Internet, historically has not met with substantial consumer acceptance. However, in the past year a number of well-financed businesses have announced plans to market fine jewelry via the Internet and some have begun selling fine jewelry via the Internet. Large scale consumer acceptance of Internet fine jewelry retailing could transform the jewelry retailing business, result in lower price points and margins, and have a substantial adverse effect on our results of operations or financial condition. Although we have initiated an e-commerce sales program, there can be no assurance that its initiative will be successful. -12- 13 INTELLECTUAL PROPERTY Whitehall(R) Co. Jewellers, Lundstrom(R) Jewelers and Marks Bros.(R) Jewelers are registered trademarks in the United States. We also have registered the Internet domain names "whitehalljewellers.com" and "lundstromjewelers.com." We are currently licensing the name "Lundstrom Jeweler" for retail jewelry stores located in Japan and we may, in the future, consider additional licensing of our trademarks and tradenames on an opportunistic basis. EMPLOYEES As of January 31, 2000, we had 2,367 employees, including approximately 2,205 store level employees. We usually hire a limited number of temporary employees during each Christmas selling season. None of our employees are represented by a union. We believe that our relations with our employees are good. REGULATION Our operations are affected by numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts, and limitations on the maximum amount of finance charges that may be charged by a credit provider. Although credit to our customers is provided by third parties without recourse to us based upon a customer's failure to pay, any restrictive change in the regulation of credit, including the imposition of, or changes in, interest rate ceilings, could adversely affect the cost or availability of credit to our customers and, consequently, our results of operations or financial condition. Our operations are also affected by federal and state laws relating to marketing practices in the retail jewelry industry. In marketing to our customers, we compare many of our prices to "reference prices." Our literature indicates to customers that our reference price for an item is either the manufacturer's suggested retail price or our determination of the non-discounted price at which comparable merchandise of like grade or quality is advertised or offered for sale by competitive retailers and is not our current selling price or the price at which we formerly sold such item. We are, from time to time, subject to regulatory investigation relating to our "reference prices" in marketing to our customers. Although we believe that pricing comparisons are common in the jewelry business, there can be no assurance that this position would be upheld. An investigator for the Office of Consumer Affairs for the Commonwealth of Virginia recently requested that we substantiate our advertised claim of 50% off "reference prices." We have responded to that request and we are planning follow-up discussions with the Office of Consumer Affairs. ITEM 2. PROPERTIES As of April 11, 2000, we operated 310 stores in 34 states. All of these stores are leased and are located in regional or super-regional malls. Our typical new store lease has a term of 10 years plus the first partial lease year. Terms generally include a minimum base rent, a percentage rented based on store sales and certain other occupancy charges. At January 31, 2000 the average remaining life of the leases for our stores was approximately six years. While there can be no assurance, we expect to be generally able to renew these leases as they expire. We also lease approximately 28,400 square feet of office and administrative space in Chicago, Illinois in an office building housing our corporate headquarters, distribution functions and quality assurance operations. This lease expires on May 13, 2004. -13- 14 ITEM 3. LEGAL PROCEEDINGS An investigator for the Office of Consumer Affairs for the Commonwealth of Virginia recently requested that we substantiate our advertised claim of 50% off "reference prices." We have responded to that request and we are planning follow-up discussions with the Office of Consumer Affairs. The investigation is in a preliminary stage. In addition, an action filed in California state court on February 14, 2000 was received by us on March 1, 2000. That action alleges violations of federal and state regulations governing advertising of comparative pricing and seeks injunctive relief and unspecified damages including disgorgement of profits and restitution. We have removed that action to the federal district court, and have filed an answer denying any liability. The litigation is in preliminary stages and our preliminary analysis is that this action is unlikely to have a material adverse effect on the Company. Other than such investigation and such action, we are involved in certain legal actions and regulatory investigations from time to time arising in the ordinary course of business. We believe that none of these other actions or investigations will have a material adverse effect on our results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -14- 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference to section entitled "Related Stockholder Matters and Market for the Company's Common Stock" in the Company's 1999 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference to section entitled "Selected Historical Financial and Operating Data" in the Company's 1999 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference to section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference to section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference to sections entitled "Statements of Operations," "Balance Sheets," "Statements of Stockholders' Equity," "Statements of Cash Flows" and "Notes to Financial Statements" in the Company's 1999 Annual Report, which is included as Exhibit 13 to this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -15- 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the headings "Election of Directors" and "Executive Officers" in the Proxy Statement (which Proxy Statement we intend to file with the Securities and Exchange Commission on or about April 28, 2000) is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Except for information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the headings "Election of Directors" and "Executive Compensation and Other Information" in the Proxy Statement (which Proxy Statement we intend to file with the Securities and Exchange Commission on or about April 28, 2000) is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement we intend to file with the Securities and Exchange Commission on or about April 28, 2000) is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Certain Relationships and Related Transactions" in the Proxy Statement (which Proxy Statement we intend to file with the Securities and Exchange Commission on or about April 28, 2000) is incorporated herein by reference. -16- 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements The following financial statements are filed as part of this report: Report of Independent Public Accountants.* Balance Sheets of the Company as of January 31, 2000 and 1999.* Statements of Operations of the Company for the years ended January 31, 2000, 1999 and 1998.* Statements of Stockholders' Equity of the Company for the years ended January 31, 2000, 1999 and 1998.* Statements of Cash Flows of the Company for the years ended January 31, 2000, 1999 and 1998.* Notes to Financial Statements.* - ----------- * Incorporated herein by reference from the Company's 1999 Annual Report. (a)(2) Financial Statement Schedules Report of Independent Public Accountants on Financial Statement Schedule Page 20 Schedule II - Valuation and Qualifying Accounts Page 21 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3) Exhibits The following Exhibits are filed herewith or incorporated herein: EXHIBIT DESCRIPTION NO. ----------- - ------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Amended and Restated By-Laws of the Company (2) 4.1 Amended and Restated Stockholders Rights Plan (3) 4.2 Certificate of Designations of Series A Junior Participating Preferred Stock (4) 4.3 Indenture governing the Notes dated as of April 15, 1996 between the Company and Norwest Bank Minnesota, National Association, as Trustee (5) 4.4 Form of Series C Notes (included in Exhibit 4.3 to this Form 10-K) (5) 4.5 Form of Series D Notes (included in Exhibit 4.3 to this Form 10-K) (5) 4.6 First Supplemental Indenture to Indenture (5) 4.7 Second Supplemental Indenture to Indenture (6) -17- 18 10.1 Second Amended and Restated Registration Agreement (5) 10.2 Letter Agreements re: Incentive Stock Option dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin, respectively (4) (7) 10.3 Letter Agreements re: Restricted Stock Awards dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin (4) (7) 10.4 Letter Agreements re: Incentive Compensation dated September 28, 1995 between the Company and each of Hugh M. Patinkin, John R. Desjardins and Matthew M. Patinkin (4) (7) 10.5 Company's 1995 Executive Incentive Stock Option Plan (4) (7) 10.6 Letter Agreement re: Incentive Stock Option between the Company and Lynn D. Eisenheim (4) (7) 10.7 1996 Long-Term Incentive Plan, as amended (7) (8) 10.8 Lease dated May 14, 1992 between the Company and New York Life Insurance Company relating to the Company's corporate headquarters (4) 10.9 Executive Severance Agreements each dated May 7, 1996, between the Company and each of Hugh M. Patinkin, John R. Desjardins, Matthew M. Patinkin and Lynn D. Eisenheim (5) (7) 10.10 ESOP Restructuring Agreement, dated as of March 29, 1996, between the Company and the Whitehall Jewellers, Inc. Employee Stock Ownership Trust (5) 10.11 Amended and Restated Employee Stock Ownership Plan (9) 10.12 1997 Long-Term Incentive Plan, as amended (7) (8) 10.13 1998 Non-Employee Directors Stock Option Plan (7) (10) 10.14 Amendment to the 1998 Non-Employee Directors Stock Option Plan (2) (7) 10.15 Asset Purchase Agreement dated as of June 19, 1998 by and among Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.), Carlyle & Co. Jewelers, Carlyle & Co. of Montgomery and J.E. Caldwell Co. (11) 10.16 Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement dated as of September 10, 1998 by and among Whitehall Jewellers, Inc. (f/k/a Marks Bros. Jewelers, Inc.) the Banks (as defined therein), BankBoston, N.A. as Agents for the Banks, and LaSalle National Bank and ABN AMRO Bank, N.V. as Agents for the Banks (12) 10.17 First Amendment to Amended and Restated Revolving Credit, Term Loan and Gold Consignment Agreement dated as of November 17, 1998, by and among Whitehall Jewellers, Inc., the Banks (as defined therein), BankBoston, N.A. as Agents for the Banks, and LaSalle National Bank and ABN AMRO Bank, N.V. as Agents for the Banks 10.18 401(k) Plan (6) (7) 10.19 Second Amendment to 401(k) Plan (7) (13) 10.20 Third Amendment to 401(k) Plan (2) (7) 10.21 Fourth Amendment to 401(k) Plan (2) (7) 10.22 Employment and Severance Agreement dated March 17, 1997 between the Company and Manny A. Brown (2) (7) 10.23 Form of Severance Agreement with executive officers (7) (8) 13 1999 Annual Report 23 Consent of PricewaterhouseCoopers LLP 24 Powers of Attorney (included on signature page) 27 Financial Data Schedule - ------------------- (1) Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K dated January 20, 2000 and filed with the Securities and Exchange Commission on February 3, 2000, file No. 0-028176. (2) Incorporated by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the -18- 19 fiscal year ended January 31, 1999, file No. 0-028176. (3) Incorporated by reference to the exhibits filed with the Company's Registration Statement as amended on Form 8-A/A and filed with the Securities and Exchange Commission on April 28, 1999, file No. 0-028176. (4) Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form S-1, as amended (Registration No. 333-1794). (5) Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form S-1, as amended (Registration No. 333-0403). (6) Incorporated by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, file No. 0-028176. (7) Represents management contract or compensatory plan or arrangement. (8) Incorporated by reference to the exhibits filed with the Company's Registration Statement on Form S-3, as amended (Registration No. 333-95465). (9) Incorporated herein by reference to the exhibits filed with the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1997, file No. 0-028176. (10) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-8 (Registration No. 333-5015). (11) Incorporated by reference to the exhibits filed with the Company's Current Report on Form 8-K dated September 10, 1998 and filed with the Securities and Exchange Commission on September 22, 1998, file No. 0-028176. (12) Incorporated by reference to the exhibits filed with the Company's Quarterly Report on Form 10-Q for the period ended October 31, 1998, file No. 0-028176. (13) There is no First Amendment to 401(k) Plan. (b) Reports on Form 8-K Current Report on Form 8-K dated December 14, 1999 and filed with the Securities and Exchange Commission on December 14, 1999 (reporting the three-for-two stock split), file No. 0-028176. -19- 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Whitehall Jewellers, Inc. In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) on page 17 present fairly, in all material respects, the financial position of Whitehall Jewellers, Inc. at January 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2000 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 17 present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 22, 2000 -20- 21 WHITEHALL JEWELLERS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS TWELVE MONTHS ENDED JANUARY 31, 1998, 1999 AND 2000 (DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - --------------------------------------- -------- ------------------------ -------- -------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD ----------- ------------ ---------- ---------- --------- ---------- Twelve months ended 1/31/98 Allowance for doubtful accounts...... $ 708 $1,182 -- $1,347(1) $ 543 ====== ====== ====== ====== Inventory allowance.................. 1,711 3,764 -- 3,776 1,699 ====== ====== ====== ====== Twelve months ended 1/31/99 allowance for doubtful accounts...... $ 543 $1,278 -- $ 944(1) $ 877 ====== ====== ====== ====== Inventory allowance.................. 1,699 4,634 2,000(2) 4,385 3,948 ====== ====== ====== ====== Twelve months ended 1/31/00 Allowance for doubtful accounts...... $ 877 $1,180 -- $1,337 $ 720 ====== ====== ====== ====== Inventory allowance.................. 3,948 5,851 -- 6,282 3,517 ====== ====== ====== ======
