<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 February 27, 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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (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 April 12, 1999, the issuer had a total of 5,001,800 shares of common
stock 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
PART I FINANCIAL INFORMATION
<S> <C>
ITEM 1. Financial Statements
Balance Sheets 1
Statements of Operations 2
Statements of Cash Flows 4
Notes to Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
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.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Co. Predecessor Co.
February 27, May 30,
1999 1998
------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,416 $ 19,301
Customer receivables, net of allowance for doubtful accounts of
$5,593 at February 27, 1999, and $7,099 at May 30, 1998 47,954 48,076
Merchandise inventories 34,489 26,993
Prepaid expenses and other current assets 617 1,569
--------- ---------
Total current assets 84,476 95,939
Property and equipment:
Leasehold improvements, furniture and fixtures 13,187 17,824
Computers and equipment 4,523 5,724
--------- ---------
17,710 23,548
Less: accumulated depreciation 1,464 10,250
--------- ---------
Net property and equipment 16,246 13,298
Other assets 640 1,495
Reorganization value in excess of amounts allocated to
identifiable assets, net 16,953 --
--------- ---------
Total assets $ 118,315 $ 110,732
========= =========
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Accounts payable - trade $ 16,105 $ 9,086
Other accrued liabilities 13,052 9,698
--------- ---------
Total current liabilities 29,157 18,784
Liabilities subject to compromise under reorganization proceedings -- 126,812
Long-term debt 42,086 --
Shareholders' equity (deficiency):
Common stock; no par value; authorized 8,000,000 shares; issued
and outstanding, 4,029,372 shares at May 30, 1998 -- 33,247
Common stock; $.001 par value; authorized 20,000,000 shares;
issued and outstanding, 5,001,800 shares at February 27, 1999 5 --
Additional paid in capital 47,095
Notes receivable (856) --
Accumulated deficit 828 (68,111)
--------- ---------
Total shareholders' equity (deficiency) 47,072 (34,864)
Total liabilities and shareholders' equity (deficiency) $ 118,315 $ 110,732
========= =========
</TABLE>
See Notes to Financial Statements.
<PAGE> 4
SAMUELS JEWELERS, INC. ,
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Successor Co. Predecessor Co.
Three Months Three Months
Ended Ended
February 27, February 28,
1999 1998
------------ ---------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 44,429 $ 44,662
Finance and credit insurance fees 2,531 3,020
---------- -----------
46,960 47,682
Costs and expenses:
Cost of goods sold, buying and occupancy 26,607 26,864
Selling, general and administrative expenses 13,697 14,082
Provision for doubtful accounts 1,981 2,568
---------- -----------
42,285 43,514
Operating income 4,675 4,168
Interest expense, net 830 2,930
---------- -----------
Income before reorganization costs 3,845 1,238
Reorganization costs -- 2,075
---------- -----------
Net income (loss) $ 3,845 $ (837)
========== ===========
Basic and diluted income per share (a) $ .77 n/a
========== ===========
Weighted-average number of common shares
outstanding (a) 5,001,800 n/a
========== ===========
</TABLE>
(a) The basic and diluted loss per share and weighted average number of common
shares outstanding for the Predecessor Company have not been presented because,
due to the reorganization and implementation of Fresh-Start Reporting, they are
not comparable to subsequent periods.
See Notes to Financial Statements.
<PAGE> 5
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Successor Co. Predecessor Co. Predecessor Co.
Five Months Four Months Nine Months
Ended Ended Ended
February 27, October 2, February 28,
1999 1998 1998
------------- --------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 58,024 $ 27,494 $ 90,535
Finance and credit insurance fees 4,096 3,397 8,589
---------- ---------- ----------
62,120 30,891 99,124
Costs and expenses:
Cost of goods sold, buying and occupancy 36,333 19,091 59,405
Selling, general and administrative expenses 20,748 12,980 36,185
Provision for doubtful accounts 2,831 1,492 5,486
---------- ---------- ----------
59,912 33,563 101,076
Operating income (loss) 2,208 (2,672) (1,952)
Interest expense, net 1,380 2,367 9,027
---------- ---------- ----------
Income (loss) before reorganization items,
income taxes and extraordinary item 828 (5,039) (10,979)
Reorganization items:
Fresh-Start adjustments -- (66,042) --
Reorganization costs -- 4,437 3,532
---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item 828 56,566 (14,511)
Income taxes -- -- --
---------- ---------- ----------
Net income (loss) before extraordinary item 828 56,566 (14,511)
Gain on forgiveness of debt -- (11,545) --
---------- ---------- ----------
Net income (loss) $ 828 $ 68,111 ($ 14,511)
========== ========== ==========
Basic and diluted loss per share (a) $ .17 n/a n/a
========== ========== ==========
Weighted-average number of common shares
Outstanding (a) 5,001,800 n/a n/a
========== ========== ==========
</TABLE>
(a) The basic and diluted loss per share and weighted average number of common
shares outstanding for the Predecessor Company have not been presented because,
due to the reorganization and implementation of Fresh-Start Reporting, they are
not comparable to subsequent periods.
