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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SAMUELS JEWELERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 5944 95-3746316
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
2914 MONTOPOLIS DRIVE, SUITE 200 E. PETER HEALEY COPIES TO:
AUSTIN, TEXAS 78741 EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL CHARLES E. HARRELL, ESQ.
(512) 369-1400 OFFICER, WEIL, GOTSHAL & MANGES LLP
(Address, Including Zip Code, and Telephone SECRETARY AND TREASURER 700 LOUISIANA, SUITE 1600
Number, Including Area Code, of Registrant's 2914 MONTOPOLIS DRIVE, SUITE 200 HOUSTON, TEXAS 77002
Principal Executive Offices) AUSTIN, TEXAS 78741 (713) 546-5000
(512) 369-1400
(Name, Address, Including Zip Code and
Telephone Number, Including Area
Code, of Agent For Service)
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Approximate date of commencement of the proposed sale to the public:
From time to time after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Amount Proposed Proposed Amount of
Securities to be Registered to be Maximum Maximum Registration
Registered Offering Price Aggregate Offering Fee
Per Share(1) Price(2)
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Common Stock, $.001 par value per
share........ 7,790,950 -- $ 30,189,931.25 $ 8,393
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(1) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the proposed maximum offering price per share is not included
in this table.
(2) Estimated, in accordance with Rule 457(c) of the Securities Act of 1933,
solely for the purpose of determining the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
[SAMUELS LOGO]
A 100 Year Diamond Tradition
2914 Montopolis Drive, Suite 200
Austin, Texas 78741
(512) 369-1400
7,790,950 SHARES OF COMMON STOCK
Samuels Jewelers, Inc. (the "Company") operates 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. See "Business and
Properties."
Of the 7,790,950 shares offered, the Company may offer and issue 5,000,000 from
time to time in connection with future acquisitions of other businesses or
properties. See "Plan of Distribution." We will set forth in a supplement to
this prospectus all material information about the Company's offering and
issuance of shares in relation to future acquisitions.
This prospectus includes 2,790,950 shares to be registered pursuant to rights
granted to certain shareholders of the Company. See "Selling Stockholders." We
will receive none of the proceeds from the sale of the 2,790,950 of the shares,
but will pay the expenses for their registration. The selling stockholders
reserve the right to accept or reject any proposed purchase of the shares. We
will set forth in a supplement to this prospectus all material information about
a particular offer in the future, including any changes to the identities of the
selling stockholders.
The Company and the selling stockholders may offer, from time to time, all of
their respective shares included in this offering. Since the shares are being
offered on a delayed or continuous basis under Rule 415 of the Securities Act of
1933, as amended, we cannot provide information about the price of the shares or
proceeds to the selling stockholders.
The selling stockholders and any brokers or dealers acting on their behalf may
be deemed underwriters under the Securities Act, in which case commissions paid
to the brokers may be deemed underwriting commissions under the Securities Act.
The proceeds to the selling stockholders will be the selling price of the shares
sold less any discounts or commissions.
We cannot assure that any of the shares registered under this prospectus will be
sold.
Our stock trades on Nasdaq's OTC Bulletin Board(R) under the symbol,
"SMJW," closing at $ 3 7/8 on May 18, 1999.
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE
SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. YOU SHOULD LOOK AT THE "RISK
FACTORS" SECTION OF THIS PROSPECTUS BEGINNING ON PAGE 4 FOR A COMPLETE
DESCRIPTION OF THE RISKS INVOLVED.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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May __, 1999
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TABLE OF CONTENTS
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PAGE
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Risk Factors............................................................................................................4
Use of Proceeds........................................................................................................10
Dividend Policy........................................................................................................10
Capitalization.........................................................................................................10
Dilution...............................................................................................................10
Selected Historical Financial Data.....................................................................................12
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................................13
Business and Properties................................................................................................20
Management.............................................................................................................26
Security Ownership of Certain Beneficial Owners and Management.........................................................28
Compensation of Directors and Executive Officers.......................................................................30
Description of Capital Stock...........................................................................................33
Shares Eligible for Future Sale........................................................................................35
Plan of Distribution...................................................................................................35
Legal Matters..........................................................................................................37
Experts................................................................................................................37
Index to Financial Statements.........................................................................................F-1
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RISK FACTORS
You should carefully consider the risks described below before making
an investment decision. The risks and uncertainties below are not the only ones
facing the Company. Additional risks and uncertainties not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
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RECENT EMERGENCE FROM CHAPTER o The Company is the successor corporation to Barry's
11/HISTORY OF OPERATING LOSSES Jewelers, Inc. ("Barry's"), which emerged on October 2,
1998 from bankruptcy proceedings that Barry's had
instituted on May 11, 1997. Barry's had also emerged
from prior bankruptcy proceedings just
over six years ago in 1992. We believe
that Barry's lack of success may be
attributed to the following:
* failed merchandising programs;
* poor credit underwriting practices;
* cash flow constraints;
* excessive collection costs;
* poor inventory controls and below average percentage
of consignment inventory;
* executive attrition;
* restrictive financing arrangements; and
* ineffective investments in technology and resulting
excessive administrative costs.
INDEBTEDNESS OF THE COMPANY o On October 2, 1998, the Company entered into a three
year, $50 million financing agreement with Foothill
Capital Corporation. As of February 27, 1999, we have
approximately $42.1 million of long-term debt and $7.9
million available for borrowing under the financing
agreement. The Company heavily relies on this source of
funding and would likely suffer significant financial
difficulty if restrictions were imposed on its ability to
receive further amounts under the financing agreement or were
it to suffer an event of default under the financing
agreement. See "Restrictions Imposed By Terms of
Indebtedness."
o The Company has significant operating lease obligations
related to our stores.
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RESTRICTIONS IMPOSED BY TERMS
OF INDEBTEDNESS o Our revolving loan agreement contains certain covenants that
limit our activities with regard to the following:
* incurrence of additional indebtedness;
* the payment of dividends;
* the redemption of capital stock;
* the making of certain investments;
* the issuance of guarantees;
* transactions with affiliates;
* asset sales; and
* certain mergers and consolidations.
In addition, the revolving loan agreement contains other
restrictive covenants which require us to satisfy certain
financial tests. Our ability to comply with such covenants
and to satisfy such financial tests may be affected by events
beyond our control. See "LIQUIDITY AND CAPITAL
RESOURCES--Financing Transactions."
o A breach of any of the covenants under our revolving loan
agreement could result in an event of default. In the event
of a default under the revolving loan agreement, the lenders
could elect to declare all amounts borrowed, together with
accrued interest, to be immediately due and payable and could
terminate all commitments thereunder.
IMPACT OF GENERAL ECONOMIC
CONDITIONS o Jewelry purchases are discretionary for consumers and may be
particularly affected by adverse trends in the general
economy. The success of our operations depends to a
significant extent upon a number of factors relating to
discretionary consumer spending, including economic
conditions that affect disposable consumer income such as:
* employment;
* wages and salaries;
* business conditions;
* interest rates;
* availability of credit; and
* taxation
for the economy as a whole and in regional and local markets
where we operate. There can be no
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assurance that consumer spending will not be adversely
affected by general economic conditions and negatively impact
our results of operations or financial conditions.
o In addition, we are a mall-based jewelry retail chain and are
dependent upon the continued popularity of malls as a
shopping destination and the ability of malls, their tenants
and other mall attractions to generate customer traffic for
its stores. There can be no assurance that mall traffic will
not decrease and negatively impact our business.
o Any significant deterioration in general economic conditions
or increases in interest rates may inhibit consumers' use of
credit and cause a material adverse affect on our net sales
and profitability. Furthermore, any downturn in general or
local economic conditions in the markets in which we operate
could materially adversely affect our collection of
outstanding customer accounts receivables.
COMPETITION o We operate in a highly competitive retail jewelry market.
Numerous other companies, including publicly and privately
held independent stores and small retail chains, department
stores, catalog showrooms, direct mail suppliers and
television home shopping networks, compete against us on both
national and regional levels. Certain of our competitors are
much larger than us and have greater financial resources.
o The malls and shopping centers in which we operate generally
contain several other national chain or independent jewelry
stores, as well as one or more jewelry departments located in
the "anchor" department stores.
o Factors beyond our control often affect our competitive
environment, such factors including consumer preferences,
economic conditions, population/demographics and traffic
patterns.
SEASONALITY o We greatly depend on the success of our "Christmas selling
season" for our success. The success of our Christmas season
depends on
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many factors beyond our control, including general economic
conditions and industry competition. Sales during the
Christmas selling season typically account for approximately
25% of net sales and almost all of annual earnings. Net sales
were $30.2 million during our 1998 Christmas selling season.
o Barry's experienced significant operating losses during the
1997 fiscal year, including an operating loss of $6.8 million
for its third quarter, which included the Christmas selling
season. Although we had operating income of $3.8 million for
the third quarter of fiscal 1999, which included the 1998
Christmas selling season, such results cannot be considered
predictive of future success.
SUPPLY AND PRICE FLUCTUATIONS o The marketing arm of DeBeers Consolidated Mines, Ltd., the
Central Selling Organization ("CSO"), possesses considerable
influence over the world supply and price of diamonds,
supplying approximately 80% of the world's demand for rough
diamonds over the past several years.
o The continued availability of diamonds to our suppliers is
materially dependent on the political and economic situation
in South Africa. While several other countries also supply
diamonds, we cannot predict with certainty the effect on the
overall supply or price of diamonds in the event of an
interruption of diamond supply from South Africa or CSO.
o The Company is subject to other supply risks, including
fluctuations in the prices of precious gems and metals.
Presently, we do not engage in any activities to hedge
against possible fluctuations in the prices of precious gems
and metals. If fluctuations in these prices are unusually
large or rapid and result in prolonged higher or lower
prices, we cannot assure that the necessary retail price
adjustments can be made quickly enough to prevent us from
being adversely affected.
DEPENDENCE ON KEY PERSONNEL o In 1997, Barry's hired Randy N. McCullough, our President
and Chief Executive Officer and we
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have retained or recruited a number of other senior
executives and other key employees. We are dependent on these
personnel, who have been instrumental in designing and
implementing our recent initiatives and are involved in the
strategies, for our future growth and profitability.
o The loss of services of Mr. McCullough could have a material
adverse effect on our results of operations and financial
condition. There can be no assurance that we will be able to
attract and retain additional qualified personnel as needed
in the future. We do not maintain key-man life insurance on
our senior executives or other key employees.
REGULATION o Our operations are affected by numerous federal and state
laws that impose disclosure and other requirements upon the
origination, servicing and enforcement of credit accounts.
The laws also place limitations on the maximum amount of
finance charges that may be charged by a credit provider.
Credit providers do not generally possess recourse rights
against us in situations where our customers fail to make
their credit payments. Any change in the regulation of credit
could adversely affect our results of operations or financial
condition.
o Our practices are also subject to review in the ordinary
course of business by the Federal Trade Commission. We
believe that we are currently in material compliance with all
applicable state and federal regulations. However, there can
be no assurance that a failure to comply with applicable
regulations will not have a material adverse effect on us.
o A substantial amount of merchandise in the retail jewelry
industry is commonly sold at a discount to the "regular" or
"original" price. A number of states in which we operate have
regulations which require that the retailers offering
merchandise at discounted prices must offer the merchandise
at the regular or original prices for stated periods of time.
We believe that we are in compliance with all such applicable
laws.
MARKET FOR THE SHARES o Initially, our common stock may lack a healthy
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market because we have undergone two separate Chapter 11
reorganizations in the last six years. These two bankruptcy
proceedings may create a lack of confidence in our future
performance and, correspondingly, in the market for our
shares.
o Nasdaq National Market suspended trading in Barry's common
stock on July 11, 1997. Neither Barry's nor the Company's
common stock has traded on a national exchange or on Nasdaq's
National Market or Small Cap markets since that time. Barry's
traded on the "pink sheets" following its delisting until it
was merged into the Company. While our common stock now
trades on Nasdaq's OTC Bulletin Board(R), we cannot ensure
that the market for our common stock will be as liquid as if
it traded on a national exchange or on Nasdaq's National
Market or Small Cap markets.
YEAR 2000 COMPLIANCE o Many existing computer systems and applications 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
is planning to contract with a third party with a year 2000
compliant operating system to provide billing and collections
for the Company. The Company is also 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. If the Company should
fail to find compliance solutions for its billing and
collection functions as set forth, it could pose significant
operational problems or result in costs that would have a
material adverse impact on its financial condition or results
of operations.
TAX LOSS CARRYFORWARDS o In the event of an ownership change of a corporation, the
Internal Revenue Code places potential limitations on the new
owner's use of the net operating losses that the corporation
incurred prior to the ownership change. This may limit the
Company's use of net operating losses previously recorded by
Barry's.
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USE OF PROCEEDS
The Company will not receive any of the proceeds of the offering of
2,790,950 of the shares, which were issued to certain shareholders of the
Company in connection with Barry's bankruptcy reorganization. 5,000,000 of the
shares registered hereby may be offered and issued by the Company from time to
time in connection with future acquisitions of other retail jewelry businesses
or properties. The net proceeds of the offering or offerings cannot be
determined because the shares are being offered on a delayed or continuous
basis.
DIVIDEND POLICY
The Company intends to retain its earnings to provide funds for
reinvestment in the Company's business, and therefore, does not anticipate
declaring or paying cash dividends in the foreseeable future. Payment of
dividends is subject to the then existing business conditions and the business
results, cash requirements and financial condition of the Company, and will be
at the discretion of the Board of Directors. Under the Company's working capital
facility with certain lenders party thereto, and Foothill Capital Corporation,
as agent and a lender, the Company is prohibited from paying dividends. See
"Management's Discussion and Analysis and Results of Operations - Liquidity and
Capital Resources --- Financing Transactions."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 27, 1999. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this prospectus.
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AS OF FEBRUARY 27, 1999
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(in thousands)
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Long-term debt.................................................................. $ 42,086
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Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized; 5,001,800
shares issued and outstanding at February 27, 1999..................... 5
Additional paid in capital............................................... 47.095
Notes receivable................................................................ (856)
Retained earnings............................................................... 828
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Total stockholders' equity...................................................... $ 47,072
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Total capitalization............................................................ $ 89,158
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DILUTION
2,790,950 OF THE SHARES OFFERED IN THIS PROSPECTUS ARE VALIDLY ISSUED,
FULLY PAID AND NONASSESSABLE SHARES OF THE COMPANY'S COMMON STOCK. THE SALE OF
THOSE 2,790,950 SHARES BY THE SELLING STOCKHOLDERS WILL NOT SERVE TO DILUTE
CURRENT EQUITY POSITIONS IN THE COMPANY. THE OTHER 5,000,000 SHARES OFFERED
HEREBY MAY BE OFFERED FROM TIME TO TIME BY THE COMPANY IN CONNECTION WITH FUTURE
ACQUISITIONS OF OTHER RETAIL JEWELRY BUSINESSES OR PROPERTIES. BECAUSE THE TERMS
AND TIMES OF FUTURE ACQUISITIONS ARE UNKNOWN AT THIS TIME, THE COMPANY IS UNABLE
TO DETERMINE THE DILUTIVE EFFECT, INCLUDING ANY EFFECT ON THE NET TANGIBLE BOOK
VALUE OF THE SHARES, THAT THE SALES OF THOSE 5,000,000 SHARES WILL HAVE ON
CURRENT EQUITY POSITIONS OR ANY DILUTION OF THE PURCHASER'S EQUITY INTEREST THAT
WILL OCCUR DUE TO ADDITIONAL OFFERINGS OF SHARES BY THE COMPANY. A MATERIAL
ACQUISITION OR SERIES OF ACQUISITIONS (CONSTITUTING IN THE AGGREGATE A MATERIAL
TRANSACTION) WOULD REQUIRE THE
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COMPANY TO FILE AN AMENDMENT TO THE REGISTRATION STATEMENT, OF WHICH THIS
PROSPECTUS FORMS A PART, DISCUSSING OR DISCLOSING THE ACQUISITION OR
ACQUISITIONS AND ITS EFFECTS.
SELLING STOCKHOLDERS
An aggregate of 1,792,439 shares (or approximately 35.8% of the
Company's current outstanding shares) are being offered hereby by certain funds
advised by DDJ Capital Management, LLC (the "DDJ Funds"). In particular, The
Galileo Fund, L.P. is offering 57,000 shares, the DDJ Overseas Corp. is offering
30,500 shares and the B III Capital Partners, L.P. is offering 1,704,939 shares.
An additional 998,511 shares (or approximately 20.0% of the Company's current
outstanding shares) are being offered hereby by certain funds advised by
Mitchell Hutchins Asset Management, Inc. (the "Mitchell Hutchins Funds"). The
DDJ Funds and Mitchell Hutchins Funds are offering all of the shares they hold
in the Company, which comprise an aggregate total 2,790,950 shares representing
55.8% of the outstanding shares of common stock of the Company (the
"Stockholders' Offered Shares"). All of the Stockholders' Offered Shares are
being offered hereby.
The Company, each of the DDJ Funds and Mitchell Hutchins Funds entered
into a Registration Rights Agreement, dated as of October 2, 1998 (the
"Registration Rights Agreement"). See "Security Ownership of Certain Beneficial
Owners and Management" and "Plan of Distribution".
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SELECTED HISTORICAL FINANCIAL DATA
The following financial data are included for the benefit of the
investor. This information provides the investor with financial information
about Barry's and the Company. Prior to the effectiveness of the merger of
Barry's with and into the Company, the Company was a non-operating wholly owned
subsidiary of Barry's. The merger was effected for purposes of consummating
Barry's Plan of Reorganization, changing the Company's name and state of
incorporation and receiving the new equity. The financial history of Barry's
provides the investor with the historical performance of the Company's assets.
See "Management's Discussion and Analysis and Results of Operations."
