<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 November 28, 1998. 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 January 15, 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
<S> <C>
PART I FINANCIAL INFORMATION
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 11
ITEM 2. Changes in Securities 11
ITEM 3. Defaults Upon Senior Securities 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
</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.
November 28, May 30,
1998 1998
------------- ---------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,493 $ 19,301
Customer receivables, net of allowance for doubtful accounts of
$5,218 at November 28, 1998, and $7,099 at May 30, 1998 43,215 48,076
Merchandise inventories 34,807 26,993
Prepaid expenses and other current assets 2,893 1,569
--------- ---------
Total current assets 86,408 95,939
Property and equipment:
Leasehold improvements, furniture and fixtures 11,864 17,824
Computers and equipment 3,900 5,724
--------- ---------
15,764 23,548
Less: accumulated depreciation 597 10,250
--------- ---------
Net property and equipment 15,167 13,298
Other assets 637 1,495
Reorganization value in excess of amounts allocated to
identifiable assets, net 18,329 --
--------- ---------
Total assets $ 120,541 $ 110,732
========= =========
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Accounts payable - trade $ 16,851 $ 9,086
Other accrued liabilities 18,083 9,698
--------- ---------
Total current liabilities 34,934 18,784
Liabilities subject to compromise under reorganization proceedings -- 126,812
Long-term debt 41,524 --
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 November 28, 1998 5 --
Additional paid in capital 47,095
Accumulated deficit (3,017) (68,111)
--------- ---------
Total shareholders' equity (deficiency) 44,083 (34,864)
Total liabilities and shareholders' equity (deficiency) $ 120,541 $ 110,732
========= =========
</TABLE>
See Notes to Financial Statements.
1
<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. Predecessor Co.
Two Months One Month Three Months
Ended Ended Ended
November 28, October 2, November 30,
1998 1998 1997
---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 13,595 $ 7,546 $ 23,585
Finance and credit insurance fees 1,565 813 2,622
---------------- ---------------- ----------------
15,160 8,359 26,207
Costs and expenses:
Cost of goods sold, buying and occupancy 9,726 5,135 16,681
Selling, general and administrative expenses 7,051 3,735 11,609
Provision for doubtful accounts 850 356 1,425
---------------- ---------------- ----------------
17,627 9,226 29,715
Operating loss (2,467) (867) (3,508)
Interest expense, net 550 643 2,979
---------------- ---------------- ----------------
Loss before reorganization items, income
taxes and extraordinary item (3,017) (1,510) (6,487)
Reorganization items:
Fresh-Start adjustments -- (67,853) --
Reorganization costs -- 4,439 447
---------------- ---------------- ----------------
Income (loss) before income taxes and
extraordinary item (3,017) 61,904 (6,934)
Income taxes -- -- --
---------------- ---------------- ----------------
Net income (loss) before extraordinary item (3,017) 61,904 (6,934)
Gain on forgiveness of debt -- (11,545) --
Net income (loss) $ (3,017) $ 73,449 $ (6,934)
================ ================ ================
Basic and diluted loss per share(a) $ (.60) n/a n/a
================ ================ ================
Weighted-average number of common shares
outstanding(a) 5,002 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.
2
<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.
Two Months Four Months Six Months
Ended Ended Ended
November 28, October 2, November 30,
1998 1998 1997
---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Net sales $ 13,595 $ 27,494 $ 45,873
Finance and credit insurance fees 1,565 3,397 5,569
---------------- ---------------- ----------------
15,160 30,891 51,442
Costs and expenses:
Cost of goods sold, buying and occupancy 9,726 19,091 32,541
Selling, general and administrative expenses 7,051 12,980 22,103
Provision for doubtful accounts 850 1,492 2,918
---------------- ---------------- ----------------
17,627 33,563 57,562
Operating loss (2,467) (2,672) (6,120)
Interest expense, net 550 2,367 6,097
---------------- ---------------- ----------------
Loss before reorganization items, income
taxes and extraordinary item (3,017) (5,039) (12,217)
Reorganization items:
Fresh-Start adjustments -- (67,853) --
Reorganization costs -- 6,248 1,457
---------------- ---------------- ----------------
Income (loss) before income taxes and
extraordinary item (3,017) 56,566 (13,674)
Income taxes -- -- --
---------------- ---------------- ----------------
Net income (loss) before extraordinary item (3,017) 56,566 (13,674)
Gain on forgiveness of debt -- (11,545) --
---------------- ---------------- ----------------
Net income (loss) $ (3,017) $ 68,111 $ (13,674)
================ ================ ================
Basic and diluted loss per share(a) $ (.60) n/a n/a
================ ================ ================
Weighted-average number of common shares
Outstanding(a) 5,002 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.