See Notes to Financial Statements.
<PAGE> 6
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Successor Co. Predecessor Co. Predecessor Co.
Five Months Four Months Nine Months
Ended Ended Ended
February 27, October 2, February 28,
1999 1998 1998
------------- --------------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 828 $ 68,111 ($ 14,511)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Fresh-Start adjustments -- (66,042) --
Extraordinary item - gain on forgiveness of debt -- (11,545) --
Depreciation and amortization 2,206 1,341 3,180
Provision for doubtful accounts 2,831 1,492 5,486
Loss on disposal of assets 315 -- 186
Management stock grant -- 417 --
Notes receivable
Change in operating assets and liabilities:
Customer receivables (6,853) 2,652 (4,142)
Merchandise inventories (7,960) (4,592) 16,140
Prepaid expenses and other current assets 400 552 636
Other assets (157) (21) (22)
Accounts payable - trade 3,403 3,616 4,431
Accrued liabilities (2,188) 1,921 4,517
--------- --------- ---------
Net cash provided by (used in) operating activities (7,175) (2,098) 15,901
Investing activities:
Purchase of property and equipment (4,458) (2,641) (974)
Proceeds from sale of assets 100 -- --
--------- --------- ---------
Net cash used in investing activities (4,358) (2,641) (974)
Financing activities:
Net borrowings (repayments) under revolving credit facility (4,372) (11,397) --
Notes receivable (856) -- --
Issuance of common stock 15,012 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities 9,784 (11,397) --
Increase (decrease) in cash (1,749) (16,136) 14,927
Cash at beginning of period 3,165 19,301 7,322
--------- --------- ---------
Cash at end of period $ 1,416 $ 3,165 $ 22,249
========= ========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 1,134 $ 2,060 $ 4,237
Income taxes -- -- --
</TABLE>
See Notes to Financial Statements.
<PAGE> 7
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Samuels Jewelers, Inc. (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 results of operations and cash flows have been split into
two periods. The first four months ended October 2, 1998 reflect operations
prior to the emergence from Chapter 11 proceedings. The latest five months
ended February 27, 1999 reflect operations after the emergence from Chapter 11
proceedings and reflect the effects of Fresh-Start Reporting (see note 2). As a
result, the net income for the five months ended February 27, 1999 is not
comparable with prior periods and is not combined with prior period net income
for year-to-date totals due to non-comparability. The balance sheet at February
27, 1999 is also not comparable to 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. Operating results for the interim
periods presented are not necessarily indicative of the results that may be
expected for the year ending May 29, 1999. For further information, refer to
the financial statements and footnotes thereto included in the Barry's
Jewelers, Inc. Annual Report on Form 10-K for the year ended May 30, 1998.
The Company changed its fiscal year end during 1998 from May 31 to the Saturday
closest to May 31. The Company's fiscal month of September 1998 ended on
October 3, 1998. This eighteen-week period is referred to as the four months
ended October 2, 1998 to conform with the effective date of the Company's plan
of reorganization as any differences are deemed to be not significant. The
three months ended February 27, 1999 consists of the thirteen weeks then ended,
while the quarter ended February 28, 1998 consists of the three months then
ended.
Samuels Jewelers, Inc. is a chain of specialty retail jewelry stores generally
located in regional shopping malls. The Company's stores offer fine jewelry
items in a wide range of styles and prices, with a principal emphasis on
diamond and gemstone jewelry. It operated 111 stores on February 27, 1999, and
125 stores on February 28, 1998.
The accompanying financial statements have been presented in accordance with
Statement of Position 90-7 "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" (Fresh Start Reporting).
