<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 28, 1999. Commission File Number 0-15017
SAMUELS JEWELERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3746316
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2914 Montopolis Dr., Suite 200, Austin, Texas 78741
(512) 369-1400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
Warrants
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. [ ]
As of October 8, 1999, the Registrant had 5,061,800 shares of common stock, par
value $.001 per share, outstanding.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court. [X] Yes. [ ] No.
<PAGE> 2
SAMUELS JEWELERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 12
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE> 3
Item 1.
Part I
SAMUELS JEWELERS, INC.
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Successor
August 28, 1999 May 29, 1999
--------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,824 $ 1,456
Customer receivables, net of allowance for doubtful accounts of
$4,975 at August 28, 1999, and $5,120 at May 29, 1999 42,551 45,098
Merchandise inventories 39,642 32,684
Prepaid expenses and other current assets 570 1,207
--------------- ---------------
Total current assets 84,587 80,445
Property and equipment:
Leasehold improvements, furniture and fixtures 17,355 15,396
Computers and equipment 4,559 4,334
--------------- ---------------
21,914 19,730
Less: accumulated depreciation 2,907 2,109
--------------- ---------------
Net property and equipment 19,007 17,621
Other assets 623 631
Reorganization value in excess of amounts allocated to
identifiable assets, net 16,071 16,512
--------------- ---------------
Total assets $ 120,288 $ 115,209
=============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 46,124 $ 45,893
Accounts payable - trade 20,661 12,157
Other accrued liabilities 12,598 13,304
--------------- ---------------
Total current liabilities 79,383 71,354
Shareholders' equity:
Common stock; $.001 par value; authorized 20,000,000 shares;
issued and outstanding, 5,061,800 shares at August 28, 1999,
5,001,800 at May 29, 1999 5 5
Additional paid in capital 48,616 48,346
Deferred compensation (1,251) (1,251)
Notes receivable (687) (771)
Accumulated deficit (5,778) (2,474)
--------------- ---------------
Total shareholders' equity 40,905 43,855
Total liabilities and shareholders' equity $ 120,288 $ 115,209
=============== ===============
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 4
SAMUELS JEWELERS, INC.
STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Quarter Ended
Successor Predecessor
August 28, August 29,
1999 1998
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 21,131 $ 19,948
Finance and credit insurance fees 2,257 2,584
--------------- ---------------
23,388 22,532
Costs and expenses:
Cost of goods sold, buying and occupancy 15,429 13,956
Selling, general and administrative expenses 9,455 9,245
Provision for doubtful accounts 839 1,136
--------------- ---------------
25,723 24,337
Operating loss (2,335) (1,805)
Interest expense, net 969 1,724
--------------- ---------------
Loss before reorganization costs and income
taxes (3,304) (3,529)
Reorganization costs -- 1,809
--------------- ---------------
Loss before income taxes (3,304) (5,338)
Income taxes -- --
--------------- ---------------
Net loss $ (3,304) $ (5,338)
=============== ===============
Basic and diluted loss per share $ (.66) $ (1.32)
=============== ===============
Weighted-average number of common shares
outstanding, in thousands 5,028 4,029
=============== ===============
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
SAMUELS JEWELERS, INC.
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
Successor Predecessor
August 28, August 29,
1999 1998
--------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss $ (3,304) $ (5,338)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,239 1,005
Provision for doubtful accounts 839 1,136
Change in operating assets and liabilities:
Customer receivables 1,708 2,390
Merchandise inventories (6,958) (2,150)
Prepaid expenses and other current assets 637 242
Other assets 32 (1)
Accounts payable - trade 8,504 969
Accrued liabilities (706) 997
--------------- ---------------
Net cash provided by (used in) operating activities 1,991 (750)
Investing activities:
Purchase of property and equipment (1,938) (1,795)
--------------- ---------------
Net cash used in investing activities (1,938) (1,795)
Financing activities:
Net borrowings under revolving credit facility 231 --
Notes receivable 84 --
--------------- ---------------
Net cash provided by financing activities 315
Decrease in cash (368) (2,545)
Cash at beginning of period 1,456 19,301
--------------- ---------------
Cash at end of period $ 1,824 $ 16,756
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,016 $ 1,494
Income taxes $ -- $ --
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
SAMUELS JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. REORGANIZATION AND BASIS OF PRESENTATION
REORGANIZATION
Samuels Jewelers, Inc. ("Samuels," the "Company" or "Successor"), was created in
August, 1998 for the purpose of acquiring the assets of Barry's Jewelers, Inc.