Note: (1) Uncollectible items written off, less recoveries of items previously written off; and a reclassification to a reserve for non-sufficient funds. (2) Charged to goodwill as part of the acquisition of the Jewel Box chain of jewelry stores. -21- 22 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, this Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 28, 2000 WHITEHALL JEWELLERS, INC. By: /s/ John R. Desjardins --------------------------------------- John R. Desjardins Executive Vice President, Finance & Administration and Secretary POWER OF ATTORNEY AND SIGNATURES Each of the undersigned officers and directors of Whitehall Jewellers, Inc. hereby severally constitutes and appoints Hugh M. Patinkin and John R. Desjardins, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all amendments to this Annual Report on Form 10-K, and generally to do all things in our names and on our behalf in such capacities to enable Whitehall Jewellers, Inc. to comply with the provisions of the Securities Exchange Act of 1934, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities indicated on this 28th day of April, 2000. Name Capacity ---- -------- /s/ Hugh M. Patinkin Chairman, President and Chief Executive - ------------------------------ Officer (principal executive officer) Hugh M. Patinkin and Director /s/ John R. Desjardins Executive Vice President, Finance & - ------------------------------ Administration and Secretary (principal John R. Desjardins financial officer) and Director /s/ Matthew M. Patinkin Director - ------------------------------ Matthew M. Patinkin /s/ Norman J. Patinkin Director - ------------------------------ Norman J. Patinkin /s/ Jack A. Smith Director - ------------------------------ Jack A. Smith /s/ Daniel H. Levy Director - ------------------------------ Daniel H. Levy /s/ Richard Berkowitz Director - ------------------------------ Richard Berkowitz -22- EX-13 2 1999 ANNUAL REPORT 1 EXHIBIT 13 Company Profile Corporate Information Whitehall Jewellers, Inc. is a leading national specialty retailer of fine jewelry operating 290 stores in 32 states as of January 31, 2000. Founded in 1895, the Company operates stores in regional and superregional shopping malls under the names Whitehall Co. Jewellers, Lundstrom Jewelers, and Marks Bros. Jewelers. Whitehall Jewellers, Inc.'s Common Stock is traded on the New York Stock Exchange under the symbol "JWL". [MAP]
FISCAL Fiscal Fiscal (in thousands, except per share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Statement of Operations Data: Net sales............................................ $315,406 $238,942 $188,898 Income from operations............................... $ 37,256 $ 27,313 $ 22,216 Net income(1)........................................ $ 19,334 $ 14,262 $ 11,230 Net income per share................................. $ 1.28 $ 0.92 $ 0.73 Return on equity(2).................................. 28.8% 25.9% 26.3% Return on assets(3).................................. 10.0% 9.9% 10.6% - -------------------------------------------------------------------------------------------------------
(1) Pro forma results exclude the extraordinary loss on the extinguishment of debt in the fourth quarter of fiscal 1997. (2) Return on equity is calculated by dividing net income by average shareholders' equity. (3) Return on assets is calculated by dividing net income by average total assets. 2 TO OUR SHAREHOLDERS: "WE EXCEEDED THE EXPECTATIONS OF BOTH WALL STREET AND OUR OWN MANAGEMENT TEAM." 1999 was a great year for Whitehall Jewellers, Inc. We continued to outpace our peer group by focusing on doing what we do best: - - Drive growth by opening immediately productive new stores in prime regional mall locations throughout the country; - - Deliver quality upscale merchandise that captures the hearts and imaginations of our highly discriminating customer base; - - Create shareholder value by achieving strong growth in profitability and increasing return on investment. This strategy produced record-breaking results for the eighth consecutive year. For the fiscal year ended January 31, 2000, earnings per share improved 39 percent to $1.28 -- significantly higher than the 29 percent average EPS (CAGR) growth we have achieved since becoming a public company in 1996. Net sales grew by 32 percent to a record $315.4 million. Comparable store sales rose 11 percent over 1998, exceeding our 5-year average of 8 percent annual comp sales growth. Cash flow return on net investment for all stores reached 38 percent. To meet our growth targets; we opened 46 new stores in 1999 and [BAR GRAPH] EARNINGS PER SHARE
94 95 96 97 98 99 -- -- -- -- -- -- $0.11 $0.43 $0.60 $0.73 $0.92 $1.28
[PHOTO] IN 1999 WHITEHALL INTRODUCED A NEW STORE CONCEPT THAT GIVES OUR STORES THE UPSCALE LOOK OUR CUSTOMERS PREFER. 1 3 "WE DIFFERENTIATE OURSELVES THROUGH UPSCALE MERCHANDISE." successfully integrated a chain of 36 jewelry stores which were acquired in September 1998. Once again, our performance --- especially in the area of sales and earnings growth -- exceeded the expectations of Wall Street and surpassed the goals of Whitehall's management team. FOUNDATIONS OF SUCCESS Whitehall has built its success on a solid foundation of outstanding real estate, upscale merchandise, non-recourse private label credit and a talented and motivated sales force. These four factors all help shape the Whitehall customer experience and drive bottom line results in complementary ways. Whitehall has developed a focused, disciplined approach to its real estate operations. We target high-traffic, center-court locations in quality regional malls. We build stores with open storefronts that make shopping easy and inviting. We also adhere to our proven small-store concept which helps keep our fixed occupancy costs low and our sales productivity high. Our prototype store is 750 square feet and produces an average of $1,300 in sales per square foot - -- one of the highest in the retail industry. Our total per store sales volume is comparable to that of our [BAR GRAPH] SALES GROWTH Dollars in Millions CAGR=24.2%
94 95 96 97 98 99 -- -- -- -- -- -- $107 $131 $156 $189 $239 $315
[PHOTO] 2 4 "WE TARGET HIGH-TRAFFIC, CENTER-COURT LOCATIONS IN REGIONAL MALLS TO MAKE SHOPPING EASY AND INVITING." peer group, even though our stores are significantly smaller. In many malls where we operate a successful Whitehall store, we also open a second store under the Lundstrom name, creating an opportunity to increase our market share from that mall. We also differentiate ourselves through our upscale merchandise presentation and offer a deep selection in the categories our customers prefer. Our relentless focus on quality and service has earned the trust of an affluent customer base that gravitates toward more expensive diamond, precious and gold jewelry. In fact, items priced over $3,000 accounted for 15 percent of our 1999 sales, while retail prices for 21 of our top 25 items exceeded or equaled $1,000. Like our competitors, we offer our customers the convenience of private label credit. Unlike many of our competitors, we do not take customer credit risk. While our credit program gives customers a flexible alternative to cash or standard credit, it also benefits us in three additional ways. Customers buy more expensive merchandise when they use private label credit, giving us higher sales volume. Our credit program creates strong cash flow, because we receive cash payment for private label credit sales within two business days. And by outsourcing all our [BAR GRAPH] STORE GROWTH
94 95 96 97 98 99 -- -- -- -- -- -- 131 146 164 191 250 290
[PHOTO] DURING THE LAST TWO YEARS, WHITEHALL'S GROWTH STRATEGY HAS PRODUCED A 39% INCREASE IN NEW STORES. WE PLAN TO OPEN 62 ADDITIONAL STORES IN 2000 AND EACH THE 500 STORE MARK BY THE END OF 2002. 3 5 "OUR DISCIPLINE OPERATING STRATEGIES HAVE LED TO STRONG AND CONSISTENT COMPARABLE STORE SALES PERFORMANCE." consumer credit functions, we reduce overhead and create a more focused selling environment. Our middle- to upper-middle income customer base comes to Whitehall to make important and meaningful purchases, and we count on our sales team to give them the special attention these occasions warrant. We also rely on these sales professionals to help us meet our comp store sales targets. For these reasons, we continually train and upgrade the quality of our personnel -- from sales associates through supervisors. We sponsor sales incentive programs that provide bonus opportunities throughout the year, and we recognize superior performance through numerous recognition programs. LEVERAGING OUR ASSETS Between 1994 and the end of fiscal 1999, Whitehall's network of retail stores has grown from 131 to 290. This rapid expansion opens the door to greater profitability through aggressive, disciplined management of these assets. Equally important, it gives us access to new customers and markets. During this period, we have achieved consistent growth in our average merchandise sale and steady increases in unit transaction volume. COMPARABLE STORE SALES GROWTH
Comp Store Fiscal Year Sales Growth - ----------------------------- 94 7.6% - ----------------------------- 95 11.0% - ----------------------------- 96 7.9% - ----------------------------- 97 4.8% - ----------------------------- 98 5.8% - ----------------------------- 99 11.0% - ----------------------------- Average 8.0%
[PHOTO] CUSTOMERS RETURN TO WHITEHALL TO MAKE IMPORTANT, MEANINGFUL JEWELRY PURCHASES BECAUSE THEY TRUST US TO GIVE THEM QUALITY, UPSCALE MERCHANDISE AND ATTENTIVE SERVICE. 4 6 "WE CONTINUE TO DRIVE COMP STORE SALES GROWTH BY FOCUSING ON INCREASING OUR AVERAGE JEWELRY SALE." This combination has produced average annual comp store sales growth of 8 percent. Over the past six years, our new stores have strongly contributed to our store sales results. Because we follow the same proven approach to selecting prime locations in regional malls, our fist year stores have recently generated an average first-year cash on cash return on investment of approximately 27 percent. And with a robust pipeline of new stores scheduled for 2000 and beyond, we are well positioned to build on our industry-leading sales growth. We also continue to drive comp store sales growth throughout our organization through a merchandising strategy that emphasizes more expensive jewelry. Over the past five years, our average merchandise sale has grown steadily to $303 in 1999, producing a five-year CAGR of 5.8 percent. This consistent growth in our average sale has been a key building block for our strong comp store sale performance. Our ongoing marketing programs have a measurable impact on comp store sales growth by enhancing the Whitehall brand and driving customers to our stores. Our brand speaks directly to the tastes and needs of affluent baby boomers who appreciate quality, upscale merchandise [BAR GRAPH] AVERAGE MERCHANDISE SALE Dollars in Millions CAGR= 5.8% 94 $ 229 95 $ 245 96 $ 255 97 $ 273 98 $ 286 99 $ 303