2. REORGANIZATION
On May 11, 1997, (the "Petition Date"), the Company filed a voluntary petition
for reorganization under Chapter 11 in the United States Bankruptcy Court for
the Central District of California, Los Angeles Division (the "Bankruptcy
Court"). After the Petition Date, the Company continued in possession of its
properties and, as Debtor-in-Possession, was authorized to operate and manage
its businesses and enter into all transactions (including obtaining services,
inventories, and supplies) that it could have entered into in the ordinary
course of business without approval of the Bankruptcy Court.
On September 16, 1998, the Bankruptcy court entered an order (the "Confirmation
Order") confirming the Company's Original Disclosure Statement and Plan of
Reorganization, dated April 30, 1998, as Modified (as so modified and
confirmed, the "Plan"). A copy of the Plan and the Confirmation Order are
attached as Exhibits to the Company's Current Report on Form 8-K dated
September 16, 1998. Please refer to such documents for more information.
<PAGE> 8
The Plan was confirmed and became effective on October 2, 1998 (the "Effective
Date"). The Company adopted the fresh start reporting requirements of Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" during the second quarter of fiscal 1999. In accordance with
the fresh start reporting requirements, the reorganization value of the Company
has been allocated to the Company's assets in conformity with the procedures
specified by APB Opinion 16, Business Combinations. In addition the accumulated
deficit of the Company was eliminated and its capital structure was revalued in
accordance with the Plan. The Company has recorded the effects of the Plan and
Fresh-Start Reporting as of October 2, 1998. The adjustment to eliminate the
Company's accumulated deficit totaled $77.6 million of which $11.6 million was
forgiveness of debt and the remaining $66.0 million was Fresh-Start
adjustments.
The results of operations and cash flows for the four months ended October 2,
1998 include operations prior to the Company's emergence from Chapter 11
proceedings (referred to as "Predecessor Company") and the effects of
Fresh-Start Reporting. The results of operations and cash flows for the four
months ended February 27, 1999 include operations subsequent to the Company's
emergence from Chapter 11 proceedings and reflect the effects of Fresh-Start
Reporting. As a result, the net income for the four months ended February 27,
1999 is not comparable with prior periods and the net income for the
year-to-date period ended February 27, 1999 is divided into Successor Company
and Predecessor Company and is also not comparable with prior periods. In
addition, the balance sheet as of February 27, 1999 is not comparable to prior
periods for the reasons discussed above.
Under the plan, the Company issued 5,001,800 shares of the reorganized company
stock. Of those shares 2,500,000 shares were issued to holders of Allowed Class
2 and Class 5 claims (secured and unsecured Claims of Bondholders), an
additional 2,251,800 were sold to holders of Allowed Class 2 and Class 5
claims, and 250,000 shares were granted to executive officers of the
reorganized company. Under the plan, the Company issued 263,158 Reorganized
Company Warrants to the holders of Allowed Class 9 claims (claims of former
holders of common stock of Barry's Jewelers, Inc.) which are exercisable at
rates outlined in the Company's Plan of Reorganization.
The Company's stock is traded on the Nasdaq OTC Bulletin Board under the symbol
"SMJW".
The reorganized value of the Company's common equity of $47.1 million, was
determined by the Company, with the assistance of financial advisors, by
reliance on the Discounted Cash Flow method using the weighted average cost of
capital. The reorganized value of the Company has been allocated to specific
assets categories pursuant to Fresh-Start Reporting. Reorganization Value in
Excess of Amounts Allocated to Identifiable Assets reflects the difference in
the Company's stock valuation and the Company's net assets. The Company is
amortizing the Reorganization Value in Excess of Amounts Allocated to
Identifiable Assets over ten years.
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consisted of
the following at May 30, 1998:
<TABLE>
<S> <C>
Secured liabilities: May 30, 1998
-------------
Borrowings outstanding under
Amended Revolving Credit Agreement $ 57,855
Senior Secured Notes (includes interest payable
of $3,073 accrued through the Petition Date) 53,073
Other notes payable and capital lease obligations 88
----------
111,016
Unsecured liabilities:
Accounts payable trade 4,870
Other accrued expenses 10,926
----------
15,796
----------
$ 126,812
==========
</TABLE>
In accordance with the Plan, these liabilities subject to compromise were
resolved on the Effective Date.