("Barry's" or "Predecessor") as part of Barry's Plan of Reorganization (the
"Plan") which was confirmed by the U.S Bankruptcy Court on September 16, 1998,
and consummated on October 2, 1998 (the "Reorganization"). Samuels is
incorporated in Delaware and was initially funded by $15 million of new equity
provided by the former bondholders of Barry's who also consented to the
conversion of their $50 million of Barry's bonds into equity of Samuels
Jewelers, Inc.
On October 2, 1998, as part of its plan of reorganization, Barry's was merged
into Samuels.
The new company's name, "Samuels Jewelers," comes from a chain of stores
operated by the Predecessor in the San Francisco Bay area. The chain was founded
in 1891 and it has a rich tradition of outstanding customer service and of
providing an excellent selection of fine jewelry.
The Company operates a chain of specialty retail jewelry stores located in
regional shopping malls, power centers and stand alone stores. Its stores offer
fine jewelry items in a wide range of styles and prices, with a principal
emphasis on diamond and gemstone jewelry. As of October 8, 1999, the Company
operated 130 retail jewelry stores, in twenty-two states, principally
California, Texas, Colorado, Utah, Arizona, Idaho, Montana, Indiana North
Carolina and New Mexico. As measured by the number of retail locations, the
Company is one of the larger specialty retailers of fine jewelry in the country.
The Company's corporate office is located at 2914 Montopolis Drive, Suite 200,
Austin, Texas 78741, and its telephone number is (512) 369-1400.
BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. The plan of reorganization, which became effective October 2,
1998, has materially changed the amounts reported in the accompanying financial
statements, which give effect to adjustments to the carrying values of assets
and liabilities as a consequence of the plan of reorganization. The quarter
ended August 29, 1998 reflects the results of operations and cash flows, prior
to the emergence from Chapter 11 proceedings. The quarter ended August 28, 1999
reflects the results of operations and cash flows after the emergence from
Chapter 11 proceedings and reflects the effects of Fresh-Start Reporting. As a
result, the net loss for the quarter ended August 28, 1999 is not comparable
with prior periods.
The financial statements included herein do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation for
the interim periods have been included. However, as stated above, the two
periods are not comparable and are included as required by Securities and
Exchange Act regulations to describe the general development of the business.
Thus, as used herein, the Company, refers to Samuels for periods after October
2, 1998 and to Barry's for periods through October 2, 1998.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the year ending June 3, 2000.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended May 29,
1999.
6
<PAGE> 7
The Company's fiscal year ends on the Saturday closest to May 31. The first
quarter of Fiscal 1999 consisted of the thirteen weeks ended August 29, 1999.
The first quarter of Fiscal 2000 consisted of the thirteen weeks ended August
28, 1999.
Certain previously reported amounts were reclassified to conform to current year
presentations.