[PHOTO] OUR DIRECT MARKETING CAMPAIGN TARGET AFFLUENT CUSTOMERS AND CONTRIBUTE TO STEADY GROWTH IN THE AVERAGE MERCHANDISE SALE. 5 7 "THE LAUNCH OF OUR NEW E-COMMERCE PLATFORM WILL DELIVER GREATER PURCHASING CONVENIENCE TO OUR CUSTOMERS." from an attentive organization which they can trust. In 1999, we initiated a sophisticated direct marketing program that moved beyond Christmas to target other occasions such as birthdays and Mother's Day. It was also reflected in our expanded and upgraded in-store and holiday campaigns. CORPORATE MATTERS Whitehall also took several initiatives to create shareholder value by increasing the liquidity of our stock. Our Board demonstrated its belief in the value of Whitehall stock -- and our significant growth prospects -- when it undertook a $10 million stock repurchase program during the first half of 1999. We authorized a three-for-two stock split effective January 2000, which will make the trading of our stock more efficient over time. We also joined the New York Stock Exchange and began trading under the symbol "JWL." By positioning ourselves in the world's most recognized trading market, and among the leaders in American business, we hope to broaden our shareholder base by attracting investors who seek growth and value. NEW DIRECTIONS In March of 2000, Whitehall created liquidity and balance sheet flexibility [BAR GRAPH] OPERATING INCOME GROWTH Dollars in Millions CAGR = 26.1% 94 $ 11.7 95 $ 15.4 96 $ 19.0 97 $ 22.8 98 $ 27.3 99 $ 37.3
[PHOTO] OUR NEW E-COMMERCE PLATFORM (WWW.WHITEHALLJEWELLERS.COM) SIMPLIFIES THE SHOPPING EXPERIENCE BY PROVIDING THE CONVENIENCE OF E-SHOPPING AS WELL AS ENCOURAGING CUSTOMERS TO USE OUR STORES FOR SIZINGS, REPAIRS, RETURN OR EXHANGES OR OTHER SERVICE SUPPORT. 6 8 "OUR COMMON STOCK OFFERING WILL HELP FUEL CONTINUING NEW STORE GROWTH." when we completed a common stock offering that raised over $42 million for the Company. In addition to repaying corporate debt, we will use the proceeds to fuel continued growth in new stores. To this end, we plan to: - - Continue to build the Whitehall brand by introducing a new, more upscale store design for all new and remodeled stores. - - Accelerate the pace of our expansion by opening 62 new stores in 2000. We anticipate opening a total of 200 new stores by 2002. - - Explore acquisitions of existing retail jewelry stores as well as non-jewelry retailer locations such as the five non-jewelry locations we acquired in 1999. - -Launch our new e-commerce platform to create another distribution channel. We plan to build trust by delivering greater purchasing convenience and reliable information on products and promotions. It will also help us to continue to build our Whitehall brand image. - - Continue to upgrade our infrastructure -- both our people and systems -- to support our accelerated growth. We are truly exhilarated by both our 1999 performance and our prospects for continued growth and success. We enter the new millennium with favorable economic winds at our backs. We have the strong and [PHOTO] WHITEHALL'S STOCK NOW TRADES ON THE NEW YORK STOCK EXCHANGE AS "JWL". 7 9 "WE HAVE A PROVEN OPERATING STRATEGY THAT HAS DELIVERED A CONSISTENT, RELIABLE PERFORMANCE." flexible balance sheet we need to increase our stake in an industry that is enjoying steady growth. As of this writing, we have opened our 300th store and plan to operate approximately 500 stores by the end of 2002. Our customers are reaching an age when they are making more frequent -- and more expensive - -jewelry purchases. We have a proven operating strategy that has delivered a consistent, reliable performance. And we have entered the world of e-commerce. A new era is beckoning, and we are ready to respond. Finally we mourn the loss of Ira G. Marks, the former President and Chairman of the Company. Ira was President of the Company from 1945 to 1988 when he retired. A man of great ethical vision, he was a pioneer in embracing workplace diversity, and his strong values are embedded in a Whitehall culture built on loyalty and fairness. Sincerely, /s/ Hugh M. Patinkin Hugh M. Patinkin Chairman of the Board, Chief Executive Officer and President Executive Management (left to right) MANNY A. BROWN Executive Vice President Store Operations JOHN R. DESJARDINS [PHOTO] Executive Vice President Finance and Administration, Security MATTHEW M. PATINKIN Executive Vice President Store Operations LYNN EISENIEIM Executive Vice President Merchandizing 8 10 SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth certain financial and operating data of the Company. The selected statement of operations data and balance sheet data as of and for the fiscal year ended January 31, 2000 (fiscal 1999) and each of the four prior fiscal years are derived from audited financial statements of the Company. The selected financial information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's audited financial statements appearing elsewhere herein.
(in thousands, except per share and selected operating data) FISCAL 1999 Fiscal 1998 Fiscal 1997 Fiscal 1996 Fiscal 1995 - ---------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Net sales $ 315,406 $ 238,942 $ 188,898 $ 155,474 $ 131,0220 Cost of sales (including buying and occupancy expenses) 182,898 139,368 110,873 91,134 77,722 - ---------------------------------------------------------------------------------------------------------------------------------- Gross profit 132,508 99,574 78,025 64,340 53,300 Selling, general and administrative expenses 95,252 72,261 55,809 45,309 37,887 - ---------------------------------------------------------------------------------------------------------------------------------- Income from operations 37,256 27,313 22,216 19,031 15,413 Interest expense 5,819 4,123 3,806 6,993 12,314 Stock award expense -- -- -- -- 461 ESOP compensation expense -- -- -- -- 590 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 31,437 23,190 18,410 12,038 2,048 Income tax expense (benefit)(1) 12,103 8,928 7,180 4,695 (14,924) - ---------------------------------------------------------------------------------------------------------------------------------- Net income before extraordinary items 19,334 14,262 11,230 7,343 16,972 Extraordinary item, net(2) -- -- (1,035) 10,057 -- - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 19,334 $ 14,262 $ 10,195 $ 17,400 $ 16,972 ================================================================================================================================== DILUTED EARNINGS PER SHARE: Net income before extraordinary items $ 1.28 $ 0.92 $ 0.73 $ 0.60 $ 2.33 Selected Operating Data: Stores open at end of period 290 250 191 164 146 Average net sales per store(3) $1,163,000 $1,073,000 $1,045,000 $ 990,000 $ 935,000 Average net sales per gross square foot(4) $ 1,319 $ 1,323 $ 1,325 $ 1,247 $ 1,183 Average merchandise sale $ 303 $ 286 $ 273 $ 255 $ 245 Comparable store sales increase(5) 11.0% 5.8% 4.8% 7.9% 11.0% Balance Sheet Data (at end of period): Working capital $ 31,338 $ 38,478 $ 34,967 $ 25,824 $ 21,512 Total assets 216,936 169,606 118,003 93,533 87,403 Total debt 59,007 49,526 28,907 21,267 107,891 Stockholders' equity (deficit) 71,928 62,168 47,803 37,507 (47,858)
(1) Income tax benefit in the year ended January 31, 1996 (fiscal 1995) resulted from the reversal of the Company's deferred tax valuation allowance and corresponding recognition of a deferred tax asset. (2) Reflects net extraordinary gain (loss) in connection with the extinguishment of debt (see Note 8 of Notes to Financial Statements). (3) Average net sales per store represents the total net sales for stores open for a full fiscal year divided by the total number of such stores. (4) Average net sales per gross square foot represents total net sales for stores open for a full fiscal year divided by the total square feet of such stores. (5) A store becomes comparable after it has been open for 12 full months. Fiscal year 1998 includes sales from the acquired Jewel Box stores from October 1998 through January 1999. Fiscal year 1999 includes sales from the acquired Jewel Box stores from February through July 1999 and from October through January 2000. 9 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements, including the notes thereto. BACKGROUND The Company is a leading, national specialty retailer of fine jewelry operating 290 stores in 32 states as of January 31, 2000. The Company's sales and income from operations have increased consistently since fiscal 1992 to $315.4 million and $37.3 million, respectively, in fiscal 1999. During that same period, the number of Company stores grew to 290 from 111, and the Company's average annual store sales increased to $1,163,000 from $784,000. The growth of the Company's net sales and earnings will depend to a significant degree on the Company's ability to successfully expand its operations through the opening of new stores. The Company recently increased its new store opening plans and intends to open approximately 62 new stores in calendar 2000 and a total of approximately 200 stores in 2000, 2001 and 2002 combined. The Company's policy is to charge as incurred pre-opening costs associated with new stores. On March 6, 2000 and March 28, 2000 the Company completed the sale to the public of 2,000,000 and 325,500 shares, respectively, of its common stock at an offering price of $19.5625 per share. The Company received net proceeds of approximately $43.2 million which it used to reduce bank debt, to accelerate new store openings and for working capital and general corporate purposes. In September 1998, the Company purchased substantially all of the assets of the Jewel Box chain, acquiring 36 jewelry stores located in eight states in the southeastern United States. The Company financed this acquisition through an amended and expanded term loan and revolving credit facility. All of the acquired stores have been converted to Whitehall/Lundstrom merchandise assortments, credit programs, operating procedures and brand names. In 1999, the Company conducted a detailed analysis of possible Internet marketing strategies, costs, financing alternatives, benefits and risks. After completing this analysis, the Company retained an established e-commerce development firm to develop its e-commerce website and associated software. The Company plans to launch its e-commerce website in the first half of 2000. A variety of factors affect the sales results for the Company's stores, including economic conditions, the retail sales environment, the availability and cost of credit from third party credit providers, the results of the Company's merchandising and marketing strategies, and the Company's ability to otherwise execute its business strategy. The Company experienced an 11.0% comparable store sales increase in fiscal 1999 (which includes the store sales from February through July 1999 and from October through January 2000 from 10 12 the acquired Jewel Box stores). There can be no assurance that the Company will achieve comparable store sales increases in future reporting periods. The Company's business is highly seasonal, with a significant portion of its sales and most of its income generated during the fourth fiscal quarter ending January 31. The Company has historically experienced lower net sales in each of its first three fiscal quarters and expects this trend to continue. The Company's quarterly and annual results of operations may fluctuate significantly as a result of factors including, among others, the timing of new store openings, net sales contributed by new stores, increases or decreases in comparable store sales, timing of certain holidays, changes in the Company's merchandise, marketing, or credit programs, general economic, industry and weather conditions that affect consumer spending, and pricing, merchandising, marketing, credit and other programs of competitors. The Company offers a layaway program that enables its customers to hold an item at its stores and pay for it over approximately a one-year period without interest charges. The Company retains possession of merchandise placed in layaway until the customer has made all required payments. On December 3, 1999 the SEC issued certain accounting guidance in Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements." SAB 101, among other things, indicates that revenue from layaway sales should only be recognized upon delivery of merchandise to the customer. In consideration of this guidance, the Company implemented a change in accounting in the first quarter of fiscal year 2000. The Company has recorded a charge of approximately $5.0 million, $3.0 million net of tax, which has been presented as a cumulative effect of this accounting change on February 1, 2000. The Company expects that SAB 101 will not have a material effect on its future sales but will only impact the timing of recognition of revenue. RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain information derived from the statements of operations of the Company expressed as a percentage of net sales for such periods.