3
<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.
Two Months Four Months Six Months
Ended Ended Ended
November 28, October 2, November 30,
1998 1998 1997
---------------- ---------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (3,017) $ 68,111 $ (13,674)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Fresh-Start adjustments (67,853)
Extraordinary item - gain on forgiveness of debt (11,545)
Depreciation and amortization 899 1,341 2,118
Provision for doubtful accounts 850 1,492 2,918
Loss on disposal of assets 315 -- --
Management stock grant -- 2,228 --
Change in operating assets and liabilities:
Customer receivables (133) 2,652 2,949
Merchandise inventories (8,278) (4,592) 7,923
Prepaid expenses and other current assets (1,876) 552 851
Other assets (154) (21) (22)
Accounts payable - trade 4,149 3,616 5,880
Accrued liabilities 1,907 1,921 3,715
---------------- ---------------- ----------------
Net cash provided by (used in) operating activities (5,338) (2,098) 12,658
Investing activities:
Purchase of property and equipment (2,512) (2,641) (351)
Proceeds from sale of assets 100 -- --
---------------- ---------------- ----------------
Net cash used in investing activities (2,412) (2,641) (351)
Financing activities:
Net borrowings (repayments) under revolving credit facility (4,934) (11,397) --
Issuance of common stock 15,012 -- --
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 10,078 (11,397)
Increase (decrease) in cash 2,328 (16,136) 12,307
Cash at beginning of period 3,165 19,301 7,322
---------------- ---------------- ----------------
Cash at end of period $ 5,493 $ 3,165 $ 19,629
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 306 $ 2,060 $ 2,805
Income taxes -- -- 6
</TABLE>
See Notes to Financial Statements.
4
<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 two months ended
November 28, 1998 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 two months ended November 28, 1998 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 November
28, 1998 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 five-week period is referred to as the one month 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 two months ended
November 28, 1998 consists of the eight weeks then ended, while the quarter
ended November 30, 1997 consists of the three months then ended. The four months
ended October 2, 1998 consist of the 18 weeks 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 114 stores on November 28, 1998, and 128
stores on November 30, 1997.
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.
5
<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 $79.4 million of which $11.6 million was
forgiveness of debt and the remaining $67.8 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 two
months ended November 28, 1998 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 two months ended November 28,
1998 is not comparable with prior periods and the net income for the
year-to-date period ended November 28, 1998 is divided into Successor Company
and Predecessor Company and is also not comparable with prior periods. In
addition, the balance sheet as of November 28, 1998 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.).
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>
<CAPTION>
Secured liabilities: May 30, 1998
------------
<S> <C>
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.
6
<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 November 28, 1998, the Company had direct borrowings of $41,524,000
outstanding with additional credit available of approximately $8,476,000.
As of November 28, 1998, the Company was in compliance with all terms of the
financing agreement.