<PAGE> 9
4. LONG-TERM DEBT
On October 2, 1998, the Company entered into a three year, $50,000,000
financing agreement with Foothill Capital Corporation as a lender and as agent
for a lender group (the "Lenders"). The lenders will make revolving advances to
the Company in amounts determined based on percentages of eligible accounts
receivable and inventory. The annual rate of interest will be, 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. 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 a minimum level of tangible net worth and a ratio of in-house
credit sales to total merchandise sales. The financing agreement also gives the
Company an option to reduce the maximum credit line to no less than $25,000,000
upon the sale of the Company's entire accounts receivable portfolio, provided,
however, that such option will expire eighteen months from the date of closing
of the financing agreement.
As of February 27, 1999, the Company had direct borrowings of $42,086,000
outstanding with additional credit available of approximately $7,914,000.
As of February 27, 1999, the Company was in compliance with all terms of the
financing agreement.
<PAGE> 10
ITEM 2 MANAGEMENT'S 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 and its predecessor as of and for the interim three and five month
periods ended February 27, 1999, the interim four month period ended October 2,
1998 and the nine months and fiscal quarter ended February 28, 1998. This
information should be read in conjunction with the audited consolidated
financial statements and the notes thereto as reported on Barry's Jewelers,
Inc. Annual Report on Form 10-K for the fiscal year ended May 30, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED FEBRUARY 27, 1999 COMPARED TO THE THREE MONTHS ENDED
FEBRUARY 28, 1998
Net sales for the three months ended February 27, 1999, were $44.4 million, a
decrease of 0.7% or $0.3 million, as compared to the predecessor company's net
sales of $44.7 million for the three months ended February 28, 1998. The
decrease in total store sales was primarily a result of the reduction of the
number of operating stores by a net of 14 since February 1998. Comparable store
sales (the 109 stores open for the same period in both the current and
preceding year) were $43.4 million during the three months this year as
compared to $40.3 million last year. This is an increase of $3.1 million or
7.7% in average comparable store volumes. The Company attributes the comparable
store overall increases to several key factors, mainly the remodeling of some
stores, a continuation of the upgrading of merchandise offered and marketing
efforts to appeal to a better customer and drive sales during traditionally
slow periods. During the second quarter, the temporary closure or relocation of
approximately 18 stores, for the Company's major remodel and name change
campaign, had a negative impact on sales. These remodels and name changes were
completed early in the third quarter and these 18 stores showed an average
sales increase of 11.2% during the third quarter as compared to the third
quarter last year. During the third quarter the Company continued to upgrade
the quality of its merchandise and offer an expanded assortment of higher
ticket price merchandise. The Company has continued to refine its marketing
efforts, targeting a more mature, financially sound customer, with more
discretionary spending ability. The Company also held special promotional
events to drive additional sales during the traditionally slower periods of the
quarter. These factors were offset somewhat by reduced credit sales
(representing 43.3% of sales in the current year as compared to 49.2% in the
prior year) 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, on credit sales, for the three months ended
February 27, 1999, were $2.5 million, a decrease of 16.7%, from the same three
months in the prior year of $3.0 million. This decrease resulted primarily from
a decrease in the average total customer receivables outstanding during the
three months of approximately 12.0%. Average customer receivables were lower
primarily because of the closure of stores, changes in credit underwriting and
continuing efforts to reduce the reliance on credit to generate sales.
Cost of goods sold, buying and occupancy expenses were $26.6 million for the
three months ended February 27, 1999, as compared to $26.9 million for the same
quarter last year. Cost of goods sold, buying and occupancy expenses were 59.9%
of net sales for the three months ended February 27, 1999 and 60.1% 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
58.9% of sales. The reduction in cost of goods sold, buying and occupancy
expenses resulted primarily from improved merchandise margins and savings in
occupancy expense due to the closing of relatively high rent stores and the
relocation of the Company's headquarters, offset somewhat by increased
marketing expenses relating to the Company's promoting during the holiday
season and the remodel and name change campaign.
Selling, general and administrative expenses were $13.7 million for the three
months ended February 27, 1999, as compared to $14.1 million in the same
quarter last year. Selling, general and administrative expenses as a percentage
of net sales were 30.8% for the three months ended February 27, 1999 and 31.5%
for the three months ended November 30, 1998. This improvement resulted from
some sales efficiencies as well as improvements in the efficiency of the
structure of the company but was offset somewhat by some fixed expenses being
spread over a smaller sales base.