Percentage of Net Sales FISCAL 1999 Fiscal 1998 Fiscal 1997 - ---------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales (including buying and occupancy expenses) 58.0 58.3 58.7 - ---------------------------------------------------------------------------------------------- Gross profit 42.0 41.7 41.3 Selling, general and administrative expenses 30.2 30.3 29.5 - ---------------------------------------------------------------------------------------------- Income from operations 11.8 11.4 11.8 Interest expense 1.8 1.7 2.0 - ---------------------------------------------------------------------------------------------- Income before income taxes 10.0 9.7 9.8 Income tax expense 3.9 3.7 3.8 - ---------------------------------------------------------------------------------------------- Income before extraordinary item 6.1 6.0 6.0 Extraordinary item, net - - (0.6) - ---------------------------------------------------------------------------------------------- Net income 6.1% 6.0% 5.4% - ----------------------------------------------------------------------------------------------
11 13 FISCAL 1999 COMPARED TO FISCAL 1998 Net sales increased $76.5 million, or 32.0%, to $315.4 million in fiscal 1999 from $238.9 million in fiscal 1998. Comparable store sales (which includes the Jewel Box store sales from February through July 1999 and from October 1999 through January 2000) increased $25.9 million, or 11.0% in fiscal 1999. Sales from new stores contributed $41.9 million to the overall increase in net sales. Sales from the acquired stores contributed $10.8 million in increased sales. Increases in layaway balances contributed to a higher sales increase of $1.4 million compared to the prior fiscal year. These increases were offset partially by lower sales of $2.4 million related to store closings, together with stores closed for remodeling for limited periods. The total number of merchandise units sold increased by approximately 24.5% from fiscal 1998, while the average price per merchandise sale increased by approximately 5.9% to $303 in fiscal 1999 from $286 in fiscal 1998. Comparable store sales increased for a number of reasons including the strong economic environment for jewelry purchases, increased use of non-recourse credit, marketing programs, strong store inventory assortments and the contribution from the acquired jewelry stores. The Company opened 46 new stores and closed six stores during fiscal 1999, increasing the number of stores operated to 290 as of January 31, 2000 from 250 as of January 31, 1999. Gross profit increased $32.9 million, or 33.1%, to $132.5 million in fiscal 1999, from $99.6 million in fiscal 1998. As a percentage of net sales, gross margin increased to 42.0% in fiscal 1999 from 41.7% in fiscal 1998. This increase was due to higher margins on diamonds and precious and semi-precious jewelry categories that were partially offset by slightly higher buying costs. Selling, general and administrative expenses increased $23.0 million, or 31.8%, to $95.3 million in fiscal 1999 from $72.3 million in fiscal 1998. As a percentage of net sales, selling, general and administrative expenses were 30.2% in both fiscal 1999 and fiscal 1998. The dollar increase primarily related to higher advertising expenses ($0.9 million), higher payroll expenses ($15.0 million), increased other operating expenses ($5.8 million), and higher credit expense ($1.6 million). Selling, general and administrative expenses attributable to the 46 stores opened in fiscal 1999 and the 34 stores opened and 36 stores acquired in fiscal 1998 accounted for $6.7 million of the total increase in selling, general and administrative expenses. Advertising expenses increased in fiscal 1999 as compared to fiscal 1998 due to an expansion of the Company's marketing programs, including radio advertising during the Christmas holiday season and direct marketing campaigns. Payroll costs increased in fiscal 1999 as compared to fiscal 1998 primarily due to an increase in the number of store-based personnel, an increase in incentive compensation paid to store-based personnel, plus the addition of more field-based supervisors. Credit sales as a percentage of net sales increased to 40.0% in fiscal 1999 from 38.6% in fiscal 1998 due to greater emphasis on private label credit promotions. The usage of private label credit contributed to an increase in the average price per merchandise sale and higher total sales. 12 14 As a result of the factors discussed above, income from operations increased 36.4%, to $37.3 million in fiscal 1999 from $27.3 million in fiscal 1998. As a percentage of net sales, income from operations increased to 11.8% in fiscal 1999 from 11.4% in fiscal 1998. Interest expense increased $1.7 million, or 41.1%, to $5.8 million in fiscal 1999 from $4.1 million in fiscal 1998. As a percentage of net sales, interest expense increased to 1.8% in fiscal 1999 from 1.7% in fiscal 1998. The dollar increase in interest expense was due primarily to higher average indebtedness. FISCAL 1998 COMPARED TO FISCAL 1997 Net sales increased $50.0 million, or 26.5%, to $238.9 million in fiscal 1998 from $188.9 million in fiscal 1997. Comparable store sales increased $11.0 million, or 5.8% in fiscal 1998. Sales for the Jewel Box stores (purchased in September 1998) from October 1998 through January 1999 contributed approximately 0.3% of the comparable store sales increase for fiscal 1998. Sales from new stores contributed $27.8 million to the overall increase in net sales. Sales from the acquired stores contributed $12.5 million in increased sales. Increases in layaway balances contributed to a higher sales increase of $0.7 million compared to the prior fiscal year. These increases were offset partially by lower sales of $1.9 million related to store closings, together with stores closed for remodeling for limited periods. The total number of merchandise units sold increased by approximately 21.2% from fiscal 1997 to fiscal 1998, while the average price per merchandise sale increased by 4.8% to $286 in fiscal 1998 from $273 in fiscal 1997. Comparable store sales increased for a number of reasons including the strong economic environment for jewelry purchases, increased use of non-recourse credit, enhanced marketing programs, strong store inventory assortments, the contribution from the acquired jewelry stores, and on-going improvements in the quality of the Company's store-based personnel. The Company opened 70 new stores (including the 36 acquired stores) and closed 11 stores during fiscal 1998, increasing the number of stores operated to 250 as of January 31, 1999 from 191 as of January 31, 1998. Gross profit increased $21.5 million, or 27.6%, to $99.6 million in fiscal 1998, from $78.0 million in fiscal 1997. As a percentage of net sales, gross margin increased to 41.7% in fiscal 1998 from 41.3% in fiscal 1997. This increase was due to a shift in product mix to somewhat higher margin jewelry items and higher margins on gold, precious and semi-precious jewelry categories. Occupancy, distribution and buying costs decreased as a percentage of net sales due to economies of scale achieved through the Company's larger store base and increased net sales. Selling, general and administrative expenses increased $16.5 million, or 29.5%, to $72.3 million in fiscal 1998 from $55.8 million in fiscal 1997. As a percentage of net sales, selling, general and administrative expenses increased to 30.2% in fiscal 1998 from 29.5% in fiscal 1997. The dollar increase related primarily to higher advertising expenses ($1.3 million), higher payroll expenses ($10.6 million), increased other operating expenses ($2.9 million), and higher credit expense ($1.5 million). Selling, general and 13 15 administrative expenses attributable to the 34 stores opened and 36 stores acquired in fiscal 1998 and 30 stores opened in fiscal 1997 accounted for $10.4 million of the total increase in selling, general and administrative expenses. Expenses associated with the acquisition and integration of jewelry stores accounted for approximately $1.0 million of the increase. Advertising expenses increased in fiscal 1998 as compared to fiscal 1997 due to an expansion of the Company's marketing programs, including radio advertising during the Christmas holiday season and direct marketing campaigns. Payroll costs increased in fiscal 1998, as compared to fiscal 1997, due primarily to a continuing effort to upgrade the quality of store managers, an increase in incentive compensation paid to store-based personnel plus the addition of more field-based supervisors. Credit sales as a percentage of net sales increased to 38.6% in fiscal 1998 from 38.0% in fiscal 1997 due to greater emphasis on private label credit promotions. The usage of private label credit contributed to an increase in the average price per merchandise sale and higher total sales. As a result of the factors discussed above, income from operations increased 22.9%, to $27.3 million in fiscal 1998 from $22.2 million in fiscal 1997. As a percentage of net sales, income from operations decreased to 11.4% in fiscal 1998 from 11.8% in fiscal 1997. Interest expense increased $0.3 million, or 8.3%, to $4.1 million in fiscal 1998 from $3.8 million in fiscal 1997. As a percentage of net sales, interest expense decreased to 1.7% in fiscal 1998 from 2.0% in fiscal 1997. The dollar increase in interest expense was due primarily to higher average indebtedness. LIQUIDITY AND CAPITAL RESOURCES The Company's cash requirements consist principally of funding increases in inventory at existing stores, funding 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, cash flow from operations and from public offerings of the Company's common stock from time to time similar to the offering consummated in March 2000. The Company's cash flows from operating activities increased to $13.1 million in fiscal 1999 from $11.0 million in fiscal 1998. Higher income from operations together with increases in accounts payable ($11.4 million), accrued expenses ($7.3 million), and depreciation and amortization ($7.6 million) were offset partially by increases in merchandise inventories ($30.9 million) and layaway receivables ($2.1 million). Cash used in investing activities included the funding of capital expenditures ($22.2 million) related primarily to the opening of 46 new stores in fiscal 1999. Cash generated from financing activities included (i) an increase in revolver borrowings under the credit facility ($9.2 million), (ii) proceeds from gold consigned under the gold consignment facility ($3.0 million), and (iii) proceeds from the exercise of stock options ($0.4 million). The Company decreased its use of cash for financing activities in fiscal 1999 due in part to an increase in the net amount of outstanding checks ($9.2 million). The Company utilized cash for financing 14 16 activities in fiscal 1999 primarily to purchase treasury stock as a part of a stock repurchase program ($10.0 million) and to make scheduled principal payments on the term loan ($2.8 million). Stockholders' equity increased from $62.2 million at January 31, 1999 to $71.9 million at January 31, 2000. The Company's cash flows from operating activities increased to $11.0 million in fiscal 1998 from a positive cash flow of $0.4 million in fiscal 1997. Higher income from operations together with increases in accounts payable ($9.1 million), accrued expenses ($9.2 million), depreciation and amortization ($5.2 million), and the proceeds from accounts receivable sold ($4.0 million) were offset partially by increases in merchandise inventories ($28.5 million), layaway receivables ($0.9 million), and accounts receivable ($0.8 million). Cash used in investing activities included the purchase of 36 jewelry stores ($21.8 million) and the funding of capital expenditures ($14.7 million) related primarily to the opening of 34 new stores in fiscal 1998. Cash generated from financing activities included (i) proceeds from the term loan under the credit facility ($20.0 million), (ii) an increase in revolver borrowings under the new credit facility ($12.0 million), (iii) proceeds from gold consigned under the gold consignment facility ($6.0 million), and (iv) proceeds from the exercise of stock options ($0.1 million). The Company utilized cash for financing activities in fiscal 1998 primarily to repay the previous term loan ($11.4 million). The Company increased its use of cash for financing activities in fiscal 1998 due in part to a decrease in the net amount of outstanding checks ($1.8 million). Stockholders' equity increased from $47.8 million at January 31, 1998 to $62.2 million at January 31, 1999. In September, 1998, the Company amended and expanded its credit facility to a total of $110 million. The Company has a $90.0 million revolving credit facility, and a $17.3 million term loan facility (originally $20.0 million, less principal repayments) through September 10, 2003. A gold consignment facility of up to $40.0 million is available under the revolving credit facility. Interest rates and commitment fees charged on the unused facility float in a grid based on the Company's quarterly performance. Since these interest rates are determined by reference to Eurodollar or prime rates, changes in market interests rates can materially affect the Company's interest expense. Borrowings under the revolver are limited to a borrowing base determined based on the levels of the Company's inventory and accounts receivable. Availability under the revolver is based on amounts outstanding thereunder, including the value of consigned gold which fluctuates based on current gold prices. The peak outstanding