The following table sets forth summary historical financial data with
respect to the Company for the periods ended and as of the dates indicated. The
summary historical statement of operations data for the years ended May 31 are
derived from the audited financial statements of Barry's. The historical
statement of operations data for the four months ended October 2, 1998 and the
five months ended February 27, 1999 and the historical balance sheet data as of
February 27, 1999 are derived from the unaudited financial statements of the
Company included elsewhere in this prospectus. The unaudited financial
statements include, in the opinion of management, all adjustments consisting of
normal recurring adjustments necessary to present fairly the data for the such
periods.
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BARRY'S
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FISCAL YEAR ENDED MAY 31
1994 1995 1996 1997 1998
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STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales $ 114,023 $ 136,055 $ 140,145 $ 130,446 $ 113,873
Finance and credit insurance fees 14,487 15,681 16,008 13,900 11,316
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Total revenues 128,510 151,736 156,153 144,346 125,189
Expenses:
Cost of goods sold(a) 62,152 78,907 83,769 93,002 75,567
Selling, general and administrative 46,341 50,966 51,974 57,036 47,045
Provision for doubtful accounts 9,723 10,193 11,759 18,766 6,586
Impairment loss (b) -- -- -- 3,947 --
Restructuring expenses (c) -- -- -- 1,336 --
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Operating income (loss) 10,294 11,670 8,651 (29,741) (4,009)
Interest expense, net 7,746 9,764 11,146 12,745 7,025
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Income (loss) before reorganization costs, income
taxes and extraordinary item 2,548 1,906 (2,495) (42,486) (11,034)
Reorganization costs, income taxes and
extraordinary item (d) 1,009 -- 288 3,482 11,134
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Net income (loss) $ 1,539 $ 1,906 $ (2,783) $ (45,968) $ (22,168)
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE DATA:
Net income per share (e) $ .53 $ .48 $ (.70) $ (11.47) $ (5.50)
Weighted average shares
outstanding (e) 2,902 3,969 3,978 4,007 4,029
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $ 1,098 $ 954 $ 1,765 $ 7,322 $ 19,301
Property and equipment 12,124 15,700 16,366 15,423 13,298
Total assets 122,252 144,959 145,875 123,483 110,732
Long-term debt 75,469 91,880 103,398 -- --
Stockholders' equity (deficiency) 33,567 35,744 33,221 (12,696) (34,864)
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THE COMPANY'S
BARRY'S NINE BARRY'S FOUR FIVE MONTHS
MONTHS ENDED MONTHS ENDED ENDED
FEBRUARY OCTOBER 2, FEBRUARY
28, 1998 1998 27, 1999
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STATEMENT OF OPERATIONS DATA:
Revenues:
Net sales $ 90,535 $ 27,494 $ 58,024
Finance and credit insurance fees 8,589 3,397 4,096
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Total revenues 99,124 30,891 62,120
Expenses:
Cost of goods sold(a) 59,405 19,091 36,333
Selling, general and administrative 36,185 12,980 20,748
Provision for doubtful accounts 5,486 1,492 2,831
Impairment loss (b) -- -- --
Restructuring expenses (c) -- -- --
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Operating income (loss) (1,952) (2,672) 2,208
Interest expense, net 9,027 2,367 1,380
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Income (loss) before reorganization costs, income
taxes and extraordinary item (10,979) (5,039) 828
Reorganization costs, income taxes and
extraordinary item (d) 3,532 (73,150) --
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Net income (loss) $ (14,511) $ 68,111 $ 828
========= ========= =========
EARNINGS (LOSS) PER SHARE DATA:
Net income per share (e) $ (3.60) $ 13.62 $ .17
Weighted average shares
outstanding (e) 4,029 5,002 5,002
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $ 22,249 $ 1,416
Property and equipment 13,903 16,246
Total assets $ 117,920 118,315
Long-term debt -- 42,086
Stockholders' equity (deficiency) $ (27,207) 47,072
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(a) Barry's recorded an inventory valuation reserve of $3.0 million for the year
ended May 31, 1997 (see Note 3 of Audited Financial Statements).
(b) Barry's recognized an impairment loss of approximately $3.9 million for the
year ended May 31, 1997 as a result of impaired leasehold improvements and
fixtures at 37 closed stores, as well as impaired computer equipment and
software related to its merchandise management and point-of-sale system.
(c) Barry's recorded approximately $1.3 million of restructuring expense for the
year ended May 31, 1997, consisting primarily of severance and store closing
costs at 11 stores.
(d) Barry's recorded reorganization costs of $2.3 million and $11.1 million for
the fiscal years ended May 31, 1997 and 1998, respectively (see Note 10 of
Audited Financial Statements). Barry's recorded an extraordinary charge of $.9
million in connection with the early extinguishment of a securitization facility
(see Note 6 to Audited Financial Statements). Barry's also recorded revisions
for income taxes totaling $1.0 million, $.3 million, and $.3 million for the
fiscal years ended May 31, 1994, 1996, and 1997, respectively. During the four
months ended October 2, 1998 Barry's recorded reorganization costs of $4.4
million and adopted Fresh-Start Accounting resulting in the recording of $66.0
million of Fresh-Start Adjustments and an $11.5 million gain on the forgiveness
of debt (see Note 2 to Interim Financial Statements).
(e) Net income (loss) per share and weighted average number of common shares
outstanding for Barry's are not comparable to subsequent periods due to the
reorganization and implementation of Fresh Start Reporting.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is included for the benefit of
the investor and it provides the investor with financial information about the
Company and Barry's. The discussion and analysis of the financial information
refers to the relevant entity for such financial data except where it references
the Company's nine months ended February 27, 1999, which incorporates a
five-month operating period for the Company and a four-month operating period
for Barry's. Prior to the effective date of the merger of Barry's with and into
the Company, the Company was a non-operating wholly owned subsidiary of Barry's.
The merger was effected for purposes of consummating Barry's Plan of
Reorganization, changing the Company's name and state of incorporation and
receiving the new equity. The financial history of Barry's provides the investor
with the historical performance of the Company's assets.
PRIVATE SECURITIES LITIGATION REFORM ACT
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby.
NINE MONTHS ENDED FEBRUARY 27, 1999 (COMBINING BOTH BARRY'S AND THE COMPANY)
COMPARED TO THE NINE MONTHS ENDED FEBRUARY 28, 1998
For purposes of Management's Discussion and Analysis of Financial Condition and
Results of Operation, and Discussion of Business, the results of operations and
cash flows for the nine months ended February 27, 1999, are a combination of the
results of Barry's for the four months ended October 2, 1999 and the Company's
results of operations for the five months ended February 27, 1999, as outlined
in the table below.
<TABLE>
<CAPTION>
THE COMPANY'S BARRY'S
NINE MONTHS NINE MONTHS
ENDED ENDED
FEBRUARY 27, FEBRUARY 28,
1999 1998
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS:
Net sales $ 85,518 $ 90,535
Finance and credit insurance fees 7,493 8,589
--------- ---------
93,011 99,124
Costs and expenses:
Cost of goods sold, buying and occupancy 55,424 59,405
Selling, general and administrative expenses 33,728 36,185
Provision for doubtful accounts 4,323 5,486
--------- ---------
93,475 101,076
Operating income (loss) (464) (1,952)
Interest expense, net 3,747 9,027
--------- ---------
Loss before reorganization items,
income taxes and extraordinary item (4,211) (10,979)
Reorganization items:
Fresh-Start adjustments (66,042) --
Reorganization costs 4,437 3,532
--------- ---------
Income (loss) before income taxes and
extraordinary item 57,394 (14,511)
Income taxes -- --
--------- ---------
Net income (loss) before extraordinary item 57,394 (14,511)
Gain on forgiveness of debt (11,545) --
--------- ---------
Net income (loss) $ 68,939 $ (14,511)
========= =========
STATEMENT OF CASH FLOWS:
Net cash provided by (used in) operating
Activities $ (9,273) $ 15,901
Net cash used in investing activities (6,999) (974)
Net cash used in financing activities (1,613) --
--------- ---------
Increase (decrease) in cash (17,885) 14,927
Cash at beginning of period 19,301 7,322
--------- ---------
Cash at end of period $ 1,416 $ 22,249
========= =========
</TABLE>
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Net sales for the nine months ended February 27, 1999 were $85.5
million, a decrease of 5.5% or $5.0 million, as compared to Barry'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 sales was a result of a continuation of the upgrading of merchandise
offered, marketing efforts to appeal to a more affluent customer and improve
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 comparable store 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 for Barry's 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
Barry's 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 Barry's 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 promotions during the
holiday season and the remodel and name change campaign.
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<PAGE> 15
Selling, general and administrative expenses were $33.7 million for the
nine months ended February 27, 1999, as compared to $36.2 million for the same
period 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 Barry's 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.
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 Barry's for the same nine months in the prior year. The
provision was approximately 5.1% and 6.1%, respectively, of net sales for the
Company for the nine months ended February 27, 1999 and for Barry's for the nine
months ended 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 nine months ended
February 27, 1999, a decrease of $5.3 million, or 58.9% from $9.0 million for
Barry's for the same nine months in the prior year. The decrease was due
partially to interest associated with Barry'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.
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.
FISCAL YEAR ENDED MAY 31, 1998 ("FISCAL 1998") COMPARED WITH FISCAL YEAR ENDED
MAY 31, 1997 ("FISCAL 1997") (All references in this section are to Barry's,
unless otherwise noted)
Net sales for Fiscal 1998 were $113.9 million, a decrease of $16.5
million, or 12.7%, from net sales of $130.4 million for Fiscal 1997. This
decrease resulted primarily from the closure of 13 stores in Fiscal 1998 and 33
stores in May 1997 offset by an increase in comparable store sales (those open
in both the current and preceding year). Comparable store sales increased by
$8.6 million, or 9.2% from Fiscal 1997 to Fiscal 1998. This increase resulted
from improved merchandise offerings and improved marketing but was offset by the
reduction of credit sales caused by changes in credit granting standards.
Finance and credit insurance fees decreased from $13.9 million in
Fiscal 1997 to $11.3 million in Fiscal 1998. This decrease of $2.6 million, or
18.7%, was primarily due to the decrease in average outstanding customer
receivables resulting from store closures, changes in credit underwriting
criteria, and lower reliance on credit to generate sales.
Cost of goods sold, buying and occupancy expenses were 66.4% of sales
in Fiscal 1998 compared to 71.3% of sales in Fiscal 1997. The increase in gross
margin resulted from the sale of fresher merchandise purchased during Fiscal
1998 under the new merchandising strategy, (which allowed for a reduction in
competitive discounting) and a reduction in the inventory shrink percentage. In
connection with the change in merchandising strategy developed by Barry's new
management team, an inventory valuation reserve of $3.0 million was established
as of May 31, 1997. The inventory valuation reserve was $2.2 million at May 31,
1998. The reduction of the inventory valuation reserve is the result of sales of
merchandise below cost to reposition Barry's merchandise selection.
Selling, general and administrative expenses were $47.0 million, a
decrease of $10.0 million, or 17.5% from the prior year, primarily due to
decreases in advertising expenses, professional services,
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<PAGE> 16
shipping expenses, credit department expenses, payroll expense and other store
related expenses. Selling, general and administrative expenses decreased as a
percentage of net sales to 41.3% in Fiscal 1998 from 43.7% in Fiscal 1997. The
decrease as a percentage of net sales is attributable primarily to the decrease
in marketing expense and efficiencies in Barry's credit department.
The provision for doubtful accounts was $6.6 million, a decrease of
$12.2 million from the prior year. The provision for doubtful accounts was
approximately 5.8% and 14.4% of net sales for Fiscal 1998 and Fiscal 1997,
respectively. The decrease is primarily due to improvement in the performance of
Barry's credit portfolio and changes in credit underwriting criteria.
Additionally, in May 1997, Barry's closed 33 stores. These store closures
required an increase in the provision for doubtful accounts for Fiscal 1997.
Interest expense was $7.0 million, a decrease of $5.7 million from the
prior year. As indicated in the plan of reorganization, the Senior Notes were
exchanged for common stock in the Company. Accordingly, and in accordance with
SOP 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" interest expense of $6.0 million on these notes was not recorded because
management believes that it is unlikely that such interest will be paid and
because the accrued interest on the Senior Notes will not become an allowed
claim.
Barry's recorded $11.1 million of reorganization costs in Fiscal 1998.
The reorganization costs primarily include professional fees, losses on the
disposal of property and equipment related to 13 store closures and the closure
of Barry's former headquarters in Monrovia, California, adjustments to
pre-petition unsecured liabilities, provision for lease rejection claims and
employee costs related to the Chapter 11 filing. The above expenses are offset
by interest earned on accumulated cash resulting from the Chapter 11 filing.
Tax Loss Carryforwards
At May 31, 1998, Barry's had a net operating loss carryforward for
federal income tax purposes of $96.2 million which is scheduled to expire in the
years May 31, 2006 through May 31, 2012. Of this, approximately $19,965 is
scheduled to expire in the years May 31, 2006 through May 31, 2008, and is
subject to the limitations imposed under Internal Revenue Code ("IRC") Section
382.
Section 382 of the IRC provides a limitation (Section 382 limitation)
on the use of net operating loss carryovers, net operating losses, and certain
built-in losses and deduction items of a loss corporation that has an ownership
change. For financial statement purposes, utilization of a net operating loss,
under Section 382 of the IRC, is recorded as a credit to common stock.
On October 2, 1998, the Company finalized its current plan of
reorganization, which created another ownership change. Such ownership change
subjected Barry's remaining $76.2 million of net operating loss carryforwards to
the limitations imposed under IRC Section 382. The extent of the impairment will
be known after the Company completes a detailed Section 382 analysis.
At May 31, 1998 and 1997, Barry's has recorded a non-current deferred
tax asset of $72,000 representing alternative minimum tax (AMT) credit
carryforwards. Unlike net operating loss carryforwards, the AMT credit has an
indefinite carryforward period. The Company maintains a valuation allowance
against the net deferred tax assets, which, in management's opinion, reflects
the net deferred tax asset which is more likely than not to be realized.
FISCAL 1997 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1996 ("FISCAL 1996") (All
references in this section are to Barry's, unless otherwise noted)
Net sales in Fiscal 1997 were $130.4 million, a decrease of $9.7
million, or 7%, from net sales of $140.1 million in Fiscal 1996. The decrease
was the combined result of the closure of 48 stores and a decrease of 10% in
sales of comparable stores (those open for the same period in both the current
and preceding years) versus the prior year. The comparable store sales decrease
was due in part to implementation of a value-pricing strategy commenced earlier
in the fiscal year. Additionally, net sales were adversely impacted by late
receipt of merchandise in the stores for the Christmas selling season, which
resulted in excessive stock outs, as well as an increase in the sales mix of
promotionally priced merchandise and competitive discounts.
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<PAGE> 17
Finance and credit insurance charges on credit sales in Fiscal 1997
were $13.9 million, a decrease of $2.1 million, or 13%, from the prior year
primarily due to a decrease in the average total outstanding customer
receivables.
Cost of goods sold, buying and occupancy expenses were 71% of net sales
for Fiscal 1997 compared to 60% for the prior year. The gross margin percentage
declined in Fiscal 1997 primarily as a result of Barry's value-pricing strategy,
and the sales mix of promotionally priced merchandise and competitive discounts.
In connection with the change in merchandising strategy as developed by Barry's
new management team, an inventory valuation allowance of approximately $3.0
million was established as of May 31, 1997. The allowance reduces the carrying
value of ending inventory to its estimated net realizable value.
Selling, general and administrative expenses were $57.0 million, an
increase of $5.1 million, or 10%, from the prior year, primarily due to
increases in the costs of advertising, professional services, and shipping.
Selling, general and administrative expenses increased as a percentage of net
sales to 44% in Fiscal 1997 from 37% for the Fiscal 1996. The increase as a
percentage of net sales is attributable to a combination of a decline in net
sales and an increase in total expense.
The provision for doubtful accounts was $18.8 million, an increase of
$7.0 million from the prior year. The provision was approximately 14% and 8% of
net sales for Fiscal 1997 and 1996, respectively. The increase of such provision
was primarily due to an additional provision for customer receivables from
closed stores, and a general provision increase as a result of an overall
analysis of portfolio performance.
Barry's recorded approximately $1.3 million of restructuring expenses
during Fiscal 1997. The restructuring expenses consist primarily of severance
and store closing costs at 11 stores (see Note 1 of Audited Financial
Statements).
Barry's recognized an impairment loss of approximately $3.9 million as
a result of impaired computer equipment and software related to the Company's
merchandise management and point-of-sale systems (see Note 2 of Audited
Financial Statements).
Interest expense was $12.7 million in 1997, an increase of $1.6 million
from the prior year. Such increase was a result of higher average interest rates
on Barry's long-term debt, and $325,000 of additional interest expense charged
during the third quarter of Fiscal 1997 in connection with obtaining an
amendment to Barry's Amended Revolving Credit Agreement as discussed in "--
Liquidity and Capital Resources." Barry's also recorded $876,000 of
extraordinary charges due to the write-off of deferred finance fees in
connection with the early extinguishment of its Securitization Facility during
the first quarter of Fiscal 1997.
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 all 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 receivable balances
was $53.5 million. As of May 31, 1998, the aggregate customer receivables
balance for Barry's was $55.2 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 approximately $27.0 million for Barry's at May 31, 1998. This
increase is a result of the Company implementing a new merchandise assortment
plan, designed to target a 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.
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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
On May 11, 1997, Barry's filed a voluntary petition for relief under
Chapter 11. Under Chapter 11, actions to enforce certain claims against Barry's
are stayed if the claims arose, or are based on events that occurred on or
before the date of the Chapter 11 petition. Following the consummation of the
plan of reorganization on October 2, 1998, as confirmed by the bankruptcy court
on September 16, 1998, such pre-petition claims and other claims were
compromised as set forth in the plan and 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 $9.3 million for the nine months ended February 27, 1999 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 for Barry's resulting primarily from
liquidation of aged merchandise and Barry'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.