2. NOTES RECEIVABLE
To replace the Debtor In Possession (DIP) Financing agreement and to provide for
longer term financing on October 2, 1998, the Company entered into a three year,
$50.0 million financing agreement with Foothill Capital Corporation as a lender
and as agent for a lender group (the "Lenders"). Under the financing agreement
the lenders make revolving advances to the Company in amounts determined based
on percentages of eligible accounts receivable and inventory. The annual rate of
interest is, at the Company's option, (i) 2.25% per annum over the Eurodollar
rate or (ii) 0.5% per annum over the bank's prime rate, provided, however, that
in no event will the applicable interest rate on any advance be less than 7% per
annum. Interest charges are payable monthly. Upon the occurrence and during the
continuation of any event of default under the financing agreement, all
obligations will bear interest at a per annum rate equal to three percentage
points above the otherwise applicable interest rate. As collateral for any and
all obligations to the lenders under the financing agreement, the Company
granted a first priority perfected security interest in and to substantially all
of its owned or thereafter acquired assets, both tangible and intangible. The
financing agreement contains quarterly covenants which include its meeting a
minimum level of tangible net worth and prohibits the payment of dividends. The
Company entered into Amendment Number One to the Loan and Security Agreement
with the Lenders on April 15, 1999. The amendments under this Amendment Number
One adjusted some of the covenants required of the Company under this financing
agreement.
As of August 28, 1999, the Company had direct borrowings of $46.1 million
outstanding with additional credit available of approximately $3.9 million.
As of August 28, 1999, the Company was in compliance with all terms of the
financing agreement.
See "Note 3 Subsequent Events."
3. SUBSEQUENT EVENTS
SALE OF CREDIT PORTFOLIO TO ALLIANCE DATA SYSTEMS. On July 20, 1999, the Company
entered agreements with Alliance Data Systems ("ADS") to sell its existing
credit card accounts and to provide a third party credit card program for the
benefit of the Company's customers. The transactions set out in the agreements
were effected on August 30, 1999. The Company does not expect a significant
change in its credit policies under the agreement with ADS. On closing the sale
to ADS, the company sold its approximately $46.8 million, Accounts Receivable to
World Financial Network National Bank ("WFN") at face value, less a hold back
reserve of approximately $9.4 million. The net proceeds of approximately $37.4
million were used to reduce the balances outstanding under the company's
financing agreement with the Lenders.
AMENDMENT TO FINANCING AGREEMENT WITH FOOTHILL. Concurrent with the sale of the
credit facility with ADS, the financing agreement was amended to allow, among
other things, for the sale to WFN and a reduction of the total commitment under
the financing agreement with the Lenders from $50.0 million to $40.0 million.
ACQUISITION OF SILVERMAN'S AND NEW STORE COMMITMENTS. On July 20, 1999 Samuels
entered into a purchase agreement with Silverman's to acquire lease rights and
fixtures for seventeen Silverman's stores. The purchase price for these assets
was 60,000 shares of the Company's Common Stock, the delivery of which is
contingent upon the delivery of the assets to the Company. The Company will not
assume any of Silverman's liabilities and will be acquiring none of Silverman's
other assets as part of the purchase agreement. Acquisition of the lease rights
is subject to landlord approval, and where landlord approval cannot be received,
the purchase price will be reduced based upon an agreed upon allocation. The
60,000 shares have been issued and are registered under the Company's shelf
registration on Form S-1, declared
7
<PAGE> 8
effective by the SEC on June 9, 1999, but they are currently held in trust
pursuant to an escrow agreement and are to be released to the seller upon the
successful assignment of the lease rights to the Company. The actual number of
leases assigned may not be determinable until as late as December 1, 1999. To
the extent certain lease rights are not assigned, the shares allocated to those
leases will be returned to the Company. As of October 8, 1999, twelve lease
agreements have been consummated that will require the issuance of 54,200
shares. Three lease assignments with a total of 5,400 shares allocated have
already been abandoned. The other two lease assignments are still under
negotiation.
As of October 8, 1999, the Company has opened seven new stores, including an
additional three stores acquired from Silverman's. The Company also has leases
for five more new stores and expects to open another five stores acquired from
Silverman's, all prior to the 1999 Christmas retail selling season.
Additionally, the Company is in various stages of negotiations for several other
leases on new locations.
8
<PAGE> 9
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT. This Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby.
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the quarters ended August 28, 1999 and August 29, 1998.