borrowing under the Company's revolver during fiscal 1999 and 1998 was $66.6 million and $45.5 million, respectively. The unused facility was $28.8 million as of January 31, 2000. The Company has a gold consignment facility with a lending institution pursuant to which the Company accepts as consignee, and is responsible to return at some future date, a fixed number of ounces of gold. The periodic charges paid by the Company are computed based on a percentage of the value of the gold consigned. Therefore, an increase in the price of gold could substantially increase the annual costs to the Company of the gold 15 17 consignment and the eventual cost to the Company upon the termination of this arrangement. During fiscal 1996 and 1998, the Company sold and simultaneously consigned 39,000 and 20,000 troy ounces of gold for $15.3 and $6.0 million, respectively. On March 3, 1999, the Company sold and simultaneously consigned 10,500 troy ounces of gold for $3.0 million under its gold consignment facility. With the addition of the newly consigned gold, on September 10, 2003, the Company is required to repurchase 69,500 troy ounces of gold under the facility at the prevailing gold rate in effect on that date, or the facility will be renewed. A substantial portion of the merchandise sold by the Company is carried on a consignment basis prior to sale or is otherwise financed by vendors, thereby reducing the Company's direct capital investment in inventory. The peak consigned inventories from merchandise vendors were $59.0 million and $43.2 million during fiscal 1999 and 1998, respectively. The willingness of vendors to enter into such arrangements may vary substantially from time to time based on a number of factors, including the merchandise involved, the financial resources of vendors, interest rates, availability of financing, fluctuations in gem and gold prices, inflation, the financial condition of the Company and a number of economic or competitive conditions in the jewelry business or the economy generally. Any change in these relationships could have a material adverse effect on the Company's results of operations or financial condition. 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 authorized the Company to purchase shares over the next 18 months in the open market or through privately negotiated transactions The Company has effectively completed the repurchase program. As of January 31, 2000, the Company has repurchased 883,350 shares at a total cost of approximately $10.0 million. The Company's inventory levels and working capital requirements have historically been highest in advance of the Christmas season. The Company has funded these seasonal working capital needs through borrowings under the Company's revolver and increases in trade payables and accrued expenses. Management expects that cash flows from operating activities and funds available under its revolving credit facility should be sufficient to support the Company's current new store expansion program and seasonal working capital needs for the foreseeable future. INTEREST RATE RISK The Company's exposure to changes in interest rates relates primarily to its borrowing activities to fund business operations. The Company principally uses floating rate borrowings under its revolving credit and term loan facilities. The Company currently does not use derivative financial instruments to protect itself from fluctuations in interest rates. 16 18 The information below summarizes the Company's interest rate risk associated with debt obligations outstanding as of January 31, 2000. The table presents principal cash flows and related interest rates by fiscal year of maturity or repricing date.
Expected Fiscal Year of Maturity/Repricing 2000 2001 2002 2003 Thereafter Total - ---------------------------------------------------------------------------------------------- Variable rate (a) $58,367 $58,367 Average interest rate 7.67% 7.67% Fixed rate $640 $ 640 Average interest rate 12.15% 12.15%
(a) Includes $17.3 million of term debt with scheduled principal payments due between April 2000 and September 2003. All term loans are variable rate which reprice within 2000. As of January 31, 2000, interest rates for borrowings under the revolving credit and term loan facility are, at the Company's option, Eurodollar rates plus 137.5 and 187.5 basis points, respectively, or the bank's prime rate plus zero and 50 basis points, respectively. Interest rates charged on the facility float in a grid based on the Company's quarterly financial performance. GOLD PRICE RISK The Company's exposure to changes in the price of gold relates to its borrowing activities under its gold consignment facility. The Company accepts as consignee, and is responsible to return at some future date, a fixed number of ounces of gold. The periodic charges paid by the Company are computed based on a percentage of the value of the gold consigned. An increase in the price of gold could substantially increase the annual costs to the Company of the gold consigned and the eventual costs to the Company upon the termination of this arrangement. The information below summarizes the Company's market risks associated with gold consigned as of January 31, 2000. The table below presents the number of troy ounces of gold consigned and the current average gold prices by fiscal year of maturity.
Expected Fiscal Year of Maturity/Repricing 2000 2001 2002 2003 Thereafter Total - ---------------------------------------------------------------------------------------------- Troy ounces of gold consigned 69,500 69,500 Average gold price $ 289 $ 289
INFLATION The Company believes that inflation generally has not had a material effect on the results of its operations. There is no assurance, however, that inflation will not materially affect the Company in the future. YEAR 2000 The "Year 2000" problem concerns the inability of information systems to properly recognize and process date-sensitive information beyond January 1, 2000. As of January 31, 17 19 2000, we have not experienced any significant "Year 2000" problems in connection with our mission-critical systems. FORWARD-LOOKING STATEMENTS All statements, trend analysis and other information contained in this release relative to markets for the Company's products, trends in the Company's operations or financial results, plans, expectations, estimates and beliefs, 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, and access to funds for new store openings; (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) the Company's ability to maintain adequate information systems capacity and infrastructure; (10) the Company's leverage and cost of funds; (11) the Company's ability to maintain adequate loss prevention measures; (12) fluctuations in raw material prices including diamond, gem and gold prices; (13) the extent and results of the Company's E-commerce strategies and those of others; (14) regulation affecting the industry generally, including regulation of marketing practices; (15) the successful integration of acquired locations and assets into the Company's existing operations; (16) timely "Year 2000" compliance by the Company and third party suppliers and service providers and, (17) the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission. 18 20 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
(in thousands, except for per share data) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------- Net sales $315,406 $238,942 $188,898 Cost of sales (including buying and occupancy expenses) 182,898 139,368 110,873 - -------------------------------------------------------------------------------------------------------------------------- Gross profit 132,508 99,574 78,025 Selling, general and administrative expenses 95,252 72,261 55,809 - -------------------------------------------------------------------------------------------------------------------------- Income from operations 37,256 27,313 22,216 Interest expense 5,819 4,123 3,806 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 31,437 23,190 18,410 Income tax expense 12,103 8,928 7,180 - -------------------------------------------------------------------------------------------------------------------------- Income before extraordinary items 19,334 14,262 11,230 Extraordinary item, net -- -- (1,035) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 19,334 $ 14,262 $ 10,195 ========================================================================================================================== Basic earnings per share: Income before extraordinary item $ 1.33 $ 0.93 $ 0.74 Extraordinary item, net -- -- (0.07) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 1.33 $ 0.93 $ 0.67 ========================================================================================================================== Weighted average common share and common share equivalents 14,560 15,275 15,140 Diluted earnings per share: Income before extraordinary item $ 1.28 $ 0.92 $ 0.73 Extraordinary item, net -- -- (0.07) - -------------------------------------------------------------------------------------------------------------------------- Net income $ 1.28 $ 0.92 $ 0.66 ========================================================================================================================== Weighted average common share and common share equivalents 15,129 15,495 15,338
The accompanying notes are an integral part of the financial statements. 19 21 BALANCE SHEETS AS OF JANUARY 31, 2000 AND JANUARY 31, 1999
(in thousands, except for share amounts) 2000 1999 - ------------------------------------------------------------------------------------------------------- ASSETS Current assets: Accounts receivable, net $ 3,159 $ 3,297 Layaway receivables, net 5,638 3,514 Merchandise inventories 147,691 116,748 Other current assets 1,109 1,329 Deferred income taxes, net 2,086 1,518 Deferred financing costs 362 143 - ------------------------------------------------------------------------------------------------------- Total current assets 160,045 126,549 Property and equipment, net 49,144 34,304 Goodwill, net 6,186 6,448 Deferred income taxes, net 613 926 Deferred financing costs 948 1,529 - ------------------------------------------------------------------------------------------------------- Total assets $216,936 $169,756 ======================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Outstanding checks, net $017,207 $ 8,003 Revolver loans 41,117 28,886 Current portion of long-term debt 3,250 2,750 Accounts payable 37,005 25,601 Income taxes 7,315 5,226 Accrued payroll 5,945 4,174 Other accrued expenses 16,868 13,431 - ------------------------------------------------------------------------------------------------------- Total current liabilities 128,707 88,071 Total long-term debt, net of current portion 14,640 17,890 Other long-term liabilities 1,661 1,627 - ------------------------------------------------------------------------------------------------------- Total liabilities 145,008 107,588 Commitments and contingencies Stockholders' equity: Common Stock ($.001 par value; 30,000,000 shares authorized; 15,353,120 shares, 15,278,789 shares issued, respectively) 15 15 Class B Common Stock ($1.00 par value; 29,567 shares authorized; 152 shares issued and outstanding) -- -- Additional paid-in capital 60,426 60,003 Accumulated earnings 21,484 2,150 - ------------------------------------------------------------------------------------------------------- 81,925 62,168 Treasury stock, 883,376 and 26 shares, respectively, at cost (9,997) -- - ------------------------------------------------------------------------------------------------------- Total stockholders' equity, net 71,928 62,168 - ------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $216,936 $169,756 =======================================================================================================
The accompanying notes are an integral part of the financial statements. 20 22 STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED JANUARY 31, 2000, 1999, AND 1998
Common Class B Additional Accumulated Treasury (in thousands) Stock Common Stock Paid-In Capital Earnings/(Deficit) Stock - --------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 1997 $15 -- $59,799 $(22,307) -- Net income -- -- -- 10,195 -- Exercise of options -- -- 101 -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 1998 15 -- 59,900 (12,112) -- Net income -- -- -- 14,262 -- Exercise of options -- -- 103 -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 1999 15 -- 60,003 2,150 -- Net income -- -- -- 19,334 -- Exercise of options -- -- 423 -- -- Treasury stock repurchase -- -- -- -- (9,997) - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 2000 $15 -- $60,426 $ 21,484 $(9,997) ==========================================================================================================================
The accompanying notes are an integral part of the financial statements. 21 23 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JANUARY 31, 2000, 1999, AND 1998