7
<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 two month period ended
November 28, 1998, the interim one month and four month periods ended October 2,
1998 and the six months and fiscal quarter ended November 30, 1997. 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 Net sales for the three months ended November 28, 1998,
combining both the predecessor and successor companies, were $21.1 million, a
decrease of 10.4%, from net sales of $23.6 million for the quarter ended
November 30, 1997. Net sales for the combined six months were $41.1 million, a
decrease of 10.4%, from net sales of $45.9 million for the six months ended
November 30, 1997. The decrease was primarily the result of the closure of 16
stores since November 1997 and a decrease in comparable store sales. Comparable
store sales (those open for the same period in both the current and preceding
years), decreased by 4.1% from $21.8 million to $20.9 million for the three
months ended November 28, 1998 and 3.8% from $42.1 million to $40.5 million for
the six months ended November 28, 1998. The decrease in comparable store sales
was primarily a result of changes in credit underwriting criteria to lessen the
Company's reliance on credit sales and to attract a more creditworthy customer,
increased sales resulting from a promotional markdown sale during fiscal 1997
used to liquidate aged merchandise, and temporary closure or relocation of
approximately 18 stores late in the quarter as the Company began its major
remodel and name change campaign.
Finance and credit insurance fees, on credit sales, for the combined three
months ended November 28, 1998, were $2.4 million, a decrease of 9.3%, from the
same three months in the prior year of $2.6 million. Finance and credit
insurance fees, on credit sales for the combined six months ended November 28,
1998, were $5.0 million, a decrease of 10.9%, from the same six months in the
prior year of $5.6 million. This decrease in finance and credit insurance fees
resulted primarily from a decrease in the average total customer receivables
outstanding during the six months ended November 28, 1998 of approximately $8.5
million compared to the six months ended November 28, 1997, offset somewhat by
an improvement in finance charge yield from improved collections results.
Average customer receivables were lower primarily because of the closure of
stores, changes in credit underwriting and lower reliance on credit to generate
sales.
Cost of goods sold, buying and occupancy expenses were $14.9 million for the
combined three months ended November 28, 1998, a reduction of 10.9% from the
prior year. Cost of goods sold, buying and occupancy expenses were $28.8 million
for the combined six months ended November 28, 1998, a reduction of 11.4% from
the prior year. Cost of goods sold, buying and occupancy expenses were 70.1% of
net sales for the six months ended November 28, 1998 and 70.9% of net sales for
the prior year period. The reduction in cost of goods sold, buying and occupancy
expenses resulted primarily from slightly improved merchandise margins and a
savings in occupancy expense due to closed stores and the relocation of the
Company's headquarters.
Selling, general and administrative expenses were $10.8 million for the combined
three months ended November 28, 1998, a decrease of 7.1% from the prior year.
Selling, general and administrative expenses were $20.0 million for the combined
six months ended November 28, 1998, a decrease of 9.5% from the prior year. The
decrease in expenses resulted primarily from reductions in store payroll and
from other reductions in expenses due to closed stores offset slightly by
increased advertising expense due to earlier promotions for the holiday selling
season in 1998. Selling, general and administrative expenses as a percentage of
net sales were 48.7% for the six months ended November 28, 1998 and 48.1% for
the six months ended November 30, 1997. The increase of .6% was a result of some
fixed expenses being spread over a smaller store base.
The provision for doubtful accounts was $1.2 million for the combined three
months ended November 28, 1998. This was a decrease of $.2 million, or 15.3%
from the same three months in the prior year. The provision for doubtful
accounts was $2.3 million for the combined six months ended November 28, 1998.
This was a decrease of $.6 million, or 19.0% from the same six months in the
prior year. The provision was approximately 5.6% and 6.4%, respectively, of net
sales for the six months ended November 28, 1998 and November 30, 1997. The
provision was approximately 10.1% and 10.6%, respectively, of net credit sales
for the six months ended November 1998 and 1997. 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.
8
<PAGE> 11
Net interest expense was $1.2 million for the combined three months ended
November 28, 1998, a decrease of $1.8 million, or 60.0% from the prior year
quarter. Net interest expense was $2.9 million for the combined six months ended
November 28, 1998, a decrease of $3.2 million, or 52.2% from the same six 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 six months
ended November 30, 1997 but was not accrued during the six months ended November
28, 1998 (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 during
the months of October and November (see Notes 2 and 3).