This information should be read in conjunction with the audited consolidated
financial statements of the Company and the notes thereto as reported on the
Company's Annual Report on Form 10-K for the fiscal year ended May 29, 1999.
RESULTS OF OPERATIONS
Store Activity
The following table sets forth selected store data with respect to the quarters
ended August 28, 1999 and August 29, 1998:
<TABLE>
<CAPTION>
August August
1999 1998
------- -------
<S> <C> <C>
Number of stores at beginning of quarter ......... 116 117
Acquired during the quarter .................... 6 --
Opened during the quarter ...................... 2 --
Closed during the quarter ...................... (1) (1)
------- -------
Total at quarter end ................... 123 116
======= =======
Percentage increase (decrease) in sales of
comparable stores .............................. 5.8% (3.3)%
Quarterly average sales per comparable store
(in thousands) ................................. $ 187 $ 156
Equivalent store weeks ........................... 1,523 1,508
</TABLE>
Net sales for the quarter ended August 28, 1999, were $21.1 million, an increase
of 6.0% or $1.2 million, as compared to the predecessor company's net sales of
$19.9 million for the quarter ended August 29, 1998. Equivalent store weeks were
1,523 for the quarter this year as compared to 1,508 for the quarter last year,
as the Company opened a net of seven new stores during the first quarter this
year. Equivalent weekly sales were $13.9 thousand for the quarter ended August
28, 1999 as compared to $13.2 thousand for the quarter ended August 29, 1998
reflecting the overall sales increase. Comparable store sales (the 108 stores
open for the same period in both the current and preceding year) were $20.2
million during the quarter this year as compared to $19.1 million for the same
period last year. This is an increase of $1.1 million or 5.8% in comparable
store sales. Average sales per comparable store were up 19.9% for the quarter
this year as compared to the same quarter last year due to the overall increase
in sales volume and the change in the comparable store base resulting from the
closure of eight older stores during the preceding twelve months. The Company
attributes the overall increase in sales to several key factors, mainly the
remodeling of stores, a continuation of the upgrading of the quality of its
merchandise to offer an expanded assortment of higher ticket price merchandise
and continued efforts to refine its marketing by targeting a more mature,
financially sound customer, with more discretionary spending ability. These
factors were offset somewhat by reduced credit sales (representing 47.6% of
sales during the quarter ended August 28, 1999 as compared to 55.4% in the
quarter ended August 29, 1998) which resulted from changes in credit
underwriting criteria designed to lessen the Company's reliance on credit sales,
reduce charge-offs and build a portfolio consisting of more creditworthy
customers.
Finance and credit insurance fees decreased to $2.3 million during the quarter
ended August 28, 1999, from $2.6 million during the quarter ended August 29,
1998. This decrease of $.3 million, or 11.5%, was primarily due to the decrease
in average outstanding customer receivables resulting from the closing of almost
70 stores over the last 3 years, changes in credit underwriting criteria, and
lower reliance on credit to generate sales.
9
<PAGE> 10
Cost of goods sold, buying and occupancy expenses were $15.4 million for the
quarter ended August 28, 1999, as compared to $14.0 million for the same quarter
last year. Cost of goods sold, buying and occupancy expenses were 73.0% of net
sales for the quarter ended August 28, 1999 and 70.4% of net sales for the prior
year period. Excluding amortization of the company's reorganization value in
excess of amounts allocated to identifiable assets of $0.4 million, cost of
goods sold, buying and occupancy expenses this year was 71.0% of sales. The
increase in cost of goods sold, buying and occupancy expenses resulted primarily
from understaffing in the Company's buying and distribution departments while
the Company was in the process of relocating its home office during the quarter
ended August 29, 1998, depreciation associated with the Company's expenditures
on new computer systems during the quarter ended August 28, 1999, and the
overall increase in the number of stores in operation. The increase in cost of
goods sold, buying and occupancy expenses as a percentage of sales resulted
primarily from the above as well as moderate seasonal discounting to match
promotions from competitors.