(in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $19,334 $14,262 $10,195 Adjustments to reconcile net income to net cash provided by operating activities: Loss on extinguishment of debt, net of taxes -- -- 218 Depreciation and amortization 7,603 5,204 3,964 Loss on disposition of assets 380 84 41 Proceeds from accounts receivables sold, net -- 4,041 -- Changes in assets and liabilities, net of effects of acquisition: Decrease (increase)in accounts receivable, net 138 (754) (1,178) (Increase) in layaway receivables, net (2,124) (878) (595) (Increase) in merchandise inventories, net of gold consignment (30,943) (28,476) (20,571) Decrease (increase) in other current assets 220 (216) (358) (Increase)decrease in deferred taxes, net (255) 688 4,241 (Increase) in deferred financing costs -- (1,215) (100) Increase in accounts payable 11,404 9,076 1,819 Increase in accrued liabilities and long-term liabilities 7,331 9,193 2,712 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 13,088 11,009 388 Cash flows from investing activities: Capital expenditures (22,199) (14,667) (10,495) Payment for acquired jewelry stores -- (21,760) -- Proceeds from assets sold, net -- 467 -- - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (21,199) (35,960) (10,495) Cash flows from financing activities: Borrowing on revolver loan 343,362 273,930 499,529 Repayment of revolver loan (334,146) (261,885) (493,435) Repayment of term loan (2,750) -- -- Repayment of old term loan -- (11,426) -- Repayment of subordinated debt -- -- (9,880) Proceeds from term loan -- 20,000 11,426 Proceeds from gold consignment 3,015 5,984 -- Proceeds from exercise of stock options 423 103 101 Purchase of treasury stock (9,997) -- -- Increase (decrease) in outstanding checks, net 9,204 (1,755) 2,366 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 9,111 24,951 10,107 - ------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents -- -- -- Cash and cash equivalents at beginning of period -- -- -- - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ -- $ -- $ -- =================================================================================================================== Supplemental disclosures of cash flow information: Interest paid during year $ 5,419 $ 3,913 $ 3,481 Income taxes paid during year 10,188 4,659 945
The accompanying notes are an integral part of the financial statements. 22 24 NOTES TO FINANCIAL STATEMENTS 1. DESCRIPTION The financial statements of Whitehall Jewellers, Inc. OF OPERATIONS (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 290 stores as of January 31, 2000, located in 32 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 "Acquisition"). The Company financed the Acquisition through a term loan and revolving credit facility under its Credit Agreement (see Note 8, Financing Arrangements). 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. Goodwill amortization was $262,000 and $106,000 for the years ended January 31, 2000 and 1999, respectively. 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 CASH AND CASH EQUIVALENTS SIGNIFICANT For the purpose of the statements of cash flows, the Company ACCOUNTING considers all temporary cash investments purchased with a POLICIES maturity of three months or less to be cash equivalents. OUTSTANDING CHECKS Outstanding checks are stated net of store cash balances of approximately $2,569,000 and $1,787,000 as of January 31, 2000 and 1999, respectively. LAYAWAY RECEIVABLES, NET Layaway receivables include those sales to customers under the Company's layaway policies, which have not been collected fully as of the end of the year. Layaway receivables are net of customer payments received to date, and net of an estimate for those layaway sales, which the Company anticipates will never be consummated. This estimate is based on the Company's historical calculation of layaway sales that will never be completed. The Company charges the 23 25 customer to cover the costs of administration for inactive layaways. Effective February 1, 2000, the Company will change its accounting policy for layaway sales in consideration of guidance issued by the Securities and Exchange Commission in accordance with Staff Accounting Bulletin 101, ("Revenue Recognition in Financial Statements"). See Note 15, Subsequent Events. MERCHANDISE INVENTORIES Merchandise inventories are stated principally at the lower of average cost or market. The Company also obtains merchandise from vendors under various consignment agreements. The consigned inventory and related contingent obligations are not reflected in the Company's financial statements. At the time of sale, the Company records the purchase liability and the related cost of merchandise in cost of sales. PROPERTY AND EQUIPMENT Property and equipment are carried at cost, less accumulated depreciation and amortization. Furniture and fixtures are depreciated on a straight-line basis over estimated useful lives ranging from five to ten years. Software costs are amortized on a straight-line basis over five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the remaining lease terms or ten years. Upon retirement or disposition of property and equipment, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gains or losses are included in the results of operations. LONG LIVED ASSETS When facts and circumstances indicate potential impairment, the Company evaluates the recoverability of long lived assets carrying values, using estimates of undiscounted future cash flows over remaining asset lives. When impairment is indicated, any impairment loss is measured by the excess of carrying values over fair values. GOODWILL Goodwill represents the excess of cost over the fair values of assets acquired and is amortized over 25 years using the straight line method. DEFERRED FINANCING COSTS In connection with the Company's financing agreements, the Company incurred various financing costs, which have been deferred on the Company's balance sheet and are amortized over the terms of the agreements. STORE PREOPENING EXPENSE Expenses associated with the opening of new store locations are expensed in the period such costs are incurred. LEASE EXPENSE The Company leases office facilities and all retail stores. Certain leases require increasing annual minimum lease payments over the term of the lease. Minimum lease expense under these agreements is recognized on a straight line basis over the terms of the respective leases. Virtually all leases covering retail stores provide for additional contingent rentals based on a percentage of sales. These costs are expensed in the period incurred. 24 26 REVENUE RECOGNITION The Company recognizes revenue when the customer takes title to merchandise or based upon the opening of layaway accounts. Effective February 1, 2000, the Company will change its accounting policy for layaway sales and recognize revenue on layaway sales upon delivery of the merchandise to the customer (see Note 15, Subsequent Events). EARNINGS PER SHARE Earnings per share are calculated by dividing net income by the weighted average common and potentially issuable shares outstanding during the period. The Company completed a three-for-two stock split effected in the form of a stock dividend payable on January 4, 2000 to all common shareholders of record at the close of business on December 24, 1999. The financial statements have been restated for all periods presented to give effect to this split. INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable earnings. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. STOCK-BASED COMPENSATION The Company accounts for stock based compensation under the basis of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and will continue to do so in the future. However, the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", have been adopted. COMPREHENSIVE INCOME The Company has adopted Statement of Financials Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income", for the years ended January 31, 2000, 1999 and 1998. The Company has no components of other comprehensive income, as defined by SFAS 130, which are not contained in net income as reported on the accompanying statements of operations. MANAGEMENT ESTIMATES The preparation of financial statements in conjunction with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts for the years ended January 31, 1999 were reclassified to conform to the current year presentation. 25 27 4. ACCOUNTS The Company has charged $1,180,000, $1,278,000 and RECEIVABLE, NET $1,182,000 for doubtful accounts for the years ended January 31, 2000, 1999 and 1998, respectively.
(in thousands) 2000 1999 ----------------------------------------------------------- Accounts receivable $3,879 $4,174 Less: allowance for doubtful accounts (720) (877) ----------------------------------------------------------- Accounts receivable, net $3,159 $3,297 ===========================================================
5. INVENTORY As of January 31, 2000 and January 31, 1999, merchandise inventories consisted of:
(in thousands) 2000 1999 ----------------------------------------------------------- Raw materials $ 7,557 $ 4,177 Finished goods inventory 140,134 112,571 ----------------------------------------------------------- Merchandise inventories $147,691 $116,748 ===========================================================
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 $3,517,000 and $3,948,000 for the years ended January 31, 2000 and 1999, respectively. As of January 31, 2000 and 1999, merchandise consignment inventories held by the Company that are not included in its balance sheets totaled $52,620,000 and $37,778,000, respectively. In addition, gold consignments of $24,294,000 and $21,279,000 are not included in the Company's balance sheet at January 31, 2000 and 1999, respectively (see Note 8, Financing Arrangements). Certain general and administrative costs are allocated to inventory. As of January 31, 2000 and 1999, these amounts included in inventory are $2,464,000 and $1,950,000, respectively. General and administrative expenses previously allocated to inventory which are included in cost of sales were $3,888,000, $2,945,000, and $2,608,000 for the years ended January 31, 2000, 1999 and 1998, respectively. 6. PROPERTY AND Property and equipment includes the following as of January EQUIPMENT 31:
(in thousands) 2000 1999 ----------------------------------------------------------- Furniture, fixtures and software $53,122 $39,188 Leasehold improvements 26,406 22,398 ----------------------------------------------------------- Property and equipment 79,528 61,586 Less accumulated depreciation and amortization 30,384 27,282 ----------------------------------------------------------- Property and equipment, net $49,144 $34,304 ===========================================================
Depreciation and amortization expense was $7,355,000, $4,791,000, and $3,657,000 for the years ended January 31, 2000, 1999, and 1998, respectively. 7. LONG-TERM Included in long-term liabilities at January 31, 2000 and LIABILITIES 1999 are $1,661,000 and $1,627,000, respectively, of deferred lease obligations. 26 28 8. FINANCING In conjunction with the Acquisition (see Note 2), the ARRANGEMENTS 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. The facility provides for a $20.0 million term loan and $90.0 million revolver facility. Proceeds from the Credit Agreement were used to repay the Company's former credit facility and to fund the Acquisition. Under this Credit Agreement, the banks have a collateral security interest in substantially all of the assets of the Company including those purchased in the Acquisition. The Credit Agreement contains certain restrictions on capital expenditures, investments, payment of dividends, assumption of additional debt, and mergers, 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. 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 years ended January 31, 2000, 1999 and 1998 was $3,279,000, $2,060,000 and $1,646,000, respectively, reflecting a weighted average interest rate of 6.9%, 7.7% and 7.4%, respectively. TERM LOANS The term loan facility under the Credit Agreement is available up to a maximum of $17.3 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 under the current and former term loan facilities for the years ended January 31, 2000, 1999 and 1998 for these borrowings was $1,372,000, $1,139,000 and $75,000, respectively, reflecting a weighted average interest rate of 7.3%, 7.8% and 7.9%, 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 27 29 maximum of 115,000 troy ounces of gold 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. Interest rates and the commitment fees charged on the unused facility float in a grid based on the Company's quarterly financial performance. The consignment fees totaled $699,000, $549,000 and $447,000 for the years ended January 31, 2000, 1999 and 1998, respectively, at a weighted average rate of 3.6%, 3.5% and 3.4%, 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. Based on the gold rate as of January 31, 2000, the market value of the gold consigned was $19.8 million. SUBORDINATED NOTES Series A Senior Subordinated Notes due 2004 (the "Series A Notes") totaling $12,000,000 bear interest at 12.15% per annum payable in cash, with interest payments due quarterly. The Series B Senior Subordinated Notes due 2004 (the "Series B Notes") totaling $8,000,000 bear interest at 15% per annum increasing 1% per annum beginning May 1, 1998, payable in cash, with interest payments due quarterly. The Series A Notes subsequently were exchanged for the Series C Notes which are identical in all material respects to the Series A Notes, except that the Series C Notes have been registered under the Securities Act of 1933, as amended. The Series B Notes subsequently were exchanged for the Series D Notes which are identical in all material respects to the Series B Notes, except that the Series D Notes have been registered under the Securities Act of 1933, as amended. In conjunction with the Company's Common Stock offering in November 1996, the Series D Notes were redeemed at a premium. In January 1998, $1,480,000 of the Series C Notes were redeemed for a total of $1,554,000. In January 1998, the Company completed a tender offer to purchase $9,880,000 of the Series C Notes at a premium of $1,087,000. Interest expense was $78,000 for the years ended January 31, 2000 and 1999, respectively. As of January 31, 2000 and 1999, the current portion and noncurrent portion of long-term debt consisted of the following:
(in thousands) 2000 1999 ----------------------------------------------------------- Current portion of long-term debt: Term loan $ 3,250 $ 2,750 ----------------------------------------------------------- Total $ 3,250 $ 2,750 =========================================================== Long-term debt, net of current portion: Term loan $ 4,000 $17,250 Subordinated debt 640 640 ----------------------------------------------------------- Total $14,640 $17,890 ===========================================================
28 30 Future scheduled maturities under the loan agreements, excluding the revolver, for January 31, 2000, are as follows:
Subordinated (in thousands) Term Notes Total ---------------------------------------------------------------- January 31, 2001 $ 3,250 $ -- $3,250 January 31, 2002 4,250 -- 4,250 January 31, 2003 5,250 -- 5,250 January 31, 2004 4,500 -- 4,500 April 30, 2004 -- 640 640 ---------------------------------------------------------------- Total $17,250 $640 $17,890 ----------------------------------------------------------------
The carrying amount of the Company's borrowings under the Credit Agreement and other long-term borrowings approximate fair value. Deferred Financing Costs In conjunction with the Company's recapitalization of its financing arrangements in fiscal year 1997 and the establishment of the Credit Agreement in fiscal year 1998, the Company incurred $2,503,000 and $1,100,000, respectively, in deferred financing costs. These costs are being amortized over the term of the Credit Agreement. Amortization expense in the years ended January 31, 2000, 1999 and 1998 was $362,000, $303,000 and $308,000, respectively. In the fourth quarter of fiscal 1997, the Company recorded an extraordinary loss of $1.0 million, net of $0.7 million tax in connection with the tender offer to purchase Series C notes. The loss consisted of $1.3 million of costs associated with the extinguishment of debt and $0.4 million write-off of deferred financing costs. 9. INCOME TAXES The temporary differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to a significant portion of the deferred tax asset and deferred tax liability and their approximate tax effects are as follows, as of January 31:
2000 1999 ------------------------------------------------------ Temporary Tax Temporary Tax (in thousands) Difference Effect Difference Effect ------------------------------------------------------------------------------------------------- Merchandise inventories $1,402 $554 $ 665 $ 263 Property and equipment, net 103 40 994 393 Accrued rent 1,862 736 1,627 642 Accounts receivable 985 389 1,077 425 Sales return 1,229 485 691 273 Other 1,665 658 1,309 518 ------------------------------------------------------------------------------------------------- Total deferred tax asset 7,246 2,862 6,363 2,514 ------------------------------------------------------------------------------------------------- Other liability 413 163 177 70 ------------------------------------------------------------------------------------------------- Total deferred tax liability (413) (163) (177) (70) ------------------------------------------------------------------------------------------------- Net deferred tax asset $6,883 $2,699 $6,186 $2,444 -------------------------------------------------------------------------------------------------
29 31 The net current and non-current components of deferred income taxes recognized in the balance sheet at January 31 are as follows:
(in thousands) 2000 1999 ------------------------------------------------------------------------------------------------- Net current assets $2,086 $1,518 Net non-current assets 613 926 ------------------------------------------------------------------------------------------------- $2,699 $2,444 =================================================================================================
The income tax expense for the years ended January 31, consists of the following:
(in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------- Current expense $12,559 $8,162 $2,456 Deferred tax expense (456) 766 4,063 ------------------------------------------------------------------------------------------------- Total income tax expense $12,103 $8,928 $6,519 =================================================================================================
The provision for income taxes on income differs from the statutory tax expense computed by applying the federal corporate tax rate of 35% for the years ended January 31, 2000, and 1999 and 34% for the year ended January 31, 1998.
(in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------- Taxes computed at statutory rate $11,002 $8,116 $5,683 State tax expense, net of federal benefit 1,395 943 743 Other (294) (131) 93 ------------------------------------------------------------------------------------------------- Total income tax expense $12,103 $8,928 $6,519 =================================================================================================
10. COMMON STOCK Following are the number of shares issued for each of the Company's classes of Common Stock as of January 31:
Class B Common Stock Common Stock Treasury (Par value $.001) (par value $1.00) Stock ------------------------------------------------------------------------------------------------- Balance at January 31, 1997 15,091,739 152 (26) ------------------------------------------------------------------------------------------------- Exercise of Options 131,815 -- -- ------------------------------------------------------------------------------------------------- Balance at January 31, 1998 15,223,554 152 (26) ------------------------------------------------------------------------------------------------- Exercise of Options 55,235 -- -- ------------------------------------------------------------------------------------------------- Balance at January 31, 1999 15,278,789 152 -- ------------------------------------------------------------------------------------------------- Exercise of Options/Restricted Shares 74,331 -- -- ------------------------------------------------------------------------------------------------- Purchase of Treasury Stock -- -- (883,350) ------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 31, 2000 15,353,120 152 (883,376) -------------------------------------------------------------------------------------------------
Each share of Class B Common Stock is exchangeable into common stock on a 35.4 for 1 basis. Each share of Common Stock is entitled to one vote, and each share of Class B Common Stock is entitled to 35.4 votes on each matter submitted to stockholders for vote. 11. EARNINGS PER The Company adopted SFAS No. 128, "Earnings Per Share," in COMMON SHARE fiscal year 1998. This accounting pronouncement eliminates the measure of performance called "primary" earnings per share and replaces it with "basic" earnings per share. The essential difference between the two 30 32 calculations is that the dilutive effects of stock options outstanding are not considered in the basic computation. As a result, basic earnings per share tend to be slightly higher than primary earnings per share. The pronouncement also changed the measure previously reported as "fully diluted" earnings per share to "diluted" earnings per share. All prior periods have been restated. Basic earnings per share is computed by dividing net earnings available to holders of common stock by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed assuming the exercising of all stock options that are profitable to the recipients. Under these assumptions, the weighted average number of common shares outstanding is increased accordingly. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations:
2000 1999 1998 ------------------------------------------------------------------------------------------------------ Basic Diluted Basic Diluted Basic Diluted ------------------------------------------------------------------------------------------------------ EPS Numerator: Income before extraordinary item $19,334 $19,334 $14,262 $14,262 $11,230 $11,230 EPS Denominator: Average common shares outstanding: 14,560 14,560 15,275 15,275 15,140 15,140 Effect of dilutive securities: Stock options -- 569 -- 220 -- 198 ----------------------------------------------------------------------------------------------------- Total shares 14,560 15,129 15,275 15,495 15,140 15,338 ===================================================================================================== Earnings per share before extraordinary item $1.33 $1.28 $ 0.93 $ 0.92 $ 0.74 $ 0.73 =====================================================================================================
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. Shares repurchased by the Company will reduce the weighted average number of common shares outstanding for basic and diluted earnings per share calculations. As of January 31, 2000, the Company has repurchased 883,350 shares at a total cost of approximately $10.0 million. 12. EMPLOYEE Effective October 1, 1997, the Company established a 401(k) BENEFIT PLANS Plan (the "Plan") for the benefit of substantially all employees. Employees become eligible to participate in the Plan after one year of service which is defined as at least one year of employment and 1,000 hours worked in that year. The Company may make discretionary contributions to the Plan. No such contributions have been made. In 1988, the Company established an Employee Stock Ownership Plan (the "ESOP"), which is a noncontributory plan established to acquire shares of the Company's Class B Common Stock for the benefit of all employees. In conjunction with completion of the Company's initial public offering and recapitalization of its financing arrangements, the Company restructured its ESOP. As of January 31, 1998, all remaining shares had been released to participants. As long as the Company's stock is publicly traded, the Company is not required to repurchase shares from ESOP participants. The only remaining activity of the ESOP is to make distributions to existing participants or beneficiaries. 31 33 13. STOCK PLANS On September 28, 1995, the Company authorized options for the equivalent of 1,039,647 shares under the Incentive Stock Option Plan (the "1995 Plan") to be granted to certain members of the Company's management. Options for the equivalent of 1,032,342 shares were issued at exercise prices ranging from $0.60 to $0.66 per share. These prices were greater than or equal to the fair market value at the date of grant, as determined by an independent third party valuation. The options allow the holders to purchase Common Stock within a period ranging from five years to five years and eight months, at a fixed price. No expense was recorded in connection with these options. On September 28, 1995, the Company granted the equivalent of 759,222 shares of Restricted Stock to certain members of the Company's management. During fiscal 1995, the Company recognized $461,000 in compensation expense relating to the issuance of these shares. This amount represented the fair market value of the shares at the grant date, as determined by an independent third party valuation. In April 1996, the Company approved the 1996 Long-Term Incentive Plan (the "1996 Plan"). Under the 1996 Plan, the Company may grant incentive stock options ("ISOs") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or nonqualified stock options. In addition, the Company may grant stock appreciation rights, bonus stock awards which are vested upon grant, stock awards which may be subject to a restriction period and specified performance measures, and performance shares. Performance shares are rights, contingent upon the attainment of the performance measures within a specified performance period, to receive one share of Common Stock, which may be restricted, or the fair market value of such performance share in cash. A total of 1,156,784 shares of Common Stock have been reserved for issuance under the 1996 Plan. Grants may be made under the 1996 Plan during the ten years after its effective date. Options granted under the 1996 Plan generally vest in four equal annual installments and expire ten years after the date of grant. Options and shares granted under the plans are subject to forfeiture based on, among other things, the nature and timing of the termination of employment. The Company approved the 1997 Long-Term Incentive Plan (the "1997 Plan") on February 24, 1997 and the stockholders adopted the 1997 Plan on June 5, 1997. On June 8, 1999 the stockholders adopted an amendment to the 1997 Plan to increase the Common Stock reserved for issuance under the 1997 Plan. Under the 1997 Plan, the Company may grant ISOs or nonqualified stock options. The 1997 Plan also provides for the grant of stock appreciation rights ("SARs"), bonus stock awards which are vested upon grant, stock awards which may be subject to a restriction period and specified performance measures, and performance shares. Performance shares are rights, contingent upon the attainment of performance measures within a specified performance period, to receive one share of Common Stock, which may be restricted, or the fair market value of such performance share in cash. A total of 1,500,000 shares of Common Stock have been reserved for issuance under the 1997 Plan. Grants may be made under the 1997 Plan during the ten years after its effective date. Options granted under the 1997 Plan expire ten years after the date of grant and generally vest in (i) four equal annual installments or (ii) after nine years, subject to acceleration in the first, second and third years after the date of grant based on the Company's performance. In December 1997, the Company adopted the 1998 Non-Employee Director Stock Option Plan (the "1998 Plan"), effective February 1, 1998. Under the 1998 Plan, non-employee directors may elect to receive all or a designated amount of their directors' fee in the form of stock options. A total of 37,500 shares have been reserved for issuance under the 1998 Plan. Grants may be made during the ten years after its effective date. Options granted under the 1998 Plan 32 34 vest at the end of the quarter in which the date of grant occurs and expire ten years after the date of grant. As of January 31, 2000, options covering 27,830 shares had been granted under the 1998 Plan. Option activity for the years ended January 31, 1998, 1999 and 2000 was as follows:
Weighted-Average Options Shares Exercise Price Exercisable ------------------------------------------------------------------------------------------------------ Balance at January 31, 1997 1,337,376 $ 7.85 194,802 ------------------------------------------------------------------------------------------------------ Options granted 283,725 7.70 Options exercised (131,816) 0.63 Options canceled (16,724) 6.45 ------------------------------------------------------------------------------------------------------ Balance at January 31, 1998 1,472,561 $ 8.49 348,636 ------------------------------------------------------------------------------------------------------ Options granted 171,140 11.37 Options exercised (55,235) 2.13 Options canceled (32,363) 9.45 ------------------------------------------------------------------------------------------------------ Balance at January 31, 1999 1,556,103 $ 9.02 659,057 ------------------------------------------------------------------------------------------------------ Options granted 711,751 12.96 Options exercised (74,331) 6.15 Options canceled (21,902) 10.93 ------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 31, 2000 2,171,621 $10.38 980,663 ======================================================================================================
The weighted-average fair value of the options covering 711,751, 171,140, and 283,725shares granted was $12.97, $5.34, and $4.18, for the years ended January 31, 2000, 1999 and 1998, respectively. The following table summarizes the status of outstanding stock options as of January 31, 2000:
Shares Covered By Options Excercisable Number of Outstanding Options ------------------------ Share Covered Weighted Average Weighted- Number of Weighted- Range of By Outstanding Remaining Average Options Average Exercise Prices Options Contractual Life Exercise Price Exercisable Exercise Price -------------------------------------------------------------------------------------------------- $0.60 - $0.60 5,110 1.33 $ 0.60 5,110 $0.60 $6.75 - $9.33 1,331,654 6.46 8.92 926,403 9.01 $9.42 - $11.46 645,447 9.21 11.29 21,247 10.27 $11.54 - $26.63 189,410 9.09 17.75 27,903 12.57 $0.60 - $26.63 2,171,621 7.50 $10.38 980,663 $9.10 ==================================================================================================
Had the Company elected to apply the provisions of SFAS No. 123, "Accounting for Stock Based Compensation", regarding recognition of compensation expense to the extent of the calculated fair value of stock options granted during the years ended January 31, 2000, 1999, and 1998, reported net income and earnings per share would have been reduced as follows:
(in thousands, except per share amounts) 2000 1999 1998 ---------------------------------------------------------------------------------------------------- Net income, as reported $19,334 $14,262 $10,195 Pro forma net income 17,037 12,641 8,782 Earnings per share, as reported 1.28 0.92 0.66 Pro forma earnings per share 1.13 0.82 0.57 ----------------------------------------------------------------------------------------------------
33 35 For purposes of pro forma net income and earnings per share calculation in accordance with SFAS No. 123, for each option granted under the 1995 Plan during the year ended January 31, 1996, the fair value is estimated as of the date of grant using the Minimum Value method using a weighted-average assumption of 6.1% risk-free interest rate and 5.5 year option life. For each option granted during the years ended January 31, 2000, 1999, and 1998, the fair value is estimated using the Black-Scholes option-pricing model. The assumptions used are as follows:
2000 1999 1998 --------------------------------------------------------------------------------------------------- Risk-free interest rate 5.3% 5.3% 6.4% Dividend yield 0 0 0 Option life 6 years 6 years 6 years Volatility 39% 40% 47% ---------------------------------------------------------------------------------------------------
14. COMMITMENTS The Company leases office facilities and all retail stores, generally under noncancelable agreements for periods ranging from 7 to 13 years. Most leases require the payment of taxes, insurance and maintenance costs. Future minimum rentals under noncancelable operating leases as of January 31, 2000 are as follows:
(in thousands) Years ending January 31, Amount -------------------------------------------------------------- 2001 20,336 2002 19,879 2003 19,322 2004 18,930 2005 17,846 thereafter 64,758 -------------------------------------- $161,071 ======================================
Total rental expense for all operating leases for the years ended January 31, is as follows:
2000 1999 1998 ------------------------------------------------------------------------------------------------------ Rental expense: Minimum $17,950 $13,517 $10,748 Rentals based on sales 2,520 2,015 1,746 ------------------------------------------------------------------------------------------------------ $20,470 $15,532 $12,494 ======================================================================================================
34 36 15. SUBSEQUENT ACCOUNTING CHANGE EVENTS On December 3, 1999 the SEC issued certain accounting guidance in Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101, among other things, indicates that revenue from layaway sales should only be recognized upon delivery of merchandise to the customer. In consideration of this guidance, the Company implemented a change in accounting in the first quarter of fiscal year 2000. The Company has recorded a charge of approximately $5.0 million, $3.0 million net of tax, which will be presented as a cumulative effect of this accounting change on February 1, 2000. REGISTRATION STATEMENT (UNAUDITED) On January 27, 2000, the Company filed with the SEC a registration statement on Form S 3 for the offer and sale by the Company of 2,300,000 shares of its common stock and by selling stockholders of 625,000 shares of the Company's common stock. Net proceeds from the offering are intended to pay down bank debt, and for working capital and other general corporate purposes. 16. UNAUDITED The Company's results of operations fluctuate on a quarterly QUARTERLY basis. The following table sets forth summary unaudited RESULTS financial information of the Company for each quarter in fiscal 1999 and fiscal 1998. In the opinion of management, this quarterly information has been prepared on a basis consistent with the Company's audited financial statements appearing elsewhere in this annual report, and reflects adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such unaudited quarterly results when read in conjunction with the audited financial statements and notes thereto.
1999 Quarters Ended -------------------------------------------------------------------- (in thousands except per share amounts) April 30, 1999 July 31, 1999 October 31, 1999 January 31, 2000 ---------------------------------------------------------------------------------------------------------------- Net sales $58,935 $65,886 $62,933 $127,652 Gross profit 22,987 26,623 25,039 57,859 Income from operations 3,157 5,080 3,434 25,585 Net income 1,168 2,268 1,085 14,813 Diluted earnings per share: Net income $ 0.08 $ 0.15 $ 0.07 $ 0.97 ================================================================================================================ 1998 Quarters Ended -------------------------------------------------------------------- (in thousands, except per share amounts) April 30, 1998 July 31, 1998 October 31, 1998 January 31, 1999 ---------------------------------------------------------------------------------------------------------------- Net sales $41,584 $46,849 $48,483 $102,026 Gross profit 16,139 18,762 19,030 45,643 Income from operations 1,946 3,574 2,193 19,600 Net income 702 1,681 609 11,270 Diluted earnings per share: Net income $ 0.05 $ 0.11 $ 0.04 $ 0.73 ================================================================================================================
35 37 REPORT OF INDEPENDENT ACCOUNTANTS [PRICEWATEREHOUSECOOPERS LOGO] To the Board of Directors and Shareholders of Whitehall Jewellers, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, shareholders' equity, and cash flow, present fairly, in all material respects, the financial position of Whitehall Jewellers, Inc. (the "Company") at January 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2000, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Chicago, Illinois February 22, 2000 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's stock began trading on the New York Stock Exchange under the symbol "JWL" on January 27, 2000. Prior to that date the Company's stock traded on the NASDAQ National Market System under the symbol "WHJI." At April 11, 2000, there were 105 holders of Class B stock and 183 holders of Common Stock for a total of 288 registered shareholders.
2000 1999 ------------------------------------------------- High Low High Low --------------------------------------------------------------------------------------------------- First Quarter $11.917 $ 8.208 $13.667 $11.417 Second Quarter 18.625 10.292 13.250 10.167 Third Quarter 20.417 15.333 12.333 6.333 Fourth Quarter 26.188 14.542 12.417 7.083
The Company has not declared any dividends in fiscal 1999 and 1998, and intends to retain its earnings to finance future growth. Therefore, the Company does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment of dividends, if any, is subject to the discretion of the Board of Directors of the Company and to certain limitations under the General Corporation Law of the State of Delaware. In addition, the Company's Credit Agreement contains restrictions of the Company's ability to pay dividends. The timing, amount and form of dividends, if any, will depend, among other things, on the Company's results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors. 36 38 CORPORATE INFORMATION BOARD OF DIRECTORS MATTHEW M. PATINKIN Executive Vice President - Store Operations JACK A. SMITH(2) The Sports Authority, Inc. Former Chairman and Chief Executive Officer DANIEL H. LEVY(1),(2) Donnkenny, Inc. Chairman and Chief Executive Officer HUGH M. PATINKIN Chairman of the Board, Chief Executive Officer, President NORMAN PATINKIN(1) United Marketing Group, L.L.C. Former Chairman of the Board JOHN R. DESJARDINS Executive Vice President - Finance and Administration, Secretary RICHARD BERKOWITZ (1),(2) Arthur Anderson, L.L.P. Former Partner (1) Audit Committee (2) Compensation Committee CORPORATE OFFICERS HUGH M. PATINKIN Chairman of the Board, Chief Executive Officer, President JOHN R. DESJARDINS Executive Vice President - Finance and Administration, Secretary MATTHEW M. PATINKIN Executive Vice President - Store Operations LYNN EISENHEIM Executive Vice President - Merchandising MANNY A. BROWN Executive Vice President - Store Operations INDEPENDENT AUDITORS PricewaterhouseCoopers, LLP 200 East Randolph Street Chicago, IL 60601 TRANSFER AGENT Boston EquiServ 150 Royall Street Canton, MA 02021 CORPORATE HEADQUARTERS 155 North Wacker Drive Chicago, IL 60606 ANNUAL MEETING The Annual Meeting of Shareholders will be held June 1, 2000 at 4:00 p.m. GENERAL COUNSEL Sidley &Austin One First National Plaza Chicago, IL 60603 SHAREHOLDER INQUIRIES John R. Desjardins Executive Vice President - Finance and Administration 312-782-6800, extension 151 INTERNET WEBSITE www.whitehalljewellers.com COMMON STOCK LISTING Shares of Common Stock of Whitehall Jewellers, Inc. are listed and traded on the New York Stock Exchange under the symbol "JWL". EX-23 3 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Whitehall Jewellers, Inc. on Form S-8 (File no. 333-50159, 333-47601 and 333-14895) of our reports dated, February 22, 2000 on our audits of the financial statements and financial statement schedule of Whitehall Jewellers, Inc. as of January 31, 2000 and 1999, and for the years ended January 31, 2000, 1999 and 1998, which reports are included in the Whitehall Jewellers, Inc. Annual Report on Form 10-K for the fiscal year ended January 31, 2000. /s/ PricewaterhouseCoopers LLP Chicago, Illinois April 28, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JAN-31-2000 FEB-01-1999 JAN-31-2000 0 0 8,797 720 147,697 160,045 79,528 (30,384) 216,936 128,707 14,640 15 0 0 71,913 216,936 315,406 315,406 182,898 182,898 95,252 1,180 5,819 31,437 12,103 19,334 0 0 0 19,334 1.33 1.28
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