Reorganization costs consist primarily of professional fees directly related to
the Chapter 11 filing which are 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
November 28, 1998, the aggregate customer receivables balance was $48.4 million.
As of November 30, 1997, the aggregate customer receivables balance was $55.7
million.
INVENTORY. At November 28, 1998, inventories (not including consignment
inventory of approximately $38.1 million) were approximately $34.8 million, an
increase of approximately $7.8 million (net of a Fresh-Start Reporting
adjustment of $5.1 million) from $27.0 million at May 31, 1998. This increase is
due to merchandise purchased in preparation for the holiday season. At November
28, 1998, the Company's inventory reserves totaled $.7 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.
The Company reported cash flow used in operating activities of approximately
$7.4 million for the six months ended November 28, 1998, combining both the
predecessor and successor companies, as compared to cash flow provided by
operating activities of approximately $12.7 million for the comparable period
last year. The change in cash flow from operating activities is primarily due to
an increase of $12.9 million in inventory during the current year as compared to
a $7.9 million decrease in inventory 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
$5.2 million in new property and equipment during the six months consisting
mostly 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
$16.3 million under its revolving credit facility and received $15.0 million for
the issuance of new stock.
As of November 28, 1998, the Company had $5.5 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. At November 28, 1998, $2.0 million of the Company's cash
and cash equivalents were restricted pursuant to the terms of the Trade DIP
Financing Agreement.
9
<PAGE> 12
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 $3.2 million representing $1.2 million of new
hardware and $2.0 million of new software on this project. Through November
1998, approximately $3.0 million had already been incurred.
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.
10
<PAGE> 13
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
(a) The Annual Meeting of Stockholders of the Company was held on
November 3, 1998 (the "Annual Meeting"). Proxies were solicited
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended.
(b) At the Annual Meeting, David Barr, David J. Breazzano, Ken
D'Amato, David H. Eisenberg, E. Peter Healey, Randy N. McCullough
and Jerry Winston were elected to serve until the 1999 annual
meeting of stockholders.
(c) At the Annual Meeting, holders of shares of the Company's Common
Stock elected the above seven directors with 4,974,950 votes cast
for each director and 26,850 votes abstaining for each director.
At the Annual Meeting, the stockholders voted on and approved proposals
to approve the Company's 1998 Stock Option Plan, the Company's 1998 Stock Option
Plan for Non-Employee Directors and the Company's Employee Stock Purchase Plan.
Holders of 4,974,950 shares voted for, and holders of 26,850 abstained from
voting on, such proposals.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
11
<PAGE> 14
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.
January 15, 1999 By: /s/ Randy N. McCullough
---------------------------------
Randy N. McCullough
President and Chief Executive Officer
(Principal Executive Officer)
January 15, 1999 By: /s/ E. Peter Healey
---------------------------------
E. Peter Healey
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
January 15, 1999 By: /s/ Robert J. Herman
---------------------------------
Robert J. Herman
Vice President and Controller
(Principal Accounting Officer)
12
<PAGE> 15
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> 6-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-START> MAY-31-1998
<PERIOD-END> NOV-28-1998
<CASH> 5,493
<SECURITIES> 0
<RECEIVABLES> 48,433
<ALLOWANCES> 5,218
<INVENTORY> 34,807
<CURRENT-ASSETS> 2,893
<PP&E> 15,764
<DEPRECIATION> 597
<TOTAL-ASSETS> 119,605
<CURRENT-LIABILITIES> 33,998
<BONDS> 0
0
0
<COMMON> 5
<OTHER-SE> 44,078
<TOTAL-LIABILITY-AND-EQUITY> 119,605
<SALES> 41,089
<TOTAL-REVENUES> 46,051
<CGS> 28,817
<TOTAL-COSTS> 20,031
<OTHER-EXPENSES> 6,248
<LOSS-PROVISION> 2,342
<INTEREST-EXPENSE> 2,917
<INCOME-PRETAX> 53,549
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (11,545)
<CHANGES> 0
<NET-INCOME> 65,094
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