Selling, general and administrative expenses were $9.5 million for the quarter
ended August 28, 1999, as compared to $9.2 million in the same quarter last
year. The increase was primarily due to the amortization of management stock
grants, understaffing during the relocation of the Company's home office last
year, and an overall increase in the number of stores in operation. Selling,
general and administrative expenses as a percentage of net sales were 45.0% for
the quarter ended August 28, 1999 and 46.2% for the quarter ended August 29,
1998. The improvement as a percentage of net sales resulted primarily from the
general and administrative expenses being spread over the larger sales volume.
The provision for doubtful accounts was $0.8 million for the quarter ended
August 28, 1999. This was a decrease of $0.3 million, or 27.2% from the quarter
ended August 29, 1998. The provision was approximately 3.8% and 5.5%, of net
sales for the quarters ended August 28, 1999 and August 29, 1998 respectively.
The provision was approximately 8.4% and 10.3%, of net credit sales for the
quarters ended August 28, 1999 and August 29, 1998 respectively. The decrease in
the provision was primarily due to the closed stores, which had generated less
creditworthy customer receivables, along with the continuing effects of changes
in credit underwriting implemented by new management and lower reliance on
credit to effect sales by targeting a more creditworthy customer.
Net interest expense was $1.0 million for the quarter ended August 28, 1999, a
decrease of $0.7 million, or 41.2% from $1.7 million for the quarter ended
August 29, 1998. Upon completion of the Reorganization the Company entered into
a new financing agreement which resulted in reduced amounts outstanding as well
as a lower rate of interest on amounts outstanding after October 2, 1998. See
"Note 2 Notes Receivable."
Reorganization costs incurred by the predecessor Company consisted primarily of
professional fees directly related to the Chapter 11 filing, offset by interest
earned on accumulated cash during the pendency of the Chapter 11 filing.
FINANCIAL CONDITION
CREDIT PROGRAM. The Company offers its merchandise sales on in-house credit to
qualified customers. The Company's policy is to attempt to obtain a cash down
payment on credit sales, with monthly payments established such that the payment
of the credit balance will occur, generally, over a period ranging from 24 to 36
months. The Company's customer receivables are revolving charge accounts. As of
August 28, 1999 and May 29, 1999, the aggregate customer receivables balances
were $47.5 million and $50.2 million, respectively. See "Note 3 Subsequent
Events."
INVENTORY. At August 28, 1999, inventories (net of reserves and not including
consignment inventory) were approximately $39.6 million, an increase of
approximately $6.9 million from $32.7 million at May 29, 1999. This increase is
due to merchandise purchased in preparation for the holiday season and for the
opening of newly acquired stores.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's operations require working capital to fund the purchase
of inventory, and normal operating expenses. The seasonality of the Company's
business requires a significant build-up of inventory for the Christmas holiday
selling period. These seasonal inventory needs generally must be funded during
the late summer and fall months because of the necessary lead-time to obtain
additional inventory.
The Company reported cash flow provided by operating activities of approximately
$2.0 million for the quarter ended August 28, 1999, as compared to cash flow
used in operating activities of approximately $0.8 million for the comparable
period last year. The change in cash flow from operating activities is primarily
due to an increase in accounts payable resulting from the acquisition of
inventory for newly acquired stores. Additionally, the Company acquired $1.9
million in new property and equipment during the quarter consisting mostly of
leasehold improvements associated with the remodeling of existing stores and the
acquisition of new stores.
As of August 28, 1999, the Company had $1.8 million of cash and cash
equivalents, none of which was restricted, as compared to $16.8 million as of
August 29, 1998 which resulted from the Chapter 11 filing and the prohibition on
payments of prepetition debt. Approximately $11.4 million of the Company's cash
and cash equivalents at August 29, 1998, was restricted pursuant to the terms of
the Cash Stipulation. Additionally, $2.0 million of the Company's cash and cash
equivalents at August 29, 1998 was restricted pursuant to the terms of the Trade
DIP Financing Agreement.