Barry's reported cash flows from operating activities of approximately
$15.1 million for Fiscal 1998, as compared to cash flows provided by operating
activities of $8.3 million for Fiscal 1997 and cash flows used in operating
activities of approximately $6.0 million for Fiscal 1996. Barry's positive cash
flow for Fiscal 1998 resulted primarily from Barry's inventory decrease (net of
consigned inventory) of approximately $9.7 million, (excluding $5.5 million of
inventory returned in exchange for pre-petition liabilities) and increases in
accounts payable and accrued liabilities of approximately $8.9 million and $3.2
million, respectively, for Fiscal 1998.
As of February 27, 1999, the Company had $1.4 million of cash and cash
equivalents. At May 31, 1998, Barry's 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
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<PAGE> 19
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.
The financing agreement also contains certain covenants that limit the
Company's actions with regard to the following: the incurrence of additional
indebtedness; the payment of dividends; the redemption of capital stock; the
making of certain investments; the issuance of guarantees; transactions with
affiliates; asset sales; making excessive annual capital expenditures; and
certain mergers and consolidations. The limitations on the Company's ability of
making certain investments includes a limitation on the monetary amount that may
be outstanding pursuant to such investments in the aggregate at one time. The
limitation on capital expenditures places a cap on the total capital
expenditures permitted the Company under the financing agreement for its fiscal
years 1999 and thereafter. The financing agreement also contains covenants
requiring the Company to meet the following financial tests: (i) unless waived
by the Lenders, a credit-sales-to-overall-sales ratio of less than 60% as of the
end of any month, and (ii) a tangible net worth of $26,000,000 as of May 29,
1999, a tangible net worth of $24,000,000 as of August 29, 1999, a tangible net
worth of $20,000,000 as of November 27, 1999, and a tangible net worth in
amounts acceptable to the Lenders based on the Company's financial projections
for periods thereafter. A breach of any of these covenants under the financing
agreement could result in an event of default and, in such instances, the
Lenders could elect to declare all amounts borrowed, together with accrued
interest, to be immediately payable and could terminate all commitments
thereunder.
CONSIGNMENT AGREEMENTS
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 consigned 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.
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<PAGE> 20
BUSINESS AND PROPERTIES
The following description of the Company's business and properties is
included for the benefit of the investor. The description refers to the relevant
entity for such information except where it references the Company's nine months
ended February 27, 1999, which incorporates a five-month operating period for
the Company and a four-month operating period for Barry's. Prior to the
effectiveness of the merger of Barry's with and into the Company, the Company
was a non-operating wholly owned subsidiary of Barry's. The merger was effected
for purposes of consummating Barry's Plan of Reorganization, changing the
Company's name and state of incorporation and receiving the new equity. The
Company's business and properties are identical to the business and properties
of Barry's prior to October 2, 1998.
INTRODUCTORY NOTE
This prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Company intends that such forward-looking
statements be subject to the safe harbors created thereby.
THE COMPANY
The Company operates 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. As of May 1, 1999, the Company operated 115 retail
jewelry stores, principally in California, Texas, Arizona, Utah, North Carolina,
Colorado, Idaho, Montana and Indiana. 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.
The Company changed its fiscal year end during 1998 from May 31 to the
Saturday closest to May 31. The Company's fiscal year ended May 30, 1998 may be
referred to herein as such, or, where it is more convenient for comparison with
the prior fiscal year, it may be described as the fiscal year ended May 31,
1998. Either description references the actual fiscal year ended May 30, 1998.
EMERGENCE FROM CHAPTER 11 REORGANIZATION
Barry's filed a plan of reorganization (the "Reorganization") on April
30, 1998 with the bankruptcy court, and the bankruptcy court confirmed the plan,
with certain modifications, on September 16, 1998. The Company emerged from the
bankruptcy proceedings on October 2, 1998. The plan provided for the following:
o payment in full of certain administrative claims, tax claims,
bank secured claims and other allowed secured claims
o distribution of 2.5 million shares of our common stock to Barry's
bondholders in exchange for their allowed claims
o distribution of 2.25 million shares of our common stock in
exchange for $15 million in a new equity cash infusion
o payment of allowed claims of general unsecured creditors at a
rate of $0.15 for each dollar of their allowed claims
o issuance of 263,158 warrants to purchase our common stock to
stockholders in exchange for their shares of Barry's common stock
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<PAGE> 21
o merger of Barry's into the Company, changing its name to Samuels
Jewelers, Inc. and reincorporating as a Delaware corporation.
In addition, Foothill Capital Corporation agreed to provide the Company
with a new fully secured line of credit of up to $50,000,000. On October 2,
1998, the Company drew down approximately $32 million from this line of credit.
These borrowings along with the $15 million new cash equity infusion were used
to pay off Barry's line of credit balance with Bank Boston.
PRIOR REORGANIZATION
On February 26, 1992, Barry's voluntarily initiated a case under
Chapter 11 of the Bankruptcy Code and filed a pre-negotiated Plan of
Reorganization in the United States Bankruptcy Court for the Central District of
California (the "Court"). On June 19, 1992, the Court entered an order
confirming Barry's Amended Plan of Reorganization (the "Prior Reorganization
Plan"). The effective date of the Prior Reorganization Plan was June 30, 1992.
STRATEGY
The Company's operating strategy is to provide the best fine jewelry
values to the retail jewelry consumer. This is accomplished by partnering with
vendors to develop new products and expand assortments based on customer demand
and perceived value and then by communicating this value message through
targeted marketing programs. To enhance sales, the Company makes credit
financing available to qualified customers through its own private label credit
card and through various secondary credit sources. The Company's sales
capabilities are supported by a trained and knowledgeable sales staff, an
automated, centralized credit and collection system, and a centralized
distribution system to replenish merchandise to the stores.
MERCHANDISE STRATEGY
Strong vendor partnering has enabled management to leverage a large
portion of the Company's inventory through exclusive consignment arrangements,
resulting in dominant assortments of quality jewelry. A talented team of
merchandise buyers with jewelry manufacturing expertise has been assembled to
allow the Company to go beyond buying product, and focus on developing product
solutions that meet specific competitive opportunities created by consumer
demand. As a result, management believes the stores offer exceptional selection,
and excellent values that enhance the Company's ability to offer a better value
to the customer and, thereby, capture a larger market share.
MERCHANDISE MIX
The Company has repositioned its merchandise assortments to appeal to
the mainstream jewelry consumer. Improved price points, updated styling and an
expanded selection in high volume product categories such as bridal, diamond
fashion and gold have been the primary focus of the new merchandising strategy.
INVENTORY PURCHASING
Buyers based in the Company's corporate offices purchase most of the
stores' merchandise. Each store's inventory is replenished weekly or more often
during peak selling seasons. Management believes that centralized merchandise
purchasing provides the Company with quality controls and price advantages.
Three vendors have accounted for 41%, 27%, and 25% of merchandise
purchases for the Company's nine months ended February 27, 1999 and Barry's
Fiscal Years ended May 31 1998 and 1997, respectively. Management believes that
the Company's relationship with these three vendors, as well as its other
vendors, is good. These vendors, and all vendors key to the Company's new
merchandising strategy, have agreed to new consignment agreements.
SUPPLY AND PRICE FLUCTUATIONS
21
<PAGE> 22
The world supply and price of diamonds are influenced considerably by
the Central Selling Organization ("CSO"), which is the marketing arm of DeBeers
Consolidated Mines, Ltd. ("DeBeers"), a South African company. Through the CSO,
over the past several years, DeBeers has supplied approximately 80% of the world
demand for rough diamonds, selling to gem cutters and polishers at controlled
prices.
The continued availability of diamonds to the Company's suppliers is
dependent, to a material degree, upon the political and economic situation in
South Africa. While several other countries, including Australia, the
Commonwealth of Independent States, Zaire, Angola, Tanzania and Sierra Leone are
suppliers of diamonds, the Company cannot predict with any certainty the effect
on the overall supply or price of diamonds in the event of an interruption of
supplies from South Africa, the CSO or DeBeers.
The Company is subject to other supply risks, including fluctuations in
the price of previous gems and metals. The Company presently does not engage in
any hedging activity with respect to possible fluctuations in the price of these
items. If such fluctuations should be unusually large or rapid and result in
prolonged higher or lower prices, there is no assurance that the necessary
retail price adjustments will be made quickly enough to prevent the Company from
being adversely affected.
TRADE NAMES
The Company currently operates under the following trade names:
Samuels, Schubach, Hatfield, Harts and Mission. Over the next two to three
years, the Company intends to change the name of all of its stores to Samuels
Jewelers.
STORE PERFORMANCE
The following table sets forth selected data with respect to Barry's
operations for the four fiscal years ended May 31 and for the Company and
Barry's 11 months ended May 1, 1999 (as part of fiscal year 1999, ending on May
29, 1999).
<TABLE>
<CAPTION>
May 1,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of Stores at beginning of year 117 130 161 162 144
Acquired during the year 4 -- -- -- 15
Opened during the year 2 -- 17 7 8
Closed during the year (8) (13) (48) (8) (5)
----- ----- ----- ----- -----
Total at year end 115 117 130 161 162
===== ===== ===== ===== =====
Percentage increase (decrease) in sales of 3.3% 9.2% (10.0%) 2.2% 11.0%
comparable stores(1)
Average sales per comparable store (in thousands) N/A $ 951 $ 709 $ 905 $ 871
</TABLE>
(1) Comparable stores are stores that were open for all of the current and
preceding year and the full 11 months during the current and preceding
year for the period ended May 1, 1999.
CREDIT PROGRAM
The Company's credit policy is intended to complement its overall sales
strategy. The principal objective is the extension of credit to those customers
which will produce the most reasonable rate of return. The Company also offers
credit insurance to its customers. This insurance program, underwritten by a
major insurance company, generally provides coverage for life, disability,
unemployment and loss of property.
22
<PAGE> 23
Sales under the Company's credit program accounted for approximately
49% of sales for the nine months ended February 27, 1999, 54.3% of Fiscal 1998
for Barry's sales and 58.1% of Fiscal 1997 for Barry's sales, net of down
payments. The decline in credit sales mix is attributable to management's policy
of tightening credit granting standards and by a merchandising and marketing
strategy designed to attract a more affluent customer. Payment periods for the
credit sales generally range from 24 to 36 months. Customers may also purchase
jewelry for cash and by using major national credit cards.
SEASONALITY
The level of success of the Company is heavily dependent each year on
the success of its Christmas selling season, which in turn depends on many
factors beyond the Company's control, including the general business environment
and competition in the industry. Sales during the Christmas season (which
includes the period from the day following Thanksgiving Day to December 31)
generally account for approximately 25% of net sales and all or nearly all of
annual earnings. The Company had net sales of $30.2 million during the Christmas
1998 selling season.
COMPETITION
The retail jewelry industry is highly competitive. It is estimated that
there are approximately 35,000 retail jewelry stores in the United States, most
of which are independently operated and not part of a major chain. Numerous
companies, including publicly and privately held independent stores and small
chains, department stores, catalog showrooms, direct mail suppliers, and TV
shopping networks, provide competition on a national and regional basis. The
malls and shopping centers wherein many of the Company's stores are located
typically contain several other national chain or independent jewelry stores, as
well as one or more jewelry departments located in the "anchor" department
stores. Certain of the Company's competitors are substantially larger than the
Company and have greater financial resources.
Management believes that the primary elements of competition in the
retail jewelry business are quality of personnel, level of customer service,
breadth, depth, price and quality of merchandise offered, credit terms and store
location and design. Management believes that the Company has been unable to
compete successfully in prior years because of its failed merchandising
programs, poor credit underwriting practices, cash flow constraints, excessive
collection costs, poor inventory controls and below-average percentage of
consignment inventory, executive turnover, restrictive financing arrangements,
ineffective investment in technology and the resultant excessive administrative
costs. In addition, the Company believes that, as the jewelry retailing industry
consolidates, the ability to compete effectively may become increasingly
dependent on volume purchasing capability, regional market focus, superior
management information systems, and the ability to provide customer service
through trained and knowledgeable sales staffs. However, the competitive
environment is often affected by factors beyond a particular retailer's control,
such as shifts in consumer preferences, economic conditions, population and
traffic patterns.
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.
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. All other systems owned and operated by the Company
are believed to be year 2000 compliant.
23
<PAGE> 24
The Company expects to spend approximately $3.5 million representing
$1.2 million of new hardware and $2.3 million of new software on all projects to
insure the Company meets all requirements to be year 2000 compliant.
Through April 1999, approximately $3.4 million had already been incurred.
The Company has no current intention to replace its current customer
accounts receivable system, which is not year 2000 compliant. However, it is
planning to outsource the billing and collection functions.
In the event the Company is unable to outsource the billing and
collection functions by December 31, 1999, the Company's most likely worst case
scenario would be that it would have to continue to perform these functions and
license other existing collection systems that are year 2000 compliant. If the
Company is unable to reach an agreement with regard to either of these
alternatives, the Company could suffer material adverse effects, including a
loss of revenue and customer satisfaction, which could impact the Company's
results of operations, liquidity, and financial condition. The Company will make
a determination no later than the end of July 1999 as to whether it needs to
license other existing collection systems.
All of the other internal operating systems the Company currently uses
are 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.
EMPLOYEES
At April 30, 1999, the Company had 1,204 full-time and part-time
employees. Unions represented 37 employees, or 3.1% of the Company's employees,
at such date. On December 31, 1998, the Company modified and extended its
existing union contract covering these employees which expires on January 31,
2000. The Company believes it provides working conditions and wages that compare
favorably with those offered by other retailers in the industry and that its
employee relations are good. The Company has never experienced any material
labor unrest, disruption of operations or strikes.
PROPERTIES
The Company leases all its retail stores. Stores range in size from
approximately 577 square feet to 3,690 square feet. Store leases generally have
an initial term of five to fifteen years and will expire at various dates
through 2007. Currently, leases at 3 stores have expired, and two others were
rejected during Barry's bankruptcy proceedings; these five stores are currently
occupied on a month-to-month basis. Some leases contain renewal options for
periods ranging from five to ten years on substantially the same terms and
conditions as the initial lease. Under most of the store leases, the Company is
required to pay taxes, insurance, and its pro rata share of common area and
maintenance expenses. Most of the leases also require the Company to pay the
greater of a specified minimum rent or a contingent rent based on a percentage
of sales as defined.
The Company's lease for its headquarters in Austin, Texas, has the
following substantive terms: (a) approximately 24,000 square feet, with rent of
$0.47 per square foot per month on a triple net basis; and (b) a term of five
years, with an option to renew for one additional five year term at the average
monthly net rental rate charged for comparable premises. The Company also leases
space in Irwindale, California, for its credit center.
24
<PAGE> 25
As of April 30, 1999, the Company was operating 115 retail stores in
the following states:
<TABLE>
<CAPTION>
State Number of Stores
----- ----------------
<S> <C>
California 30
Texas 30
Colorado 9
Utah 8
Idaho 5
Montana 5
North Carolina 5
Arizona 4
Others 19
---
TOTAL 115
</TABLE>
LEGAL PROCEEDINGS
The Company is involved from time to time in various legal proceedings
of a character normally incident to its business. The Company believes that its
potential liability in any such pending or threatened proceedings will 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 with such coverage limits as management deems prudent.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently utilizes no material derivative financial
instruments which expose the Company to significant market risk. However,
interest rate changes may affect the cash flow, earnings, and the fair value of
its Long-term debt due to differences between the market interest rates and the
rates at the inception of these financial instruments. Based on the Company's
Long-term debt outstanding at February 27, 1999 and current market perception, a
50 basis point increase in the interest rates as of February 27, 1999 would
result in a net reduction of the market value of the instruments of
approximately $400,000. Conversely, a 50 basis point decrease in the interest
rates would result in an approximately $500,000 net increase in the market value
of the Company's Long-term debt outstanding at February 27, 1999.
25
<PAGE> 26
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David Barr.................. 35 Director
David J. Breazzano.......... 42 Director
Ken D'Amato................. 38 Director
David H. Eisenberg.......... 62 Director
E. Peter Healey............. 45 Executive Vice President, Chief Financial Officer,
Secretary, Treasurer and Director
Randy N. McCullough......... 46 President, Chief Executive Officer and Director
Jerry Winston............... 75 Director
Chad C. Haggar.............. 35 Senior Vice President - Operations
Bill R. Edgel............... 33 Senior Vice President - Marketing
Paul W. Hart................ 41 Senior Vice President - Management Information Systems
Robert J. Herman ........... 38 Vice President, Controller, Assistant Secretary
</TABLE>
Set forth below is biographical information for each director on the
Board of Directors and each executive officer.
David Barr has been a director of the Company since September 22, 1998.
Mr. Barr has been Chief Executive Officer and a Member of PMTD Restaurants, LLC
since September 1998. He served as Chief Executive Officer, President, Vice
President of Finance and Treasurer of Great-American Cookie Company, Inc.
("GACC") from May 1996 to September 1998. Mr. Barr was Executive Vice President
of Operations, Chief Financial Officer and Treasurer of GACC from July 1995 to
May 1996. Prior to that, Mr. Barr served as Chief Financial Officer, Vice
President of Finance and Treasurer of GACC from May 1994. Mr. Barr served as
Finance Manager of Pizza Hut, Inc. from March 1991 to May 1994.
David J. Breazzano has been a director of the Company since September
22, 1998. Mr. Breazzano co-founded DDJ Capital Management, LLC in March 1996 and
has been a member since such time. From October 1990 to February 1996, Mr.
Breazzano was Vice President and Portfolio Manager of Fidelity Management &
Research Company. Mr. Breazzano currently serves as a director of Key Energy
Group, Inc. and Waste Systems International, Inc.
Ken D'Amato has been a director of the Company since September 22,
1998. Mr. D'Amato has served as a Senior Analyst for DDJ Capital Management, LLC
since April 1998. From June 1989 to March 1998, Mr. D'Amato served as President
of Hord Cilstal Corporation, a manufacturer of costume jewelry.