<PAGE> 11
The provision for doubtful accounts was $2.0 million for the three months ended
February 27, 1999. This was a decrease of $.6 million, or 22.9% from the same
three months in the prior year. The provision was approximately 4.5% and 5.7%,
respectively, of net sales for the three months ended February 27, 1999 and
February 28, 1998 or approximately 10.3% and 11.7%, respectively, of net credit
sales. The decrease in the provision was primarily due to closed stores, which
had generated less creditworthy customer receivables, as well as the reduction
in the percentage of credit sales to total sales from the continuing effects of
changes in credit underwriting and lower reliance on credit as the Company
continues its efforts to attract a more creditworthy customer.
Net interest expense was $.8 million for the combined three months ended
February 27, 1999, a decrease of $2.1 million, or 72.4% from $2.9 million
during the prior year quarter. The decrease was due primarily to interest
associated with the Company's Senior Secured Notes, which was accrued during
the three months ended February 28, 1998 but was not accrued during the three
months ended February 27, 1999 (in accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code") as such
notes were cancelled as a part of the Company's plan of reorganization. The
Company also entered into a new financing agreement on October 2, 1998, which
resulted in reduced amounts outstanding as well as a lower rate of interest on
amounts outstanding after October 2, 1998 (see Notes 2 and 3).
NINE MONTHS ENDED FEBRUARY 27, 1999 (COMBINING BOTH THE PREDECESSOR AND
SUCCESSOR COMPANIES) COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 1998
Net sales for the nine months ended February 27, 1999, combining both the
predecessor and successor companies, were $85.5 million, a decrease of 5.5% or
$5.0 million, as compared to the predecessor company's net sales of $90.5
million for the nine months ended February 28, 1998. The decrease in total
store sales was primarily a result of the reduction of the number of operating
stores by a net of 14 since February 1998. Comparable store sales (the 109
stores open for the same period in both the current and preceding year) were
$83.0 million during the nine months this year as compared to $81.5 million for
the same nine months last year. This increase of 1.8% in average comparable
store volumes was a result of a continuation of the upgrading of merchandise
offered, marketing efforts to appeal to a better customer and drive sales
during traditionally slow periods, offset by the temporary negative impact of
the company's remodeling and name change program. Throughout the fiscal year
the Company has continued to upgrade the quality of its merchandise as well as
offering an expanded assortment of higher ticket price merchandise. The Company
has also continued to refine its marketing efforts, targeting a more mature,
financially sound customer, with more discretionary spending ability. The
Company also held special promotional events to drive additional sales during
the traditionally slower periods of the year. During the current year
comparable store sales were negatively impacted in the second quarter as the
Company began a major remodeling and name change campaign that resulted in the
temporary closure or relocation of approximately 18 stores. These remodels and
name changes were completed early in the third quarter and these 18 stores
showed average sales increases during the third quarter which more than offset
the impact in the second quarter. The increase was offset somewhat by reduced
credit sales (representing 49.0% of sales in the current year as compared to
54.7% in the prior year) 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, on credit sales, for the nine months ended
February 27, 1999, were $7.5 million, a decrease of 12.8%, from $8.6 million in
the same nine months of the prior year. This decrease resulted primarily from a
13.0% decrease in the average total customer receivables outstanding during the
nine months. Average customer receivables were lower primarily because of the
closure of stores, changes in credit underwriting and continuing efforts to
reduce the reliance on credit to generate sales.
Cost of goods sold, buying and occupancy expenses were $55.4 million for the
nine months ended February 27, 1999, as compared to $59.4 million for the same
quarter last year. Cost of goods sold, buying and occupancy expenses were 64.8%
of net sales for the nine months ended February 27, 1999 and 65.6% 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
$0.7 million cost of goods sold, buying and occupancy expenses this year was
64.0% of sales. The reduction in cost of goods sold, buying and occupancy
expenses resulted primarily from improved merchandise margins and savings in
occupancy expense due to the closing of relatively high rent stores and the
relocation of the Company's headquarters, offset somewhat by increased
marketing expenses relating to the Company's promoting during the holiday
season and the remodel and name change campaign.
Selling, general and administrative expenses were $33.7 million for the nine
months ended February 27, 1999, as compared to $36.2 million last year.