FINANCING TRANSACTIONS
To replace the DIP Financing agreement and to provide for longer term financing
on October 2, 1998, the Company entered into a three year, $50.0 million
financing agreement with Foothill Capital Corporation as a lender and as agent
for a lender group (the "Lenders"). Under the financing agreement the lenders
make revolving advances to the Company in amounts determined based on
percentages of eligible accounts receivable and inventory. The annual rate of
interest is, at the Company's option, (i) 2.25% per annum over the Eurodollar
rate or (ii) 0.5% per annum over the bank's prime rate, provided, however, that
in no event will the applicable interest rate on any advance be less than 7% per
annum. Interest charges are payable monthly. Upon the occurrence and during the
continuation of any event of default under the financing agreement, all
obligations will bear interest at a per annum rate equal to three percentage
points above the otherwise applicable interest rate. As collateral for any and
all obligations to the lenders under the financing agreement, the Company
granted a first priority perfected security interest in and to substantially all
of its owned or thereafter acquired assets, both tangible and intangible. The
financing agreement contains quarterly covenants which include its meeting a
minimum level of tangible net worth and prohibits the payment of dividends. The
Company entered into Amendment Number One to the Loan and Security Agreement
with the Lenders on April 15, 1999. The amendments under this Amendment Number
One adjusted some of the covenants required of the Company under this financing
agreement.
As of August 28, 1999, the Company had direct borrowings of $46.1 million
outstanding with additional credit available of approximately $3.9 million. As
of August 28, 1999, the Company was in compliance with all terms of the
financing agreement. See "Note 3 Subsequent Events."
YEAR 2000 COMPLIANCE. Many existing computer systems and applications, and other
control devices, use only two digits to identify a year in the date field
without considering the impact of the upcoming change in the century. As a
result, such systems and applications could fail or create erroneous results
unless corrected so that they can process data related to the year 2000 and
beyond.
The Company relies on its computer system, applications and devices in operating
and monitoring all major aspects of its business, including financial systems
(such as general ledger, accounts payable and payroll modules), customer
services, infrastructure, embedded computer chips, networks, telecommunications
equipment and end products.
11
<PAGE> 12
The Company has obtained a new integrated management information system that
includes a system processor and operating system, applications software, point
of sale hardware and additional microcomputers. The year 2000 issue was
addressed during the planning process, and all new system technology is believed
to be year 2000 compliant.
Through August 1999, the Company had spent approximately $3.5 million, with $1.2
million of this amount for new hardware and $2.3 million for new software on all
projects to ensure the Company meets all requirements to be year 2000 compliant.
All of the internal operating systems the Company currently uses are believed to
be year 2000 compliant.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as suppliers, creditors and financial organizations,
and of government entities, for accurate exchange of data.
The Company has received assurances from most of the parties with which it
interacts that their systems are currently year 2000 compliant or will be year
2000 compliant by December 31, 1999. We have no assurances that their
representations are correct, and although the year 2000 issue may not materially
affect the Company's internal systems, it possibly could be affected through
disruptions in the operations of the parties with which it interacts.