David H. Eisenberg has been a director of the Company since September
22, 1998. Mr. Eisenberg has been the Chairman of the Board, President and Chief
Executive Officer of Eisenberg and Associates since 1995. Mr. Eisenberg has
served as Chairman of the Board, President and Chief Executive Officer of Chief
Auto Parts since November 1992. Mr. Eisenberg currently serves as a director of
Helmac, Inc. and nominated to serve as a director of Earl Scheib, Inc.
E. Peter Healey has been a director of the Company since September 22,
1998. Mr. Healey has served as the Executive Vice President, Chief Financial
Officer, Secretary and Treasurer of the Company since its inception and
previously served in that capacity for Barry's since February 1997. From 1994 to
1996, Mr. Healey was the Vice President, Chief Financial Officer, Secretary and
Treasurer of MS Financial, Inc. From 1985 to 1993, Mr. Healey was with Zale
Corporation, serving as Vice President and Treasurer from 1987 to 1993.
Randy N. McCullough has been a director of the Company since August 20,
1998. Mr. McCullough has been the President and Chief Executive Officer of the
Company since its inception and previously served in that capacity for Barry's
since March 31, 1998. Mr. McCullough served as
26
<PAGE> 27
Barry's Executive Vice President and Chief Operating Officer from January to
March 1998. Mr. McCullough joined Barry's in April 1997 and was its Senior Vice
President-Merchandise from April 1997 to March 1998. Prior to joining Barry's,
Mr. McCullough served as President of Silverman's Factory Jewelers from 1991 to
March 1997. Prior to that time, Mr. McCullough was a senior manager with a
leading national retail jewelry chain for over 18 years.
Jerry Winston has been a director of the Company since September 22,
1998. Mr. Winston has been President of Jerry Winston Enterprises, Ltd., a
wholesale diamond business, for more than the past five years.
Chad C. Haggar has been the Company's Senior Vice President -
Operations since its inception and previously served in that capacity for
Barry's since February 1997. Prior to joining Barry's, Mr. Haggar served as
Director of Stores of Fred Meyer, Inc. from 1996 to 1997. From before 1992 to
1996, Mr. Haggar served as Regional Manager of Merksamer Jewelers, Inc.
Bill R. Edgel has been the Company's Senior Vice President - Marketing
since its inception and previously served in that capacity for Barry's since
February 1997. Prior to joining Barry's, Mr. Edgel served as Director of Credit
Marketing of Macy's West, a division of Federated Department Stores, from 1996
to 1997. From 1995 to 1996, Mr. Edgel served as Director of Marketing for
Merksamer Jewelers, Inc. From 1993 to 1995, Mr. Edgel served as Advertising
Manager/Creative Director for Troutman's Emporium, Inc. From 1992 to 1993, Mr.
Edgel served as Partner/Creative Director of Vaki Advertising, Inc.
Paul W. Hart has been the Company's Senior Vice President - Management
Information Systems since its inception and previously served in that capacity
for Barry's since August 1997. Prior to joining Barry's, Mr. Hart served as Vice
President - Management Information Systems of MS Financial, Inc. From 1974 to
1995, Mr. Hart was employed by Zale Corporation, serving as Director of Credit
Systems from 1994 to 1995, and as its Manager of Business Systems Planning and
Support from 1988 to 1994.
Robert J. Herman has been the Company's Vice President, Controller and
Assistant Secretary since its inception and previously served in that capacity
for Barry's since February 1998. Prior to joining the Barry's, Mr. Herman served
as the Controller for Datamark, Inc. from 1997 to February 1998. From 1994 to
1997, Mr. Herman served as the Controller for Silverman's Factory Jewelers. From
1987 to 1994, Mr. Herman was employed by Sunbelt Nursery Group, Inc., serving as
its Controller from 1991 to 1994.
27
<PAGE> 28
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 30, 1999, information as to
the beneficial ownership of the Company's Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of its outstanding shares
of Common Stock, (ii) each of the Company's directors and director nominees,
(iii) each of the officers named in the Summary Compensation Table under the
caption "Compensation of Directors and Executive Officers -- Executive
Compensation," and (iv) all executive officers and directors of the Company as a
group. In each instance, information as to the number of shares owned and the
nature of ownership has been provided by the person or entity identified or
described and is not within the direct knowledge of the Company.
<TABLE>
<CAPTION>
Amount Beneficially
Name and Address of Beneficial Owner Owned(1) Percent of Class
------------------------------------ ------------------- ----------------
<S> <C> <C>
Randy N. McCullough*(2)......................................... 111,000 2.2%
E. Peter Healey*................................................ 77,000 1.5%
Chad C. Haggar*................................................. 25,000 **
Bill R. Edgel*.................................................. 25,000 **
Paul Hart*...................................................... 25,000 **
David Barr(3)*.................................................. --- **
David J. Breazzano(3)(4)*....................................... 1,792,439 35.8%
Ken D'Amato(3)*................................................. --- **
David H. Eisenberg(3)*.......................................... --- **
Jerry Winston(3)*............................................... --- **
DDJ Capital Management, LLC(5) 1,792,439 35.8%
141 Linden Street, Suite S-4
Wellesley, Massachusetts 02482
Mitchell Hutchins Asset Management, Inc.(6) 998,511 20.0%
1285 Avenue of the Americas, 15th Floor
New York, New York 10019
Stephen Feinberg(7) 815,813 16.2%
450 Park Avenue, 28th Floor
New York, New York 10022
All executive officers and directors as a group (11 persons).... 2,055,439 41.1%
</TABLE>
- ------------------------
(1) To the Company's knowledge, except as otherwise set forth in this table,
the persons and entities in this table have sole voting, investment and
dispositive power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
(2) Mr. McCullough became President and Chief Executive Officer on March 31,
1998.
(3) Mr. Barr, Mr. Breazzano, Mr. D'Amato, Mr. Eisenberg and Mr. Winston also
have been granted, as non-employee directors of the Company, an option to
purchase 5,000 shares of the Company's Common Stock under the Company's 1998
Stock Option Plan, but their rights to exercise such options vest in 25%
increments on the successive four anniversaries of October 2, 1998, the date as
of which the Stock Option Plan was adopted. See "Compensation of Directors and
Executive Officers."
28
<PAGE> 29
(4) With respect to all of such shares, Mr. Breazzano shares voting and
dispositive power as a member of DDJ Capital Management, LLC, who may be deemed
to beneficially own all of such shares (see Footnote (5) below), but as to which
he disclaims beneficial ownership.
(5) DDJ Capital Management, LLC may be deemed to beneficially own all of
such shares through three funds controlled by it, including the 1,704,939 shares
owned by B III Capital Partners, L.P. (or approximately 34.1% of the Company's
outstanding common stock).
(6) Mitchell Hutchins Asset Management, Inc. owns all of such shares through
four funds controlled by it.
(7) Stephen Feinberg may be deemed to beneficially own the following:
158,555 shares through the fund Cerberus Partners, L.P.; 267,710 shares through
the fund Cerberus International, Ltd.; 24,510 shares through the fund Ultra
Cerberus, Ltd.; 346,275 aggregate shares through additional private investment
funds; and 18,763 warrants to purchase shares through the additional private
investment funds. The warrants are exercisable through the payment of an
exercise price, revised annually on the date after the October 2 anniversary of
the Company's Warrant Agreement establishing such warrant rights. See "Exhibit
4.1."
*Address is c/o Samuels Jewelers, Inc., 2914 Montopolis Drive, Suite 200,
Austin, Texas 78741.
**Less than one percent.
29
<PAGE> 30
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
The Company pays each of its non-employee directors (including any
non-employee director holding an officer's title with the Company but who is not
separately compensated for serving in such position) an annual retainer fee of
$15,000, plus, for attendance at meetings of the Board or committee meetings, an
additional $500 per meeting. In addition to such retainer and attendance fees,
each non-employee director was granted an option to purchase 5,000 shares of the
Common Stock upon their initial election as director under the Company's 1998
Stock Option Plan with the options vesting under the Stock Option Plan in 25%
increments on the four ensuing anniversaries of the adoption of the Stock Option
Plan, which was adopted as of October 2, 1998. All such options have an exercise
price equal to the market price of the Common Stock on the date of grant.
Directors are also reimbursed for reasonable expenses incurred in connection
with attending meetings of the Board and its committees.
EXECUTIVE COMPENSATION
The Company was formed on August 20, 1998 and no executive officers
received compensation from the Company until October 2, 1998, the effective date
of the Merger. Prior to the Merger, the Company was a wholly owned subsidiary of
Barry's. Therefore, no executive officers received compensation during the
preceding fiscal year. Compensation paid to such officers by Barry's during the
fiscal year ended May 31, 1998 is disclosed in an amendment to Barry's annual
report on Form 10-K/A for the fiscal year ended May 31, 1998 (the "Barry's 1998
Form 10-K/A"). For a description of the compensation to be paid to the executive
officers during the current fiscal year, see "Compensation Committee Report -
Certain Terms of Employment Agreements." Randy N. McCullough currently serves as
the Company's Chief Executive Officer and will be paid a salary commensurate
with the terms of his Employment Agreement as described in "Compensation
Committee Report - Certain Terms of Employment Agreements."
OPTION/SAR GRANTS IN FISCAL 1998
None of those persons serving as chief executive officer of the Company
or any other executive officer of the Company was issued any option to acquire
the Company's Common Stock. See "Approval of 1998 Stock Option Plan" for
proposed grants to such executive officers for the current fiscal year.
AGGREGATED 1998 OPTION/SAR EXERCISES
AND YEAR-END OPTION VALUES
No stock options have been exercised or are held by the chief executive
officer of the Company or any other executive officer of the Company.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
Upon the occurrence of Barry's emergence from bankruptcy proceedings
and the Merger, the Company entered into employment agreements dated October 2,
1998 (the "Employment Agreements") with each of Messrs. McCullough, Healey,
Haggar, Edgel and Hart (each, an "Executive"), a summary description of certain
terms of which is set forth under the caption "Compensation Committee Report --
Implementation of Philosophy."
30
<PAGE> 31
COMPENSATION POLICY
COMPENSATION PHILOSOPHY
The Compensation Committee of the Board is responsible for developing
and implementing the Company's executive compensation policies. The Compensation
Committee's philosophy of executive compensation is to enhance the profitability
of the Company, and thus stockholder value, by closely aligning the financial
interests of the executive officers with those of the Stockholders.
IMPLEMENTATION OF PHILOSOPHY
Generally, the Compensation Committee seeks to realize this objective
by the use of short term incentives in the form of salary and cash bonuses, and
long term incentives in the form of stock option and restricted stock grants.
Salaries initially are set based on the executive officer's experience and
competitive conditions. Thereafter, salaries may be adjusted based on various
factors, including the executive's performance. In setting and making
adjustments to salaries, the Compensation Committee also considers salaries paid
to similarly situated executive officers in comparable companies.
Upon the occurrence of the Reorganization and Merger, the Company
entered into the Employment Agreements with each Executive. Set forth below is a
summary of certain other terms of such Employment Agreements.
CERTAIN TERMS OF EMPLOYMENT AGREEMENTS
<TABLE>
<CAPTION>
MAXIMUM ANNUAL CASH
BONUS (AS A
ANNUAL BASE PERCENTAGE OF GRANT OF RESTRICTED SHARES UNDERLYING STOCK
EXECUTIVE/TITLE SALARY ANNUAL BASE SALARY) STOCK(1) OPTIONS
- --------------------------- ----------- -------------------- ------------------- -----------------------
<S> <C> <C> <C> <C>
Randy N. McCullough $325,000 100% 100,000 shares 50,000 shares
President and Chief
Executive Officer
E. Peter Healey $300,000 100% 75,000 shares 37,500 shares
Executive Vice
President, Chief
Financial Officer,
Secretary and Treasurer
Chad C. Haggar $150,000 50% 25,000 shares 12,500 shares
Vice President -
Operations
Bill R. Edgel $150,000 50% 25,000 shares 12,500 shares
Vice President -
Marketing
Paul Hart $135,000 50% 25,000 shares 12,500 shares
Vice President -
MIS
</TABLE>
- -----------------------------
(1) Shares granted on October 2, 1998 upon effectiveness of Barry's
reorganization plan and the Merger.
31
<PAGE> 32
Under the Employment Agreements, if an Executive's employment is
terminated due to an Executive's death or disability, such Executive is entitled
to receive (i) accrued annual base salary and benefits, (ii) his full annual
cash bonus and (iii) an amount equal to 18 months of his base salary. If the
employment of Messrs. McCullough or Healey is terminated by the Company without
cause or by the Executive with good reason, such Executive is entitled to
receive (i) accrued annual base salary and benefits, (ii) an amount equal to
three times the Executive's annual base salary multiplied by a fraction, the
numerator of which is (A) 36 minus (B) the number of months the Executive has
been in the Company's employ since October 2, 1998, but in no event shall it be
less than 18; and the denominator of which is 36; provided, however, that in the
event of a change of control, the numerator shall be 36. If the employment of
Messrs. Haggar, Edgel and Hart is terminated by the Company without cause or by
the Executive with good reason, such Executive is entitled to receive (i)
accrued annual base salary and benefits, (ii) an amount equal to two times the
Executive's annual base salary multiplied by a fraction, the numerator of which
is (A) 36 minus (B) the number of months the Executive has been in the Company's
employ since October 2, 1998, but in no event shall it be less than 18; and the
denominator of which is 36; provided, however, that in the event of a change of
control, the numerator shall be 36. If the Executive's employment is terminated
by the Company for cause or by the Executive without good reason, such Executive
is entitled to receive accrued annual base salary and benefits and his prorated
annual cash bonus.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
In setting Mr. McCullough's annual salary and incentive compensation,
the Compensation Committee considered numerous factors, including Mr.
McCullough's extensive experience in the jewelry industry, his prior success in
turning around troubled companies and the market rate for presidents and chief
executive officers with knowledge and experience commensurate to that of Mr.
McCullough. Based on these factors, and after negotiations between the
Compensation Committee and Mr. McCullough, the Compensation Committee
established Mr. McCullough's compensation terms.
PERFORMANCE GRAPH
The Company's common stock, par value $.001 per share ("Common Stock"),
began trading after the effective date of the plan of reorganization. As a
result, less than one year of trading history of the Common Stock is available.
A graphical comparison of Barry's Common Stock against the market and Barry's
industry prior to the effective date is available in the Barry's 1998 Form
10-K/A.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the Employment Agreements (See "Exhibits 10.2-10.6") entered into by
the Company with Randy N. McCullough, E. Peter Healey, Chad C. Haggar, Bill R.
Edgel and Paul Hart (the "related employees"), the Company agreed to provide the
related employees with a signing bonus in the form of equity grants that vest in
25% increments on the date as of such grant and the three successive
anniversaries thereof. In addition to the grants, the Company agreed to lend the
related employees, in varying amounts, sums to compensate for the taxes incurred
as a result of the grants. The total amount of these loans was approximately
$935,000. The related employees are obligated, under their respective Employment
Agreements, to repay the principal and interest on the loan quarterly for three
years at the lowest statutory interest rate necessary for tax purposes. The
Company holds twelve promissory notes for each of the related employees to
secure the repayment. The Company also agreed in the respective Employment
Agreements to pay the related employees a bonus equal to the amounts of
principal (but not interest) due under the aforementioned promissory notes on
the dates the related employees are obligated to make their respective quarterly
payments as long as the respective related employee remains employed on that
date. In the event the related employees voluntarily terminate their employment
or they are terminated by the Company for cause, the unpaid portion of the
respective related employee will be accelerated and all of the promissory notes
related thereto will become due and payable within ninety days of the date of
termination. In the event the related employees are terminated by the Company
for other reasons, the respective related employee's signing bonus grant
immediately vests and the Company is obligated to pay the respective related
employee a one time lump sum bonus equal to the principal amount of any
remaining outstanding promissory notes related to the grant to that respective
related employee.
32
<PAGE> 33
DESCRIPTION OF CAPITAL STOCK
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation, a copy of which has been included as an exhibit to the
Registration Statement of which this prospectus is a part. All capitalized terms
used and not defined below have the respective meanings assigned to them in the
Certificate of Incorporation.
COMMON STOCK
The Company is authorized to issue up to 20,000,000 shares of Common
Stock, $.001 par value per share. As of the date of this prospectus, there were
5,001,800 shares of Common Stock issued and outstanding.
Holders of Common Stock are entitled to one vote for each share held,
are not entitled to cumulative voting for the purpose of electing directors and
have no preemptive or similar right to subscribe for, or to purchase, any shares
of Common stock or other securities to be issued by the Company in the future.
Accordingly, the holders of more than 50% in voting power of the shares of
Common Stock voting generally for the election of directors will be able to
elect all of the Company's directors.
Holders of shares of Common Stock have no exchange, conversion or
preemptive rights and such shares are not subject to redemption. All outstanding
shares of Common Stock are, and upon issuance the shares of Common Stock offered
hereby will be, duly authorized, validly issued, fully paid and nonassessable.
Subject to the prior rights, if any, of holders of any outstanding class or
series of capital stock having a preference in relation to the Common Stock as
to distributions upon the dissolution, liquidation and winding-up of the Company
and as to dividends, holders of Common Stock are entitled to share ratably in
all assets of the Company which remain after payment in full of all debts and
liabilities of the Company, and to receive ratably such dividends, if any, as
may be declared by the Company's Board of Directors from time to time out of
funds and other assets legally available therefor. See "Dividend Policy" and
"Capitalization."
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
Common Stock, to issue up to 20,000,000 shares of preferred stock, $.001 par
value (the "Preferred Stock"), in one or more series, to establish the number of
shares to be included in each such series and to fix the designations,
preferences, relative, participating, optional and other special rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof. Such matters may include, among others, voting rights, conversion and
exchange privileges, dividend rates, redemption rights, sinking fund provisions
and liquidation rights that could be superior and prior to the Common Stock.