Selling, general and administrative expenses as a percentage of net sales were
39.4% for the nine months ended February 27, 1999 and 40.0% for the nine months
ended February 28, 1998. This improvement resulted from sales efficiencies as
well as some improvements in the efficiency of the structure of the company but
was offset somewhat by some fixed expenses being spread over a smaller sales
base.
<PAGE> 12
The provision for doubtful accounts was $4.3 million for the nine months ended
February 27, 1999. This was a decrease of $1.2 million, or 21.8% from $5.5
million for the same nine months in the prior year. The provision was
approximately 5.1% and 6.1%, respectively, of net sales for the nine months
ended February 27, 1999 and February 28, 1998 or approximately 10.3% and 11.1%,
respectively, of net credit sales. The decrease in the provision was primarily
due to closed stores, which had generated less creditworthy customer
receivables, as well as the reduction in the percentage of credit sales to
total sales from the continuing effects of changes in credit underwriting and
lower reliance on credit to effect sales by targeting a more creditworthy
customer.
Net interest expense was $3.7 million for the combined nine months ended
February 27, 1999, a decrease of $5.3 million, or 58.9% from $9.0 million for
the same nine months in the prior year. The decrease was due partially to
interest associated with the Company's Senior Secured Notes, which was accrued
during the nine months ended February 28, 1998 but was not accrued during the
nine months ended February 27, 1999 (in accordance with SOP 90-7, "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code") as such
interest was not allowed under the Company's plan of reorganization. The
Company also entered into a new financing agreement on October 2, 1998, which
resulted in reduced amounts outstanding as well as a lower rate of interest on
amounts outstanding after October 2, 1998 (see Notes 2 and 3).
Reorganization costs consist primarily of professional fees directly related to
the Chapter 11 filing which were expensed as incurred and the grant of stock to
management as part of the plan of reorganization, 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 February 27, 1999, the aggregate customer receivables balance
was $53.5 million. As of February 28, 1998, the aggregate customer receivables
balance was $60.1 million.
INVENTORY. At February 27, 1999, inventories (not including consignment
inventory of approximately $34.3 million) were approximately $34.5 million, an
increase of approximately $7.5 million (net of a Fresh-Start Reporting
adjustment of $5.1 million) from $27.0 million at May 31, 1998. This increase
is a result of the Company implementing a new merchandise assortment plan,
designed to target an more mature, financially sound customer, with more
discretionary spending ability. The Company has also implemented programs to
liquidate additional aged merchandise that it feels no longer fits its
assortment. At February 27, 1999, the Company's inventory reserves, excluding
any Fresh-Start Reporting adjustments, totaled $1.3 million.
LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS. As
discussed in the notes to the financial statements, the Company's Plan of
Reorganization was approved and became effective on October 2, 1998. Under
Chapter 11, actions to enforce certain claims against the Company are stayed if
the claims arose, or are based on events that occurred on or before the
Petition Date. As a result such pre-Petition Date claims and other claims were
compromised as set forth in the Plan and the Confirmation Order, and the
Company incurred the material new obligations set forth in the Plan.
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. Additionally, the heavy holiday selling period leads to a
seasonal build-up of customer receivables that must be funded during the winter
and spring months.
<PAGE> 13
The Company reported cash flow used in operating activities of approximately
$9.3 million for the nine months ended February 27, 1999, combining both the
predecessor and successor companies, as compared to cash flow provided by
operating activities of approximately $15.9 million for the comparable period
last year. The change in cash flow from operating activities is primarily due
to an increase of $12.6 million (an increase of approximately $7.5 million net
of a Fresh-Start Reporting adjustment of $5.1 million) in inventory during the
current year as compared to a $16.1 million decrease in inventory last year
resulting primarily from liquidation of aged merchandise and the Company's
inability to obtain new merchandise due to the bankruptcy filing during the
prior year. Additionally, the Company acquired $7.1 million in new property and
equipment during the nine months consisting of computer equipment associated
with the Company's new merchandise and financial systems and leasehold
improvements associated with remodeling of stores, and the Company's new
headquarters. The Company made net repayments of $15.8 million under its
revolving credit facility and received $15.0 million for the issuance of new
stock.