Therefore, despite the Company's efforts to address the year 2000 impact on its
internal systems and business operations, there can be no assurance that such
impact will not result in a material disruption of its business or have a
material adverse effect on its business, financial condition, or results of
operations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk in the form of interest rate risk. At
August 28, 1999, the Company had $46.1 million outstanding under its revolving
line of credit. This revolving line is priced with a variable rate based on
LIBOR or a base rate, plus, in each case an applicable margin. See "Note 2 Notes
Payable". An increase or decrease in interest rates would affect the interest
costs relating this revolving line of credit. The Company has no interest rate
swaps or other hedging facilities relating to its revolving line of credit.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in legal proceedings of a
character normally incident to its business. The Company believes that
its potential liability in any such pending or threatened proceedings,
either individually or in the aggregate, will not have a material
effect on the financial condition or results of operations of the
Company.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
ACQUISITION OF SILVERMAN'S. On July 20, 1999 Samuels entered into a
purchase agreement with Silverman's to acquire lease rights and
fixtures for seventeen Silverman's stores. The purchase price for these
assets was 60,000 shares of the Company's Common Stock, the delivery of
which is contingent upon the delivery of the assets to the Company. The
company will not assume any of Silverman's liabilities and will be
acquiring none of Silverman's other assets as part of the purchase
agreement. Acquisition of the lease rights is subject to landlord
approval, and where landlord approval cannot be received, the purchase
price will be reduced based upon an agreed upon allocation. The 60,000
shares have been issued and are registered under the Company's shelf
registration on Form S-1, declared effective by the SEC on June 9,
1999, but they are currently held in trust pursuant to an escrow
agreement and are to be released to the seller upon the successful
assignment of the lease rights to the Company. The actual number of
leases assigned may not be determinable until as late as December 1,
1999. To the extent certain lease rights are not assigned, the shares
allocated to those leases will be returned to the Company. As of
October 8, 1999, twelve lease agreements have been consummated that
will require the issuance of 54,200 shares. Three lease assignments
with a total of 5,400 shares allocated have already been abandoned. The
other two lease assignments are still under negotiation.
The Silverman's acquisition represents the Company's departure from a
mall only retail jewelry environment. Only one of the former
Silverman's stores is located in a mall. The others are either located
in power centers or are stand-alone stores. The Company plans to rename
the non-mall stores Samuels Diamonds. The mall store will be renamed
Samuels Jewelers.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
3.1 Certificate of Incorporation of Samuels Jewelers, Inc.(1)
3.2 Bylaws of Samuels Jewelers, Inc.(1)
10.1 Private label Credit Card Agreement between World
Financial Network National Bank and the Company dated as
of July 27, 1999.(2)
10.2 Purchase and Sale Agreement between World Financial
Network National Bank and the Company dated as of July
27, 1999.(2)
13
<PAGE> 14
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed October 6, 1998.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended May 29, 1999.
(b) Reports on Form 8-K:
Not applicable
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SAMUELS JEWELERS, INC.
October 8, 1999 By: /s/ Randy N. McCullough
----------------------------------------
Randy N. McCullough
President and Chief Executive Officer
October 8, 1999 By: /s/ E. Peter Healey
----------------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
October 8, 1999 By: /s/ Robert J. Herman
----------------------------------------
Robert J. Herman
Vice President and Controller
(Principal Accounting Officer)
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Incorporation of Samuels Jewelers, Inc.(1)
3.2 Bylaws of Samuels Jewelers, Inc.(1)
10.1 Private label Credit Card Agreement between World Financial
Network National Bank and the Company dated as of July 27,
1999.(2)
10.2 Purchase and Sale Agreement between World Financial Network
National Bank and the Company dated as of July 27, 1999.(2)
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to the Company's Current Report on Form 8-K
filed October 6, 1998.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended May 29, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-03-2000
<PERIOD-START> MAY-30-1999
<PERIOD-END> AUG-28-1999
<CASH> 1,824
<SECURITIES> 0
<RECEIVABLES> 47,526
<ALLOWANCES> 4,975
<INVENTORY> 39,642
<CURRENT-ASSETS> 84,587
<PP&E> 21,914
<DEPRECIATION> 2,907
<TOTAL-ASSETS> 120,288
<CURRENT-LIABILITIES> 79,383
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 40,900
<TOTAL-LIABILITY-AND-EQUITY> 120,288
<SALES> 21,131
<TOTAL-REVENUES> 23,388
<CGS> 15,429
<TOTAL-COSTS> 24,844
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 839
<INTEREST-EXPENSE> 969
<INCOME-PRETAX> (3,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