The issuance of one or more series of the Preferred Stock could, under
certain circumstances, adversely affect the voting power of the holders of the
Common Stock and could have the effect of discouraging or making more difficult
any attempt by a person or group to effect a change in control of the Company.
DELAWARE BUSINESS COMBINATION STATUTE
The Company is a Delaware corporation and is subject to Section 203 of
the DGCL ("Section 203"). In general, Section 203 prevents any "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as therein defined) with a Delaware corporation for three years
following the time that such person became an interested stockholder, unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the business combination in question or the transaction
which resulted in such person becoming an interested stockholder, (ii) upon
consummation of the transaction that resulted in the interested stockholder's
becoming such, the interested stockholder owns at least 85% of the voting stock
of the corporation outstanding at the time such transaction commenced (excluding
stock held by directors who are also officers of the corporation and by employee
stock plans that do not provide employees with rights to determine
confidentially whether shares held subject to the plan
33
<PAGE> 34
will be tendered in a tender or exchange offer), or (iii) at or following the
transaction in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of not less than 66 2/3% of the outstanding voting stock of the corporation not
owned by the interested stockholder. Under Section 203, the restrictions
described above do not apply to certain business combinations proposed by an
interested stockholder following the announcement (or notification) of one of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the preceding three years or who
became an interested stockholder with the approval of the corporation's
directors or at a time when the restrictions imposed by Section 203 did not
apply in accordance with the terms thereof, and which transactions are approved
or not opposed by a majority of the members of the board of directors then in
office who were directors prior to any person becoming an interested stockholder
during the previous three years or were recommended for election or elected to
succeed such directors by a majority of such directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Bank
Minnesota, N..A.
34
<PAGE> 35
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering of the Stockholders' Offered Shares
(the "Offering"), the Company will have outstanding an aggregate of 5,001,800
shares of Common Stock. All of such shares sold in the Offering will be freely
tradable without restriction or further registration under the Securities Act,
except for any shares purchased by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act (whose sales would be subject to
certain limitations and restrictions described below).
Upon completion of any offering and issuance of shares in connection
with future acquisitions of other retail jewelry businesses or properties, all
material information about the Company's offering and issuance of shares in
relation to the acquisition will be set forth in an amendment to the
Registration Statement. An amendment must become effective under the Securities
Act before any further shares may be sold hereunder. The effect of such offering
and issuance of shares on the aggregate number of the Company's shares of Common
Stock outstanding cannot be known at this time. Once the shares have been issued
in connection with an acquisition, or series of acquisitions, and the required
amendment to the Registration Statement has become effective, all of the issued
shares issued pursuant to the acquisition will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares issued to an "affiliate" of the Company.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares of a public
company for at least one year (including the holding period of any prior owner
except an affiliate) that were not acquired in a public offering is entitled to
sell in "broker's transactions" or to market makers, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding (approximately 50,002 shares
immediately after the Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Effective as of April 29, 1997, the holding period requirements contained in
Rule 144 have been changed from two years and three years to one year and two
years, respectively.
Prior to the Offering, there has been little public market for the
Common Stock, and no prediction can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on the
market price for Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception of the
availability of shares for sale, could adversely affect the prevailing market
price of the Common Stock and could impair the Company's ability to raise
capital through the sale of its equity securities.
PLAN OF DISTRIBUTION
Any distribution of the Stockholders' Offered Shares by the Selling
Stockholders, or by pledgees, donees, transferees or other
successors-in-interest, may be effected from time to time in one or more of the
following transactions (which may involve crosses or block transactions): (i) on
the NASD OTC Bulletin Board (or on such other national stock exchanges or
over-the-counter market on which the Common Stock may be listed from time to
time) in transactions which may include special offerings, exchange
distributions and/or secondary distributions pursuant to and in accordance with
the rules of such exchanges, including sales to underwriters who will acquire
the Stockholders' Offered Shares for their own account and resell them in one or
more transactions or through brokers, acting as principal or agent, (ii) in
transactions other than on such exchanges or in the over-the-counter market, or
a combination of such transactions, including sales through brokers, acting as
principal or agent, or in negotiated transactions, (iii) through the issuance of
securities by issuers other than the Company convertible into, exchangeable for,
or payable in such shares (whether such securities are listed on a national
securities exchange or otherwise) or (iv) through the writing of options on the
shares (whether such options are listed on an
35
<PAGE> 36
options exchange or otherwise) other transactions requiring delivery of the
shares or the delivery of the shares to close out a short position. Any such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at negotiated prices or at
fixed prices.
The Selling Stockholders and any such underwriters, brokers, dealers or
agents, upon effecting the sale of the Stockholders' Offered Shares may be
deemed "underwriters" as that term is defined by the Securities Act.
Underwriters participating in any offering made pursuant to this
prospectus (as amended or supplemented from time to time) may receive
underwriting discounts and commissions, and discounts or concessions may be
allowed or reallowed or paid to dealers, and brokers or agents participating in
such transactions may receive brokerage or agent's commissions or fees.
5,000,000 of the shares offered hereby may be offered and issued by the
Company from time to time in connection with future acquisitions of other
businesses or properties. It is anticipated that future acquisitions by the
Company will consist principally of additional retail jewelry and related
businesses. The consideration for acquisitions may include cash (including
installment payments), shares of Common Stock, guarantees, assumptions of
liabilities or any two or more of the foregoing, as determined from time to time
by negotiations between the Company and the owners or controlling persons of the
businesses or properties to be acquired. In addition, the Company may enter into
employment contracts and non-competition agreements with former owners and key
executive personnel of these acquired businesses. The Company at this time is
engaged in preliminary discussions with candidates for possible future
acquisitions. The Company reasonably expects the 5,000,000 shares to be offered
and sold within two years from the initial effective date of the registration.
The terms of a future acquisition will be determined by negotiations
between the Company's representatives and the owners or controlling persons of
the businesses or properties to be acquired, and the factors taken into account
in an acquisition may include among others the established quality and
reputation of the business and its management, gross revenues, earning power,
cash flow, growth potential, location of the business and properties to be
acquired and geographical diversification resulting from the acquisition. It is
anticipated that shares offered in connection with future acquisitions will be
valued at a price reasonably related to the current market value of the
Company's Common Stock either at the time the terms of the acquisition are
tentatively agreed upon or at or about the time or times of delivery of the
Company's shares. The Company does not expect to receive any cash proceeds
(other than cash balances of acquired companies) in connection with any such
issuances.
It is not expected that underwriting discounts or commissions will be
paid by the Company except that finder's fees, which may be in the form of
shares registered under this prospectus for the purpose of offering and issuance
in connection with future acquisitions, may be paid to persons from time to time
in connection with specific acquisitions. Any person receiving any such fees may
be deemed to be an underwriter within the meaning of the Securities Act.
A material acquisition or series of acquisitions (constituting in the
aggregate a material transaction) would require the Company to file an amendment
to the Registration Statement, of which this prospectus forms a part, discussing
or disclosing the acquisition or acquisitions and the effects on the Company.
That amendment must become effective under the Securities Act before any further
shares may be sold hereunder.
Any shares covered by this prospectus which qualify for sale pursuant
to Rule 144 under the Securities Act may be sold pursuant to Rule 144 rather
than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless they have been registered or qualified for sale in
such state or any exemption from registration or qualification is available and
complied with.
36
<PAGE> 37
Pursuant to the Registration Rights Agreement, the Company agreed to
cause the Registration Statement to include a resale prospectus that would
permit the Selling Stockholders to sell the Stockholders' Offered Shares without
restriction and to keep the Registration Statement continuously effective for a
certain period. The Company has agreed to pay certain expenses in connection
with such registration, including (1) all registration and filing fees, (2) fees
and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the securities registered), (3) printing expenses, (4)
internal expenses of the Company (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties), (5) reasonable fees and disbursements of counsel for the Company and
customary fees and expenses for independent certified public accountants
retained by the Company (including he expenses of any comfort letters or costs
associated with the delivery by independent certified public accountants of a
comfort letter or comfort letters but excluding costs associated with special
audits), (6) the reasonable fees and expenses of any special experts retained by
the Company in connection with such registration, (7) fees and expenses in
connection with any review of underwriting arrangements by the National
Association of Securities Dealers, Inc. including fees and expenses of any
"qualified independent underwriter" in connection with an underwritten offering
and (8) fees and disbursements of underwriters customarily paid by issuers or
sellers of securities in connection with an underwritten offering. The Company
will not be responsible for any underwriting fees, discounts or commissions in
connection with an underwritten offering or any out-of-pocket expenses
(including counsel fees and expenses) of the Selling Stockholders or any fees
and expenses of underwriters' counsel in connection with an underwritten
offering. In addition, the Selling Stockholders have agreed to pay all costs of
any special audits in connection with an underwritten offering and have agreed
to pay, or in the case of an underwritten offering to cause the underwriters to
pay, all out-of-pocket expenses of the Company in connection with any domestic
"road show" presentations. The Company and the Selling Stockholders have agreed
to indemnify each other and certain other persons against certain liabilities in
connection with the offering of the Stockholders' Offered Shares including
liabilities arising under the Securities Act. In connection with an underwritten
offering, the Company has agreed to indemnify any underwriter thereof and
certain other persons to the same extent as provided with respect to the
indemnification of the Selling Stockholder(s) if such underwriter agrees to
indemnify the Company to the same extent as provided with respect to the
indemnification of the Company by such Selling Stockholder(s). See "Management
- -- Certain Relationships and Related Transactions -- Registration Rights of
Selling Stockholders."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed on for the Company by Weil, Gotshal & Manges LLP, Houston, Texas.
EXPERTS
The financial statements of Barry's Jewelers, Inc. as of May 31, 1998
and 1997 and for each of the three years in the period ended May 31, 1998,
included in this prospectus and the related financial statement schedule
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement (which reports express an
unqualified opinion and include explanatory paragraphs referring to Barry's'
Jewelers, Inc.'s ability to continue as a going concern as a result of the
filing for reorganization under Chapter 11 of the Federal Bankruptcy Code), and
have been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
37
<PAGE> 38
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report...............................................................................F-2
Balance Sheets of Barry's Jewelers, Inc. as of May 31, 1998 and 1997................................ ......F-3
Statements of Operations of Barry's Jewelers, Inc. for the years ended May 31, 1998, 1997 and 1996.........F-4
Statements of Shareholders' (Deficiency) Equity of Barry's Jewelers, Inc. for the years ended May
31, 1998, 1997 and 1996..................................................................................F-5
Statements of Cash Flows of Barry's Jewelers, Inc. for the years ended May 31, 1998, 1997 and 1996.........F-6
Notes to Financial Statements..............................................................................F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Balance Sheets of Samuel's Jewelers, Inc. as of February 27, 1999 and Barry's Jewelers Inc. as of
May 31, 1998............................................................................................F-17
Statements of Operations of Samuel's Jewelers, Inc. for the Five Months ended February 27, 1999, and
of Barry's Jewelers, Inc. for the Four Months ended October 2, 1998 and the Nine Months ended
February 28, 1998.......................................................................................F-18
Statements of Cash Flows of Samuel's Jewelers, Inc. for the Five Months ended February 27, 1999, and
of Barry's Jewelers, Inc. for the Four Months ended October 2, 1998 and the Nine Months ended
February 28, 1998.......................................................................................F-19
Notes to Financial Statements.............................................................................F-20
FINANCIAL STATEMENT SCHEDULE
Schedule II, Valuation and Qualifying Accounts............................................................F-24
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Barry's Jewelers, Inc.
Austin, Texas
We have audited the accompanying balance sheets of Barry's Jewelers, Inc.
(Debtor-in-Possession) (the "Company") as of May 31, 1998 and 1997, and the
related statements of operations, shareholders' (deficiency) equity, and cash
flows for each of the three years in the period ended May 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item 14.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly,
in all material respects, the financial position of Barry's Jewelers, Inc. as of
May 31, 1998 and 1997, and the results of its operations and its cash flows for
each of the three years in the period ended May 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, the Company has filed
for reorganization under Chapter 11 of the Federal Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to shareholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is currently operating its business as
Debtor-in-Possession under the jurisdiction of the Bankruptcy Court, and
continuation of the Company as a going concern is contingent upon, among other
things, its ability to formulate a Plan of Reorganization, which will be
approved by its creditors and confirmed by the Bankruptcy Court, and its ability
to generate sufficient cash flows from operations and financing sources. The
uncertainties inherent in the bankruptcy process and the Company's recurring
losses from operations and shareholders' deficiency raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are discussed in Note 1 to the financial statements. The financial
statements do not include adjustments that might result from the outcome of this
uncertainty.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
August 25, 1998
F-2
<PAGE> 40
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS (Notes 1 and 6)
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 6) ...................................... $ 19,301 $ 7,322
Customer receivables, net of allowances for doubtful accounts of
$7,099 (1998) and $10,300 (1997) ..................................... 48,076 54,552
Merchandise inventories (Notes 3, 5 and 8) .............................. 26,993 41,374
Prepaid expenses and other current assets (Note 10) ..................... 1,569 2,142
--------- ---------
Total current assets ............................................ 95,939 105,390
Property and equipment: (Note 1)
Leasehold improvements, furniture and fixtures .......................... 17,824 20,726
Computers and equipment ................................................. 5,724 4,110
--------- ---------
23,548 24,836
Less: accumulated depreciation and amortization ......................... 10,250 9,413
--------- ---------
Net property and equipment .............................................. 13,298 15,423
Deferred income taxes (Note 7) .......................................... 72 72
Other assets, principally deferred debt issuance costs, net of
accumulated amortization of $2,427 (1998) and $1,834 (1997)
(Note 6).............................................................. 1,423 2,598
--------- ---------
Total assets .................................................... $ 110,732 $ 123,483
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY (Notes 1 and 6)
Current liabilities:
Accounts payable-- trade ................................................ $ 9,086 $ 221
Other accrued liabilities (Note 4) ...................................... 9,698 5,687
--------- ---------
Total current liabilities ....................................... 18,784 5,908
Liabilities subject to compromise under reorganization proceedings
(Notes 5 and 6) ......................................................... 126,812 130,271
Commitments and contingencies (Notes 8 and 9)
Shareholders' deficiency: (Note 9)
Common stock, no par value; authorized 8,000,000 shares; issued and
outstanding, 4,029,372 shares in 1998 and 1997 .......................... 33,247 33,247
Accumulated deficit ....................................................... (68,111) (45,943)
--------- ---------
Total shareholders' deficiency .................................. (34,864) (12,696)
--------- ---------
Total liabilities and shareholders' deficiency .................. $ 110,732 $ 123,483
========= =========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 41
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales .................................................. $ 113,873 $ 130,446 $ 140,145
Finance and credit insurance fees .......................... 11,316 13,900 16,008
--------- --------- ---------
125,189 144,346 156,153
--------- --------- ---------
Costs and expenses:
Cost of goods sold, buying and occupancy (Note 3) ....... 75,567 93,002 83,769
Selling, general and administrative expenses ............. 47,045 57,036 51,974
Provision for doubtful accounts .......................... 6,586 18,766 11,759
Impairment loss (Note 2) ................................. -- 3,947 --
Restructuring expenses (Note 1) .......................... -- 1,336 --
--------- --------- ---------
129,198 174,087 147,502
--------- --------- ---------
Operating (loss) income .................................. (4,009) (29,741) 8,651
Interest expense, net (excludes $5,989 of interest
expense in fiscal 1998 on Senior Secured Notes, Note 6)... 7,025 12,745 11,146
Reorganization costs (Notes 2, 8 and 10) ................... 11,134 2,322 --
--------- --------- ---------
Loss before income taxes and
extraordinary item ....................................... (22,168) (44,808) (2,495)
Income taxes (Note 7) ...................................... -- 284 288
--------- --------- ---------
Loss before extraordinary item ............................. (22,168) (45,092) (2,783)
Extraordinary item (Note 6) ................................ -- (876) --
--------- --------- ---------
Net loss ................................................... $ (22,168) $ (45,968) $ (2,783)
========= ========= =========
Basic and Diluted Per share data:
Loss before extraordinary item ........................... $ (5.50) $ (11.25) $ (0.70)
Extraordinary item (Note 6) .............................. $ -- $ (0.22) $ --
--------- --------- ---------
Loss ..................................................... $ (5.50) $ (11.47) $ (0.70)
========= ========= =========
Weighted-average number of common shares outstanding ..... 4,029 4,007 3,978
========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 42
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
-------------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ --------- -----
<S> <C> <C> <C> <C>
Balance at May 31, 1995 .................................... 3,969 $ 32,936 $ 2,808 $ 35,744
Net loss for the year .................................... (2,783) (2,783)
Utilization of pre-reorganization net operating
loss carryovers (Note 7) .............................. 173 173
Shares issued pursuant to employee stock
purchase plan (Note 9) ................................ 30 87 87
--------- --------- --------- ---------
Balance at May 31, 1996 .................................... 3,999 33,196 25 33,221
Net loss for the year .................................... (45,968) (45,968)
Shares issued pursuant to employment contracts
(Note 9) .............................................. 20 37 37
Shares issued pursuant to employee stock
purchase plan (Note 9) ................................ 10 14 14
--------- --------- --------- ---------
Balance at May 31, 1997 .................................... 4,029 $ 33,247 $ (45,943) $ (12,696)
Net loss for the year .................................... (22,168) (22,168)
--------- --------- --------- ---------
Balance at May 31, 1998 .................................... 4,029 $ 33,247 $ (68,111) $ (34,864)
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 43
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-----------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss ........................................................... $ (22,168) $ (45,968) $ (2,783)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 4,166 4,992 4,626
Impairment of long-lived assets ................................. -- 3,947 --
Extraordinary loss .............................................. -- 876 --
Compensation on issuance of common stock ........................ -- 37 --
Provision for doubtful accounts ................................. 6,586 18,766 11,759
Inventory valuation allowance ................................... (815) 3,033 --
Loss on sale or abandonment of property and equipment ........... 2,132 311 274
Deferred income taxes ........................................... -- 50 878
Changes in assets and liabilities:
Customer receivables ............................................ (110) (4,598) (10,395)
Merchandise inventories ......................................... 9,700 10,152 (724)
Prepaid expenses and other current assets ....................... 573 (111) (4)
Other assets .................................................... (141) (2,385) (1,336)
Restructuring and reorganization costs .......................... 3,090 2,752 --
Accounts payable-- trade ........................................ 8,865 6,728 (6,296)
Other accrued liabilities ....................................... 3,182 9,681 (1,995)
--------- --------- ---------
Net cash provided by (used in) operating
activities ............................................... 15,060 8,263 (5,996)
--------- --------- ---------
Cash Flows from Investing Activities:
Purchase of property and equipment ................................. (3,081) (7,158) (4,500)
Proceeds from sale of assets ....................................... -- 74 9
--------- --------- ---------
Net cash used in investing activities ...................... (3,081) (7,084) (4,491)
--------- --------- ---------
Cash Flows from Financing Activities:
Net borrowing (repayments) under revolving credit
facility ........................................................ -- 49,666 (13,435)
Net (repayments) borrowings under securitization
facility ........................................................ -- (45,119) 45,119
Proceeds from employee stock purchase plan ......................... -- 14 87
Principal payments on long-term debt ............................... -- (183) (473)
Reduction of long-term debt from securitization
transaction ..................................................... -- -- (20,000)
--------- --------- ---------
Net cash provided by financing activities .................. -- 4,378 11,298
--------- --------- ---------
Net increase in cash and cash equivalents ............................ 11,979 5,557 811
Cash and cash equivalents at beginning of year ....................... 7,322 1,765 954
--------- --------- ---------
Cash and cash equivalents at end of year ............................. $ 19,301 $ 7,322 $ 1,765
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest ........................................................ $ 5,760 $ 8,364 $ 11,338
Income taxes .................................................... $ -- $ 30 $ 543
Noncash investing and financing activities:
Merchandise inventory returned in exchange for pre-petition
liabilities (Notes 1 and 5) ..................................... $ 5,496 $ -- $ --
Capital lease obligations .......................................... $ -- $ -- $ 19
Utilization of pre-reorganization net operating loss
carryovers (increase to common stock and reduction of
current income taxes payable) ................................... $ -- $ -- $ 173
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE> 44
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. REORGANIZATION, BASIS OF PRESENTATION AND MANAGEMENT'S PLAN
Barry's Jewelers, Inc. (Debtor-in-Possession) (the "Company") operates a
chain of retail stores that sell fine jewelry and watches, utilizing credit
financing to enhance sales. Since May 11, 1997, the Company has operated as
"Debtor-in-Possession" under the protection of Chapter 11 of the United States
Bankruptcy Code ("Chapter 11"). It operated 117 stores on May 31, 1998; 130
stores on May 31, 1997; and 161 stores on May 31, 1996.