As of February 27, 1999, the Company had $1.4 million of cash and cash
equivalents. At May 30, 1998, the Company had $19.3 million of cash and cash
equivalents as a result of the Chapter 11 filing and the prohibition on
payments of prepetition debt.
FINANCING TRANSACTIONS
On October 2, 1998, the Company entered into a three year, $50,000,000
financing agreement with Foothill Capital Corporation as a lender and as agent
for a lender group (the "Lenders"). The Lenders will make revolving advances to
the Company in amounts determined based on percentages of eligible accounts
receivable and inventory. The annual rate of interest will be, 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. Upon
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 a minimum level of tangible net worth and a ratio of in-house
credit sales to total merchandise sales. The financing agreement also gives the
Company an option to reduce the maximum credit line to no less than $25,000,000
upon the sale of the Company's entire accounts receivable portfolio, provided,
however, that such option will expire eighteen months from the date of closing
of the financing agreement.
CONSIGNMENT AGREEMENT. As a result of its emergence from bankruptcy
proceedings, the company entered into new Consignment Agreements with its
consignors representing a substantial majority of its current consigned
merchandise. The Company shall hold such merchandise for sale in the ordinary
course of its business and is responsible for insuring the consignment
merchandise for its full value and against all risks of loss. The Company is
generally required to report all consignment merchandise sales on a weekly
basis, and to pay all invoices within specified trade payment terms, generally
30 days from receipt of invoice.
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 systems, 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.
The Company has obtained and is in the process of implementing 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 expected to be year 2000 compliant. The
Company expects to spend approximately $3.5 million representing $1.2 million
of new hardware and $2.3 million of new software on this project. Through
February 1999, approximately $3.3 million had already been incurred.
<PAGE> 14
The Company has no current intention to replace its customer accounts
receivable system, which is not year 2000 compliant. However, it is planning to
outsource the billing and collection functions. The Company is currently
exploring the feasibility of licensing other existing collection systems should
the Company be unable to outsource the billing and collections functions by the
year 2000. The Company expects that remaining needs will be addressed before
the end of 1999 and believes that the year 2000 issue will not pose significant
operational problems or result in costs that would have a material adverse
impact on its financial condition or results of operations.
The Company also relies, directly and indirectly, on external systems of
business enterprises such as customers, suppliers, creditors and financial
organizations, and government entities, for accurate exchange of data. The
Company is in the process of communicating with its significant suppliers to
determine the extent to which the Company's interface systems are vulnerable to
those third parties' failures to remediate their own year 2000 issues. Even if
the Company's internal systems are not materially affected by the year 2000
issue, 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.
<PAGE> 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Although the Company may be from time to time involved in various legal
proceedings of a character normally incident to the ordinary course of its
businesses, the Company believes that potential liability in any such pending
or threatened proceedings would not have a material adverse effect on the
financial condition or results of operations of the Company. The Company
maintains liability insurance to cover some, but not all, potential liabilities
normally incident to the ordinary course of its businesses as well as other
insurance coverage customary in its business, with such coverage limits as
management deems prudent.
Item 2. Changes in Securities
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
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(c) Exhibits:
Exhibit Description
27.1 Financial Data Schedule
<PAGE> 16
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.
April 14, 1999 By: /s/ Randy N. McCullough
------------------------------------
Randy N. McCullough
President and Chief Executive Officer
(Principal Executive Officer)
April 14, 1999 By: /s/ E. Peter Healey
-------------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
April 14, 1999 By: /s/ Robert J. Herman
-------------------------------------
Robert J. Herman
Vice President and Controller
(Principal Accounting Officer)
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> MAY-31-1998
<PERIOD-END> FEB-27-1999
<CASH> 1,416
<SECURITIES> 0
<RECEIVABLES> 53,547
<ALLOWANCES> 5,593
<INVENTORY> 34,489
<CURRENT-ASSETS> 84,476
<PP&E> 17,710
<DEPRECIATION> 1,464
<TOTAL-ASSETS> 118,315
<CURRENT-LIABILITIES> 29,157
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 44,067
<TOTAL-LIABILITY-AND-EQUITY> 118,315
<SALES> 85,518
<TOTAL-REVENUES> 93,011
<CGS> 55,424
<TOTAL-COSTS> 89,152
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,323
<INTEREST-EXPENSE> 3,747
<INCOME-PRETAX> 57,394
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (11,545)
<CHANGES> 0
<NET-INCOME> 68,939
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