At the end of the third quarter of fiscal 1997, due to continued operating
losses, the Company was not in compliance with certain financial covenants
contained in the Second Amended Revolving Credit Agreement. As a result, the
Company was unable to make interest payments to the holders of the Senior
Secured Notes (Note 6). Additionally, most vendors were not extending terms, and
substantially all new merchandise purchases were on a cash basis. Because of
these restrictions on cash flow and an inability to renegotiate existing bank
debt or raise additional capital through other sources, the Company decided to
seek bankruptcy protection.
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. Since the
Petition Date, the Company has continued in possession of its properties and, as
Debtor-in-Possession, is 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. A statutory Creditors' Committee and
an official Bondholders' Committee have also been appointed.
In a Chapter 11 filing, substantially all liabilities as of the Petition
Date are subject to compromise or other treatment under a plan of
reorganization. For financial reporting purposes, those liabilities and
obligations whose disposition is dependent on the outcome of the Chapter 11
filing have been segregated and classified as liabilities subject to compromise
under reorganization proceedings in the accompanying balance sheets (Note 5).
Generally, actions to enforce or otherwise effect payment of all pre-Chapter 11
liabilities, as well as all pending litigation against the Company are stayed
while the Company continues its business operations as Debtor-in-Possession. The
Company has filed schedules with the Bankruptcy Court setting forth its assets
and liabilities as of the Petition Date as reflected in the Company's accounting
records. Differences between amounts reflected in such schedules and claims
filed by creditors are being investigated and either amicably resolved or
adjudicated before the Bankruptcy Court. The ultimate amount of and settlement
terms for such liabilities are subject to a plan of reorganization (see
discussion below regarding the Company's plan of reorganization).
Also, under the Bankruptcy Code, the Company may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other pre-petition executory contracts, subject to Bankruptcy
Court approval. The liabilities subject to compromise under reorganization
proceedings (Note 5) include a provision for the estimated amount that may be
claimed by lessors and allowed in connection with the unexpired real estate
leases and executory contracts.
Responding to the issues identified above, the new management team of the
Company developed a business plan to (1) reposition the Company's merchandise
selection, (2) establish vendor partnering programs to bring in new consignment
inventory and return aged merchandise to vendors in exchange for new inventory,
(3) establish a consistent store format and consolidate trade names, (4) adjust
the Company's pricing and commission structure to improve sales and strengthen
its competitive position, (5)
F-7
<PAGE> 45
pursue alternatives to an in-house credit and collection process, (6) install
modern merchandising and point-of-sale systems and (7) reduce corporate
overhead.
As part of the business plan, in July 1997, the Company reached an agreement
with its vendors and creditors, which was approved by the Bankruptcy Court,
regarding the terms of a trade debtor-in-possession financing agreement.
Pursuant to the agreement, the participating vendors allowed the Company to
return merchandise with a value equal to up to 75% of the vendor's pre-petition
claim up to an aggregate of approximately $8,000. Additionally, participating
vendors also provided revolving credit for merchandise purchases in an amount
equal to two and one-half times the value of the pre-petition merchandise
returned until the earlier of the confirmation of a plan of reorganization or
one year, on 90-day terms.
Additionally, the Company also reached an agreement in July 1997 with its
vendors and creditors, which was approved by the Bankruptcy Court, allowing the
Company to increase the level of consigned merchandise. Pursuant to the terms of
the agreement, certain Company vendors committed to maintaining a specified
minimum amount of consigned merchandise with the Company for a specified period.
The Company holds 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 also obtained
authorization to pay for any pre-petition consigned goods sold, with the consent
of the applicable consignors, after the petition date and the Company now has
disposed of approximately half of its pre-petition consigned inventory in that
manner.
On April 30, 1998, the Company filed its Original Disclosure Statement and
Plan of Reorganization (the "Plan"). Generally, the Plan provides for (a) the
payment in full of allowed administrative claims, priority claims, and priority
tax claims; (b) the payment in full of the approximately $57,880 in allowed
secured claims owed to the bank under the Company's revolving credit agreement,
including the payment of pre- and post-petition interest (see Note 6) and the
payment of the professional fees and expenses incurred by the bank during the
reorganization case; (c) the payment or other satisfaction of other allowed
secured claims; (d) the distribution of 2,500,000 shares of new common stock to
the holders of the senior secured notes in satisfaction of their secured and
unsecured claims of $50,000; (e) the offer and sale of an additional 2,250,000
shares of new common stock for an aggregate price of $15,000 to holders of the
senior secured notes; (f) either (1) if the amount of all other allowed
unsecured claims is equal to or exceeds $17,000, the payment of $2,550 to
holders of such claims to be distributed on a pro rata basis among such holders
plus simple interest at the rate of five percent per annum from the effective
date of the Plan until the date of the distribution to such holders, or (2) if
the amount of all other allowed unsecured claims is less than $17,000, the
payment of 15% of the amount of such allowed unsecured claims, plus simple
interest at the rate of five percent per annum from the effective date of the
Plan until the date of the distribution to such holders; and (g) in satisfaction
of the existing common stockholders' interests, the provision of 263,158
warrants distributed on a pro rata basis to holders of existing common stock,
which warrants will provide such holders with the right to purchase up to an
aggregate of five percent of the new common stock, on a fully diluted basis.
The sources of funds earmarked to pay creditors and shareholders under the
Plan include: (a) cash on hand; (b) a $50,000 Plan financing agreement with
Foothill Capital Corporation as a lender and as agent for an anticipated lender
group (Note 6); and (c) $15,000 in proceeds from the sale of new common stock to
participating holders of the senior secured notes. As indicated above, in lieu
of cash payments or other distributions of property to the holders of the senior
secured notes and holders of existing common stock, the reorganized Company will
issue new common stock and warrants, respectively, to such claimants.
On July 16, 1998, a hearing was held wherein the Bankruptcy Court approved
the Plan as containing adequate information to enable creditors and equity
security holders to make an informed judgement in determining whether to vote to
accept or reject the Plan. The Company has distributed the Plan to its creditors
and shareholders for the purpose of soliciting acceptances. The bankruptcy Court
established August 10, 1998 as the deadline for creditors and shareholders to
return their ballots, and the Company has received notice from the Bankruptcy
Court indicating that the Plan was preliminarily accepted by the
F-8
<PAGE> 46
creditors and equity security holders. The Bankruptcy Court has scheduled a
hearing to consider confirmation of the Plan on September 16, 1998.
The accompanying financial statements have been prepared in conformity with
principles of accounting applicable to a going concern, which contemplate the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has had recurring losses from operations and a
shareholders' deficiency. As a result of the Chapter 11 filing and circumstances
relating to this event, such realization of assets and satisfaction of
liabilities is subject to uncertainty. The plan of reorganization could
materially change the amounts reported in the accompanying financial statements,
which do not give effect to adjustments to the carrying values of assets and
liabilities, which may be necessary as a consequence of a plan of
reorganization. The Company's ability to continue as a going concern is
contingent upon, among other things, its ability to formulate a plan of
reorganization that will ultimately be confirmed by the Company's creditors,
shareholders and the Bankruptcy Court; to achieve satisfactory levels of
profitability and cash flow from operations, to maintain compliance with the
debtor-in-possession trade financing agreement and the cash stipulation
agreement (Note 6); to obtain sufficient financing sources to meet future
obligations; and comply with the terms and covenants of any financing eventually
obtained.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year. The Company changed its fiscal year-end during 1998 from May 31
to the Saturday closest to May 31. For ease of presentation, the Company's 1998
fiscal year, which represents the period from June 1, 1997 through May 30, 1998,
has been described in these financial statements as the year ended May 31, 1998.
Prior Reorganization. On February 26, 1992, the Company voluntarily
initiated a case under Chapter 11 of the United States Bankruptcy Code and filed
a pre-negotiated plan of reorganization. On June 19, 1992, the United States
Bankruptcy Court for the Central District of California entered an order
confirming the Company's Amended Plan of Reorganization, as modified (the "Prior
Reorganization Plan"). The effective date of the Prior Reorganization Plan was
June 30, 1992.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Customer Receivables. The Company offers its merchandise on credit terms to
qualified customers. The Company's policy is to attempt to obtain a cash down
payment on all credit sales, with remaining monthly payments established such
that the payment of the credit balance will occur, generally, over a period
ranging from 24 to 36 months. In accordance with industry practice, customer
receivables are included in current assets in the Company's balance sheet. The
Company routinely assesses the collectibility of its customer receivables.
The Company does business in 18 states, primarily California, Texas,
Arizona, Utah, North Carolina, Colorado, Idaho, Montana and Indiana. At May 31,
1998, approximately 39% and 33% of all customer accounts receivables are located
in Texas and California, respectively.
Merchandise Inventories. Merchandise inventories, substantially all of which
represent finished goods, are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. Three vendors accounted for 27%
and 25% of merchandise purchases for the years ended May 31, 1998 and 1997,
respectively.
Property and Equipment. Property and equipment in existence at June 30, 1992
were stated at fair values as of that date pursuant to fresh start reporting
adopted in connection with the Prior Reorganization Plan. Additions since June
30, 1992 are stated at cost.
F-9
<PAGE> 47
Depreciation and amortization of leasehold improvements, furniture and
fixtures, computers and equipment are computed by the straight-line method over
the lesser of related lease terms or the estimated useful lives of such assets
as set forth in the following table:
<TABLE>
<CAPTION>
USEFUL LIVES
IN YEARS
------------
<S> <C>
Leasehold improvements.................. 10-15
Furniture and fixtures.................. 5-10
Computers and equipment................. 5
</TABLE>
Impairment of Long-lived Assets. Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed of," requires an entity to review long-lived
assets for impairment and recognize a loss if expected future undiscounted cash
flows are less than the carrying amount of the assets; such losses are measured
as the difference between the carrying value and the estimated fair value of the
assets. The estimated fair value is determined based on expected future
discounted cash flows. The Company adopted this standard in fiscal 1997 and
recognized an impairment loss of approximately $3,947. This impairment loss is
comprised of leasehold improvements and fixtures at 37 closed stores, as well as
computer equipment and software related to the Company's plan to replace its
merchandise management and point-of-sale systems.
Deferred Debt Issuance. Deferred debt issuance costs are reported on the
Company's balance sheet as other assets and are being amortized on a
straight-line basis over the terms of the related financing agreements.
Revenue Recognition. The Company recognizes revenue upon delivery of
merchandise to the customer and either the receipt of a cash payment or approval
of a credit agreement.
Reorganization Costs. Expenditures directly related to the Chapter 11 filing
are classified as reorganization costs and are expensed as incurred (Note 10).
Income Taxes. Income taxes are computed using the liability method. The
provision for income taxes includes income taxes payable for the current period
and the deferred income tax consequences of transactions that have been
recognized in the Company's financial statements or income tax returns. The
carrying value of deferred income tax assets is determined based on an
evaluation of whether the realization of such assets is more likely than not.
Temporary differences result primarily from accrued liabilities, valuation
allowances, depreciation and amortization, and state franchise taxes.
Loss per Share. The Company adopted SFAS No. 128, "Earnings Per Share",
during the third quarter of fiscal 1998. SFAS No. 128 requires the Company to
present basic and diluted earnings per share on the face of the income
statement. Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing net income by the sum of the weighted average number of
common shares outstanding for the period plus the assumed exercise of all
dilutive securities. However, in the case of a loss per share, dilutive
securities outstanding would be antidilutive and would, therefore, be excluded
from the computation of diluted earnings per share. Diluted earnings per share
were the same as basic earnings per share.
Accounting for Stock-based Compensation. SFAS No. 123, "Accounting for
Stock-based Compensation" requires compensation expense equal to the fair value
of an option grant to be estimated using accepted option-pricing formulas when
an option is granted. The compensation may either be charged to the statement of
operations or set forth as pro forma information in the footnotes to the
financial statements, depending on the method elected by the Company upon
adoption of the standard. During fiscal 1997, the Company adopted the disclosure
requirements of SFAS No. 123 and elected to continue using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," for stock option expense
recognition. The Company has omitted the pro forma information required to be
disclosed due to immateriality.
F-10
<PAGE> 48
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
Fair Market Value of Financial Instruments. The carrying amounts of cash and
cash equivalents, customer receivables, trade accounts payable and other accrued
liabilities approximate fair value because of the short maturity of these
financial instruments. As a result of the Company's Chapter 11 filing, a limited
market has developed for the trading of financial instruments included as
liabilities subject to compromise. Since the market for claims against the
Company under Chapter 11 is not well developed, no reliable source of market
price is available.
Prospective Accounting Changes. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement will be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not yet analyzed the impact of adopting the statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which will be effective for the Company
beginning with fiscal 1999. SFAS No. 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about an enterprise's operating segments. The Company has not yet
completed its analysis of which operating segments it will report, if any.
3. INVENTORY VALUATION
In connection with the change in merchandising strategy developed by the
Company's new management team, an inventory valuation reserve of $3,033 was
established as of May 31, 1997. The inventory valuation reserve was $2,218 at
May 31, 1998. The reduction of the inventory valuation reserve is the result of
sales of merchandise below cost to reposition the Company's merchandise
selection. This valuation allowance adjusts the carrying value of ending
inventory to its estimated net realizable value.
4. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MAY 31,
-----------------
1998 1997
------- -------
<S> <C> <C>
Accrued wages and benefits........................ $ 3,450 $ 2,277
Accrued interest.................................. 790 617
Accrued professional fees......................... 1,766 254
Other accrued expenses............................ 2,517 1,453
Sales tax......................................... 686 633
Layaway and customer refunds...................... 489 453
------- -------
$ 9,698 $ 5,687
======= =======
</TABLE>
F-11
<PAGE> 49
5. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consist
of the following as of May 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Secured liabilities:
Borrowings outstanding under Revolving Credit Agreement
(Note 6) ................................................... $ 57,855 $ 57,855
Senior Secured Notes (includes interest payable of $3,073
accrued through Petition Date) (Note 6) .................... 53,073 53,073
Other notes payable and capital lease obligations ............. 88 88
--------- ---------
111,016 111,016
--------- ---------
Unsecured liabilities:
Trade accounts payable ........................................ 4,870 10,344
Other accrued expenses (includes restructuring and
reorganization expenses) ................................... 10,926 8,911
--------- ---------
15,796 19,255
--------- ---------
$ 126,812 $ 130,271
========= =========
</TABLE>
In 1998, the Company returned approximately $5,496 of merchandise inventory
in exchange for pre-petition vendor liabilities under the terms of the trade
debtor-in-possession financing agreement (Note 1), incurred additional lease
rejection claims of $1,127 and increased unsecured liabilities by $910 (net of
certain payments of pre-petition liabilities with the approval of the Court) as
a result of the reconciliation of pre-petition claims.
Any plan of reorganization ultimately approved by the Company's impaired
pre-petition creditors and shareholders and confirmed by the Bankruptcy Court
may materially change the amounts and terms of these pre-petition liabilities.
Such amounts are estimated as of May 31, 1998, and the Company anticipates that
claims filed with the Bankruptcy Court by the Company's creditors will continue
to be reconciled to the Company's financial records. Based on the successful,
pending, and anticipated objections to claims, the Company estimates that the
aggregate amount of allowed unsecured claims will be approximately $15,000 to
$17,000. The termination of other contractual obligations and the settlement of
disputed claims may create additional pre-petition liabilities. Such amounts, if
any, will be recognized in the balance sheet as they are identified and become
subject to reasonable estimation.
6. LONG-TERM DEBT
Long-term debt consists of the following (amounts are included with
Liabilities Subject to Compromise -- Note 5):
<TABLE>
<CAPTION>
MAY 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revolving Credit Agreement .................................. $ 57,855 $ 57,855
Senior Secured Notes ........................................ 50,000 50,000
Other notes payable and capital lease obligations............ 88 88
--------- ---------
107,943 107,943
========= =========
</TABLE>
In 1995 the Company completed an accounts receivable securitization ("the
Securitization Facility"). In connection with the securitization facility, the
Company entered into an amended and restated revolving credit facility (the
"Revolving Credit Agreement"). The Company granted the lender under the
Revolving Credit Agreement a lien on substantially all of its assets and
properties. Both the Securitization Facility and the Revolving Credit Agreement
were three-year facilities.
The Senior Secured Notes bear interest at 11% per annum, payable
semiannually on April 30 and October 31, are due December 22, 2000, and are
secured by an interest in the Company's assets that is second in priority to the
obligations pursuant to the Revolving Credit Agreement. As indicated in the
Plan, the Senior Secured Notes will be exchanged for common stock in the new
reorganized company. Accordingly, interest expense of $5,989 on these notes was
not recorded because management believes that it is unlikely that such interest
will be paid and because the accrued interest on the Senior Secured Notes will
not become an allowed claim.
F-12
<PAGE> 50
During the first quarter of fiscal 1997, the Company was notified that the
Agent of the Securitization Facility desired to extinguish the commitment under
the facility. On August 30, 1996, in conjunction with the termination of the
Securitization Facility, the Company entered into an amended revolving credit
agreement (the "Amended Revolving Credit Agreement") and paid fees of
approximately $2,305, which it deferred and is amortizing over the term of the
agreement. On August 30, 1996, the indenture governing the Senior Secured Notes
was also amended to the extent required to permit the consummation of the
Amended Revolving Credit Agreement and the termination of the Securitization
Facility. The Company recorded an extraordinary charge in 1997 of $876 in
connection with the early extinguishment of the Securitization Facility.
On January 27, 1997, the Company's Amended Revolving Credit Agreement was
amended again (the "Second Amended Revolving Credit Agreement"), and the bank
waived the Company's non-compliance with certain financial covenants therein for
the quarter ended November 30, 1996 and reduced its commitment to lend to the
Company from $85,000 to $70,000 as of January 27, 1997 through May 31, 1997, at
which time the commitment would be further reduced to $65,000 from June 1, 1997
through the final maturity date of August 31, 1999. Outstanding borrowings bear
interest at the agent bank's reference rate plus 1.5% unless an Event of Default
(as defined in the Second Amended Revolving Credit Agreement) has occurred and
is continuing, or is not waived, in which case such outstanding borrowings bear
interest at 3.0% above the rate otherwise payable. During fiscal 1998, the 3.0%
default rate was waived by the lender.
The Company again failed to meet certain financial covenants contained in
the Second Amended Revolving Credit Agreement at February 28, 1997, which
constituted an Event of Default, and the bank did not waive the Company's
non-compliance with these financial covenants. Additionally, the Event of
Default prohibited the Company from paying the interest on the Senior Secured
Notes due on April 30, 1997.
Loans outstanding of $57,855 under the Second Amended Revolving Credit
Agreement at May 31, 1998 bear a weighted-average interest rate of 10.0%. All
debt has been classified as liabilities subject to compromise in the
accompanying balance sheet as a result of the Chapter 11 filing (Note 1).
On May 14, 1997, the Company received interim approval of the Bankruptcy
Court of an Agreement to Use Cash Collateral. The Company operated under this
agreement until July 22, 1997, at which time it received final court approval of
an Amended and Restated Stipulation Pursuant to Sections 361 and 363 of the
Bankruptcy Code Authorizing Debtor's Use of Cash Collateral and Granting
Adequate Protection to Collateral Agent, Lenders and Bondholders (the "Cash
Stipulation"), which expired February 28, 1998. The Cash Stipulation was
subsequently amended on several occasions to continue the Company's use of cash
collateral through and including August 31, 1998. The Company is currently
awaiting Bankruptcy Court approval to further extend the Company's use of cash
collateral through and including October 14, 1998. At May 31, 1998,
approximately $6,974 of the Company's cash balance was restricted from use in
accordance with the terms of the Cash Stipulation.
7. INCOME TAXES
At May 31, 1998, the Company had a net operating loss carryforward for
federal income tax purposes of $96,206, which is scheduled to expire in the
years May 31, 2006 through May 31, 2012. Of this, approximately $19,965 is
scheduled to expire in the years May 31, 2006 through May 31, 2008, and is
subject to the limitations imposed under Internal Revenue Code ("IRC") Section
382.
Section 382 of the IRC provides a limitation (Section 382 limitation) on the
use of net operating loss carryovers, net operating losses, and certain built-in
losses and deduction items of a loss corporation that has an ownership change.
For financial statement purposes, utilization of a net operating loss, under
Section 382 of the IRC, is recorded as a credit to common stock.
F-13
<PAGE> 51
In September of 1998, the Company expects to finalize its current plan of
reorganization, which will create another ownership change. Such ownership
change will subject the remaining $76,241 of net operating loss carryforwards to
the limitations imposed under IRC Section 382. The extent of the impairment will
be known after the Company performs a detailed Section 382 analysis after the
date of the ownership change.
At May 31, 1998 and 1997, the Company has recorded a noncurrent deferred tax
asset of $72, representing alternative minimum tax (AMT) credit carryforwards.
Unlike net operating loss carryforwards, the AMT credit has an indefinite
carryforward period. The Company maintains a valuation allowance against the net
deferred tax assets, which, in management's opinion, reflects the net deferred
tax asset that is more likely than not to be realized.
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 31,
--------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal .......... $ -- $ 204 $ (630)
State ............ -- 30 40
------ ------ ------
-- 234 (590)
====== ====== ======
Deferred:
Federal .......... -- 50 285
State ............ -- -- 593
------ ------ ------
-- 50 878
------ ------ ------
$ -- $ 284 $ 288
====== ====== ======
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 31,
-------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory rate ................................... (35.0)% (35.0)% (35.0)%
Surtax benefit ................................... 1.0 1.0 1.0
State taxes (net of federal ...................... -- -- 1.1
benefit)
Valuation allowance .............................. 34.0 35.4 41.7
Alternative minimum tax credits .................. -- -- --
Other ............................................ (0.8) 2.7
---- ---- ----
0.0% 0.6% 11.5%
==== ==== ====
</TABLE>
Significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
MAY 31, MAY 31,
1998 1997
-------- --------
<S> <C> <C>
Current tax assets:
Liabilities subject to
compromise ................................... $ 5,078 $ 5,078
Customer accounts receivable ................... 3,084 4,455
Merchandise inventories ........................ 1,312 1,313
Vacation accrual ............................... 341 318
State franchise taxes .......................... (1,018) (741)
-------- --------
8,797 10,423
-------- --------
Noncurrent tax assets:
State franchise taxes .......................... (1,390) (1,346)
Net operating loss
carryforwards ................................ 38,122 28,921
Other .......................................... 268 476
-------- --------
37,000 28,051
-------- --------
Total deferred tax assets ........................ 45,797 38,474
Valuation allowance .............................. (45,725) (38,402)
-------- --------
Net deferred tax assets .......................... $ 72 $ 72
======== ========
</TABLE>
F-14
<PAGE> 52
8. COMMITMENTS AND CONTINGENCIES
The Company leases store and office facilities and certain equipment used in
its regular operations under operating leases, which expire at various dates
through 2007. The store leases provide for additional rentals based upon sales
and for payment of taxes, insurance and certain other expenses. Rent expense
charged to operations is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Minimum rentals............................. $ 9,373 $ 11,616 $ 10,514
Contingent rentals.......................... 2,216 2,706 2,829
-------- -------- --------
$ 11,589 $ 14,322 $ 13,343
======== ======== ========
</TABLE>
Included in the above table is rent expense paid to officers/shareholders
related to certain stores and the office facility of $683, $649 and $684,
respectively for the fiscal years ended May 31, 1998, 1997, and 1996.
Subject to the approval of the Bankruptcy Court, the Company can reject
executory contracts, including leases, under the relevant provisions of the
Bankruptcy Code. Rejection of a lease gives the lessor the right to assert a
pre-petition claim against the Company. However, the amount of the claim may be
limited by the Bankruptcy Court. In connection with the closure of certain
stores (Note 1), certain leases have been renegotiated, settled, or rejected.
The expected cost of such lease terminations are included in reorganization
expenses in the statement of operations (Note 10).
Minimum rental commitments for all remaining noncancelable leases in effect
as of May 31, 1998 are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING
MAY 31,
-----------------------------
<S> <C>
1999............. $ 6,822
2000............. 6,099
2001............. 5,501
2002............. 5,126
2003............. 4,910
Thereafter....... 10,746
--------
$ 39,204
========
</TABLE>
The Company enters into consignment inventory agreements with its key
vendors in the ordinary course of business. During fiscal 1998, consignment
inventory on hand ranged from $20,000 to $40,000. These amounts are excluded
from the merchandise inventory balance on the accompanying balance sheet.
The Company is from time to time involved in routine litigation incidental
to the conduct of its business. Based upon discussions with legal counsel,
management believes that its litigation currently pending, other than its
Chapter 11 proceedings previously discussed, will not have a material adverse
effect on the Company's financial position or results of operations.
9. SHAREHOLDERS' DEFICIENCY
Stock Option Plans. At May 31, 1998, the Company had 159,093 options
outstanding with exercise prices ranging from $1.69 to $4.13. Additionally, the
Company had warrants outstanding to purchase an aggregate of 50,000 shares of
the Company's common stock at a price of $16.75 per share. Because the exercise
price of these options and warrants are substantially above the current market
price of the Company's common stock, and because the Company expects all options
and warrants to be cancelled upon confirmation of the Plan, certain option and
warrant disclosures were omitted due to their insignificance.
Employee Incentive Stock Plan. The Employee Incentive Stock Plan provides
for the grant by the Company of shares of common stock for no consideration
(other than past services). The Employee Incentive Stock Plan has a term of 10
years. A total of 100,000 shares of common stock have been reserved
F-15
<PAGE> 53
for issuance pursuant to the Employee Incentive Stock Plan. A total of 90,000
shares were issued under the plan during 1992 and 1993.
Employee Stock Purchase Plan. On November 1, 1994, shareholders of the
Company approved the Company's Employee Stock Purchase Plan, which enables
substantially all employees of the Company with more than one year of service to
purchase shares of the Company's common stock at not less than 85% of the fair
market value at the date of purchase during one or more offering periods
specified by the Company. A total of 50,000 shares were authorized for issuance
under this plan; 9,956 and 30,441 shares of common stock were purchased under
this plan during fiscal 1997 and 1996, respectively. Additionally, on February
13, 1997, the Company issued 20,000 shares of common stock to two former
executives in accordance with their employment agreements. The Company
recognized compensation expense of approximately $37 in connection with this
stock issuance. No shares of common stock were purchased under this plan during
fiscal 1998.
Nonqualified Deferred Compensation Plan. On June 1, 1994, a Nonqualified
Deferred Compensation Plan was established for the benefit of a select group of
management, highly compensated employees and/or Directors who contribute
materially to continued growth, development and business success of the Company.
The plan is unfunded for tax purposes and for the purposes of Title I of ERISA.
401(k) Retirement Plan. The Board of Directors adopted a qualified 401(k)
retirement plan effective June 1, 1995. Substantially all employees of the
Company are eligible to participate in the Company's 401(k) plan upon attaining
age 21 and six consecutive months of service. Employees may elect to contribute
1% to 15% of their compensation, subject to certain IRS limitations. Employer
matching contributions are determined annually by a Board of Directors
resolution. No employer matching contributions were granted during fiscal 1998,
1997 or 1996. Participants are partially vested in employer matching
contributions after two years and fully vested after five years of employment
with the Company.
10. REORGANIZATION COSTS
Reorganization costs for the years ended May 31, 1998 and 1997 consisted of
the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED MAY 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Professional fees .......................................... $ 5,662 $ 462
Loss on disposal of property and equipment (related to
13 store closures and the Company's former
headquarters) ........................................... 2,448
Adjustments to pre-petition unsecured liabilities .......... 1,440
Provision for lease rejection claims ....................... 1,127 1,860
Employee costs related to the Chapter 11 filing ............ 696
Other ...................................................... 586
Interest earned on accumulated cash resulting from
Chapter 11 filing ....................................... (825)
-------- --------
Total ...................................................... $ 11,134 $ 2,322
======== ========
</TABLE>
Cash paid (net of interest income) for reorganization costs during the years
ended May 31, 1998 and 1997 amounted to $3,579 and $1,205, respectively.
Retainers paid to professionals are included in prepaid and other current assets
in the accompanying 1997 balance sheet.
F-16
<PAGE> 54
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
BALANCE SHEETS
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
The Company Barry's
February 27, May 31,
1999 1998
------------ -----------
<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):
Preferred Stock, $.001 par value; authorized 20,000,000 shares; none
issued and outstanding at February 27, 1999 -- --
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) --
Retained Earnings (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.
F-17
<PAGE> 55
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(unaudited)
<TABLE>
<CAPTION>
The Company Barry's Barry's
Five Months Four Months Nine Months
Ended Ended Ended
February 27, October 2, February 28,
1999 1998 1998
--------------- ---------------- ----------------
<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 Barry's 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.
F-18
<PAGE> 56
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
<TABLE>
<CAPTION>
The Company Barry's Barry's
Five Months Four Months Nine Months
Ended Ended Ended
February 27, October 2, February 28,
1999 1998 1998
------------------ ------------------ -------------------
<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 --
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
======== ======== ========
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE> 57
SAMUELS JEWELERS, INC.
(FORMERLY KNOWN AS BARRY'S JEWELERS, INC., DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements as of and for the five months ended
February 27, 1999 reflect the operations of Samuels Jewelers, Inc. (the
"Company"). The accompanying financial statements for the four months ended
October 2, 1998 and the nine months ended February 28, 1998, reflect the
operations of Barry's Jewelers, Inc. (Debtor-in-possession) prior to the
reorganization under Chapter 11 of the United States Bankruptcy Code and are
referred to as Barry's operations. Because of the plan of reorganization, the
application of Fresh Start Reporting (see Note 2) on the assets and liabilities
of the Company and the resulting reorganization value in excess of amounts
allocated to identifiable assets, the accompanying financial statements of the
Company are not directly comparable to those of Barry's.
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 five
months ended February 27, 1999 consists of the twenty-one weeks then ended,
while the period ended February 28, 1998 consists of the nine months then ended.
Samuels Jewelers, Inc. operates 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. Three vendors accounted for 41% of merchandise
purchases for the nine months ended February 27, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement will be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company has
not yet analyzed the impact of adopting the statement.
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
F-20
<PAGE> 58
Exhibits to the Company's Current Report on Form 8-K dated September 16, 1998.
Please refer to such documents for more information.
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.
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 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.
F-21
<PAGE> 59
3. LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDINGS
Liabilities subject to compromise under reorganization proceedings consisted of
the following at May 31, 1998:
<TABLE>
<CAPTION>
May 30, 1998
------------
<S> <C>
Secured liabilities:
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.
4. LONG-TERM DEBT
On October 2, 1998, the Company entered into a three year, $50,000,000 financing
agreement with a financial institution 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.
The financing agreement contains covenants that limit the Company's actions with
regard to the following: the incurrence of additional indebtedness; the payment
of dividends; the redemption of capital stock; the making of certain
investments; the issuance of guarantees; transactions with affiliates; asset
sales; making excessive annual capital expenditures; and certain mergers and
consolidations. The limitations on the Company's ability of making certain
investments includes a limitation on the monetary amount that may be outstanding
pursuant to such investments in the aggregate at one time. The limitation on
capital expenditures places a cap on the total capital expenditures permitted
the Company under the financing agreement for its fiscal years 1999 and
thereafter. The financing agreement also contains a covenant requiring the
Company to meet the following financial tests: (i) unless waived by the Lenders,
a credit-sales-to-overall-sales ratio of less than 60% as of the end of any
month, and (ii) a tangible net worth of $26,000,000 as of May 29, 1999, a
tangible net worth of $24,000,000 as of August 29, 1999, a tangible net worth of
$20,000,000 as of November 27, 1999, and a tangible net worth in amounts
acceptable to the Lenders based on the Company's financial projections for
periods thereafter. A breach of any of these covenants under the financing
agreement could result in an event of default and, in such instances, the
F-22
<PAGE> 60
Lenders could elect to declare all amounts borrowed, together with accrued
interest, to be immediately payable and could terminate all commitments
thereunder.
As of February 27, 1999, the Company had direct borrowings of $42,086,000
outstanding with additional credit available of approximately $7,914,000.
5. INCOME TAXES
The Company's effective tax rate differs from the federal statutory rate due to
the utilization of pre-reorganization net operating losses for the five-month
period ended February 27, 1999 and the recognition of valuation allowances
offsetting deferred income tax assets for the four months ended October 2, 1998
and the nine months ended February 28, 1998.
6. RELATED PARTY TRANSACTIONS
The Company entered into Employment Agreements with its executive officers (the
"employees" for purposes of this section) in which it agreed to provide the
employees with a signing bonus in the form of equity grants that vest in 25%
increments on the date as of such grant and the three successive anniversaries
thereof. The Company agreed to lend the employees, in varying amounts, sums to
compensate for the taxes incurred as a result of the grants. The employees are
obligated, under their respective Employment Agreements, to repay the principal
and interest on the loan quarterly for three years at the lowest statutory
interest rate necessary for tax purposes. The Company holds twelve promissory
notes for each of the employees to secure the repayment. The Company also agreed
to pay the employees a bonus equal to the amounts of principal (but not
interest) due under the aforementioned promissory notes on the dates the
employees are obligated to make their respective quarterly payments as long as
the respective related employee remains employed on that date. In the event the
employees voluntarily terminate their employment or they are terminated by the
Company for cause, the unpaid portion of the respective employee will be
accelerated and all of the promissory notes related thereto will become due and
payable within ninety days of the date of termination. In the event the
employees are terminated by the Company for other reasons, the respective
employee's signing bonus grant immediately vests and the Company is obligated to
pay the respective related employee a one time lump sum bonus equal to the
principal amount of any remaining outstanding promissory notes related to the
grant to that respective employee.
F-23
<PAGE> 61
SCHEDULE II
BARRY'S JEWELERS, INC.
(DEBTOR-IN-POSSESSION)
VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGE TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS/ END OF
OF PERIOD EXPENSES OTHER PERIOD
--------- -------- ----- ------
<S> <C> <C> <C> <C>
YEAR END 1998:
Allowance for doubtful accounts $ 10,300 $ 6,586 $ (9,787) $ 7,099
Inventory valuation allowance $ 3,033 $ $ 815 $ 2,218
YEAR END 1997:
Allowance for doubtful accounts $ 10,930 $ 18,766 $ (19,396) $ 10,300
Inventory valuation allowance $ $ 3,033 $ $ 3,033
YEAR END 1996:
Allowance for doubtful accounts $ 11,662 $ 11,839 $ (12,571) $ 10,930
</TABLE>
F-24
<PAGE> 62
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION.
WE DO NOT CLAIM THE ACCURACY OF THE INFORMATION IN THIS PROSPECTUS AS
OF ANY DATE OTHER THAN THE DATE STATED ON THE COVER OF THIS PROSPECTUS.
WE ARE NOT OFFERING ANY SHARES OTHER THAN THOSE BEING REGISTERED
HEREIN.
WE ARE NOT OFFERING ANY SHARES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Risk Factors.......................................4
Use of Proceeds...................................10
Dividend Policy...................................10
Capitalization....................................10
Dilution..........................................10
Selected Historical Financial Data................12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................13
Business and Properties...........................20
Management........................................26
Security Ownership of Certain Beneficial
Owners and Management........................28
Compensation of Directors and Executive
Officers.....................................30
Description of Capital Stock......................33
Shares Eligible for Future Sale...................35
Plan of Distribution..............................35
Legal Matters.....................................37
Experts...........................................37
Index to Financial Statements....................F-1
</TABLE>
--------------------
SELLING STOCKHOLDERS ARE REQUIRED TO DELIVER A PROSPECTUS IF THEY OFFER
THEIR SHARES.
7,790,950 SHARES
[SAMUELS LOGO]
A 100 Year Diamond Tradition
2914 Montopolis Drive
Suite 200
Austin, Texas 78741
COMMON STOCK
--------------------
P R O S P E C T U S
--------------------
--------------------
May __, 1999
S-1
<PAGE> 63
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the estimated expenses of the issuance and
distribution of the securities being registered payable by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.................................. $ 8,393
Printing expenses.................................................................... 2,000
Blue Sky filing fees and expenses.................................................... --
Accountants' fees.................................................................... 50,000
Counsel fees......................................................................... 60,000
Transfer agent and registrar fees.................................................... --
Miscellaneous........................................................................ --
---------
Total........................................................................ $ 120,393
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may limit the liability of and indemnify its
directors and officers against liability in a variety of circumstances. In
accordance with the DGCL, the Company's Certificate of Incorporation contains
provisions eliminating the personal liability of the directors except for
liability for (a) a breach of his or her duty of loyalty to the Company or to
its stockholders, (b) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (c) dividends or stock
repurchases or redemptions that are unlawful under Delaware law and (d) any
transaction from which he or she receives an improper personal benefit.
The Company also maintains directors' and officers' liability insurance
which insures the Company's directors and officers against certain liabilities
which may arise from the performance of their respective duties, including
liabilities associated with certain violations of securities laws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1* Order Confirming Original Disclosure Statement and Plan of Reorganization, Dated April 30,
1998, Proposed by Barry's Jewelers, Inc., as modified, dated September 16, 1998 (with Plan
attached).
2.2* Certificate of Ownership and Merger of Barry's Jewelers, Inc. with and into Sameuls
Jewelers, Inc. dated October 2, 1998.
3.1* Certificate of Incorporation of Samuels Jewelers, Inc.
3.2* Bylaws of Samuels Jewelers, Inc.
</TABLE>
S-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
4.1* Warrant Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Norwest
Bank Minnesota, N.A., as Warrant Agent.
4.2* Registration Rights Agreement dated as of October 2, 1998
among Samuels Jewelers, Inc., The Galileo Fund, L.P., B
III Capital partners, L.P., DDJ Overseas Corporation,
Paine Webber High Income Fund, Managed High Yield Fund
Inc., All-American Term Trust Inc. and Paine Webber
Offshore Funds PLC, The High Income Fund.
4.3** Samuels Jewelers, Inc. 1998 Stock Option Plan dated as of October 2, 1998.
5.1 Opinion of Weil, Gotshal & Manges, LLP
10.1* Loan and Security Agreement dated October 2, 1998, between Samuels Jewelers, Inc. and
Foothill Capital Corporation, as agent for certain lenders party thereto.
10.2* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Randy N.
McCullough.
10.3* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and E. Peter
Healey.
10.4* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Chad C.
Haggar.
10.5* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Bill R.
Edgel.
10.6* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Paul
Hart.
10.7 Amendment Number One to Loan and Security Agreement, dated
as of April 15, 1999, between Samuels Jewelers, Inc. and
Foothill Capital Corporation, as agent for certain lenders
party thereto.
23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
</TABLE>
* Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 2, 1998.
** Incorporated by reference to the Company's Proxy Statement Pursuant to
Section 14(a) of the Securities and Exchange Act filed on October 21, 1998
and located at SEC file # 000-15017.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on October 2, 1998.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person in the
S-3
<PAGE> 65
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the registrant in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the law or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement,
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
S-4
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Austin, State of Texas on May 20, 1999.
SAMUELS JEWELERS, INC.
By: /s/ RANDY N. MCCULLOUGH
-----------------------------------------------
Randy N. McCullough
President, Chief Executive Officer and Director
S-5
<PAGE> 67
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
designates and appoints Randy N. McCullough and E. Peter Healey and each of them
(with full power to each of them to act alone) as its or his attorney-in-fact,
with full power of substitution and resubstitution (the "Attorneys-in-Fact"),
for it or him and in its or his name, place and stead, in any and all
capacities, to execute one or more amendments (including post-effective
amendments) to this Registration Statement, which amendments may make such
changes in this Registration Statement as the Attorney-in-Fact deems
appropriate, and to file each such amendment to this Registration Statement
together with all exhibits thereto and any and all documents in connection
therewith
Pursuant to the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RANDY N. MCCULLOUGH President, Chief Executive Officer and April 30, 1999
- ------------------------------------ Director
Randy N. McCullough (principal executive officer)
/s/ E. PETER HEALEY Executive Vice President, Chief Financial April 30, 1999
- ------------------------------------ Officer, Secretary, Treasurer and Director
E. Peter Healey (principal financial officer)
/s/ ROBERT J. HERMAN Vice President and Controller April 30, 1999
- ------------------------------------ (principal accounting officer)
Robert J. Herman
/s/ DAVID BARR
- ------------------------------------ Director April 30, 1999
David Barr
/s/ DAVID J. BREAZZANO
- ------------------------------------ Director April 30, 1999
David J. Breazzano
/s/ KEN D'AMATO
- ------------------------------------ Director April 30, 1999
Ken D'Amato
/s/ DAVID H. EISENBERG
- ------------------------------------ Director April 30, 1999
David H. Eisenberg
/s/ JERRY WINSTON
- ------------------------------------ Director April 30, 1999
Jerry Winston
</TABLE>
S-6
<PAGE> 68
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1* Order Confirming Original Disclosure Statement and Plan of Reorganization, Dated April 30,
1998, Proposed by Barry's Jewelers, Inc., as modified, dated September 16, 1998 (with Plan
attached).
2.2* Certificate of Ownership and Merger of Barry's Jewelers, Inc. with and into Sameuls
Jewelers, Inc. dated October 2, 1998.
3.1* Certificate of Incorporation of Samuels Jewelers, Inc.
3.2* Bylaws of Samuels Jewelers, Inc.
4.1* Warrant Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Norwest
Bank Minnesota, N.A., as Warrant Agent.
4.2* Registration Rights Agreement dated as of October 2, 1998
among Samuels Jewelers, Inc., The Galileo Fund, L.P., B
III Capital partners, L.P., DDJ Overseas Corporation,
Paine Webber High Income Fund, Managed High Yield Fund
Inc., All-American Term Trust Inc. and Paine Webber
Offshore Funds PLC, The High Income Fund.
4.3** Samuels Jewelers, Inc. 1998 Stock Option Plan dated as of October 2, 1998.
5.1 Opinion of Weil, Gotshal & Manges, LLP
10.1* Loan and Security Agreement dated October 2, 1998, between Samuels Jewelers, Inc. and
Foothill Capital Corporation, as agent for certain lenders party thereto.
10.2* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Randy N.
McCullough.
10.3* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and E. Peter
Healey.
10.4* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Chad C.
Haggar.
10.5* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Bill R.
Edgel.
10.6* Employment Agreement dated as of October 2, 1998 between Samuels Jewelers, Inc. and Paul
Hart.
10.7 Amendment Number One to Loan and Security Agreement, dated
as of April 15, 1999, between Samuels Jewelers, Inc. and
Foothill Capital Corporation, as agent for certain lenders
party thereto.
23.1 Consent of Weil, Gotshal & Manges LLP (contained in Exhibit 5.1)
23.2 Consent of Deloitte & Touche LLP
</TABLE>
* Incorporated by reference to the Company's Current Report on Form 8-K
filed on October 2, 1998.
** Incorporated by reference to the Company's Proxy Statement Pursuant to
Section 14(a) of the Securities and Exchange Act filed on October 21, 1998
and located at SEC file # 000-15017.
<PAGE> 1
EXHIBIT 5.1
May 20, 1999
Samuels Jewelers, Inc.
2914 Montopolis Drive, Suite 200
Austin, Texas 78741
Gentlemen:
We have acted as counsel to Samuels Jewelers, Inc., a Delaware
corporation (the "Company"), in connection with the execution and delivery of,
and the consummation of the transactions contemplated by, the Registration
Statement on Form S-1 (the "Registration Statement"), filed with the Securities
and Exchange Commission as of the date hereof, with respect to the offering of
7,790,950 shares (the "Shares") of common stock, par value $.001 per share, of
the Company ("Common Stock") by the Company and the Selling Stockholders.
Capitalized terms defined in the Registration Statement and used but not
otherwise defined herein are used herein as so defined.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of (i) the Registration Statement,
(ii) such other corporate records, agreements, documents and other instruments,
and such certificates or comparable documents of public officials and of
officers and representatives of the Company, and we have made such inquiries of
such officers and representatives, as we have deemed relevant and necessary as
a basis for the opinions hereinafter set forth, (iii) the prospectus of the
Company dated the date hereof (the "Prospectus").
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to all questions of
fact material to this opinion that have not been independently established, we
have relied upon certificates or comparable documents of officers and
representatives of the Company (copies of which have been furnished to you). As
used herein, "to our knowledge" means the conscious awareness of facts or other
information by any lawyer in our firm actively involved in drafting the
Registration Statement and the transactions contemplated thereby.
Based on the foregoing, and subject to the qualifications stated
herein, we are of the opinion that the authorized capital stock of the Company
consists of 20,000,000 shares of common stock, par value $.001 per share, and
20,000,000 shares of preferred stock, par value $.001 per share. As of the open
of business on May 20, 1999, there were 5,001,800 shares of common stock and no
shares of preferred stock issued and
<PAGE> 2
outstanding. All of such outstanding shares of the Company's capital stock have
been duly authorized and validly issued, are fully paid and nonassessable, have
not been issued in violation of any preemptive rights pursuant to law or in the
Company's Certificate of Incorporation and conform as to legal matters in all
material respects to the description thereof contained in the Prospectus.
The opinions expressed herein are limited to the corporate laws of the
State of Delaware and the federal laws of the United States, and we express no
opinion as to the effect on the matters covered by this letter of the laws of
any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. Those opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent.
Very truly yours,
2
<PAGE> 1
EXHIBIT 10.7
AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT
This Amendment Number One to Loan and Security Agreement ("Amendment")
is entered into as of April 15, 1999, among SAMUELS JEWELERS, INC., a Delaware
corporation (the "Borrower"), on the one hand, and the financial institutions
listed on the signature pages hereof (such financial institutions, together
with their respective successors and assigns, are referred to hereinafter each
individually as a "Lender" and collectively as the "Lenders"), and FOOTHILL
CAPITAL CORPORATION, as Agent ("Agent"), on the other hand.
RECITALS
A. Borrower, Lenders and Agent have previously entered into that
certain Loan and Security Agreement, dated as of October 2, 1998 (the
"Agreement").
B. Borrower, Lenders and Agent desire to amend the Agreement as
provided for an on the conditions herein.
NOW, THEREFORE, Borrower, Lenders and Agent hereby amend certain
provisions of the Agreement as follows:
1. DEFINITIONS. All initially capitalized terms used in this Amendment
shall have the meanings given to them in the Agreement unless specifically
defined herein.
2. AMENDMENTS.
2.1 Section 1.1 of the Agreement is hereby amended by adding the
following definition thereto:
"Owned Inventory" means, as of any date of determination, Inventory
that is owned by Borrower (other than all merchandise classified on
the Borrower's books and records as "miscellaneous" including, but not
limited to, customer trade-ins, breakouts and giftware), and
specifically excluding any Inventory acquired by Borrower on
consignment from vendors.
2.2 Section 2.1(a)(y) of the Agreement is hereby amended and
restated in its entirety to read as follows:
(y) the lesser of (i) 70% (75% during a Seasonal Period) of the Cost
of Eligible Inventory, less the amount, if any, of the Inventory
Reserve, and reserves for gift certificates outstanding and for
shrinkage, and (ii) 80% (85% during a Seasonal Period) of the GOB
Value of Owned Inventory, less the amount, if any, of the Inventory
Reserve and reserves for gift certificates outstanding and for
shrinkage, minus
<PAGE> 2
2.3 Section 7.20 (b) of the Agreement is hereby amended and
restated in its entirety to read as follows:
(b) Tangible Net Worth. Tangible Net Worth of at least the
following amounts as of the end of the corresponding fiscal
quarters:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Minimum Tangible Net Worth
--------------------- --------------------------
<S> <C>
05/29/99 $ 26,000,000
08/29/99 $ 24,000,000
11/27/99 $ 20,000,000
</TABLE>
for each fiscal quarter ending thereafter, such minimum Tangible
Net Worth shall be set at amounts acceptable to the Agent and the
Lenders based upon a discount from the Borrower's projected
Tangible Net Worth for such periods, all as set forth in detailed
financial projections (including a balance sheet, income statement,
statement of cash flows, and availability calculations) for
Borrower's fiscal year ending June 3, 2000, which projections are
to be delivered to Lenders on or before June 1, 999. Failure to
deliver such projections by such date, in form and content (and
reflecting financial performance) acceptable to the Lenders in
their sole discretion, shall constitute an Event of Default.
2.4 Section 17.5(a) of the Agreement is hereby amended by deleting
the words "within three days" contained therein and replacing them with the
words "within seven Business Days".
3. REPRESENTATION AND WARRANTIES. Borrower hereby affirms to Lenders
and Agent that all Borrower's representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date hereof
(except to the extent such representations and warranties relate solely to an
earlier date).
4. DEFAULTS; WAIVER. Agent and the Lenders acknowledge and agree that
any Event of Default occasioned by Borrower's noncompliance with the
requirements of Section 7.20(b) (minimum Tangible Net Worth) as set forth in
the Loan Agreement prior to the amendment provided in Section 2 hereof, is
hereby waived.
5. Borrower hereby affirms to Lenders and Agent that, subject to the
waiver provided in the preceding sentence, no Default or Event of Default
exists as of the date hereof.
6. CONDITIONS PRECEDENT. The effectiveness of this Amendment is
expressly conditioned upon the following:
(a) Receipt by Agent of fully executed copies of this Amendment; and
2
<PAGE> 3
(b) Payment of a fee to Agent, for the pro rata account of Lenders,
in the amount of $10,000.
7. COSTS AND EXPENSES. Borrower shall pay to Agent all of Agent's
out-of-pocket costs, and expenses (including, without limitation, the
reasonable fees and expenses of its counsel, which counsel may include any
local counsel reasonably deemed necessary, search fees, filing and recording
fees, documentation fees, appraisal fees, travel expenses, and other fees)
arising in connection with the preparation, execution, and delivery of this
Amendment and any related documents.
8. LIMITED EFFECT. In the event of a conflict between the terms and
provisions of this Amendment and the terms and provisions of the Agreement, the
terms and provisions of this Amendment shall govern. In all other respects, the
Agreement, as amended, modified, and supplemented hereby, shall remain in full
force and effect.
9. COUNTERPARTS: EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which when so executed and delivered shall be deemed to be an original. All
such counterparts, taken together, shall constitute but one and the same
Amendment. This Amendment shall become effective upon the execution of a
counterpart of this Amendment by each of the parties hereto.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
SAMUELS JEWELERS, INC.
a Delaware corporation
By:
----------------------------
Title:
-------------------------
FOOTHILL CAPITAL CORPORATION
a California corporation, as
Agent and as a Lender
By:
----------------------------
Title:
-------------------------
LASALLE BUSINESS CREDIT, INC.
a Delaware corporation
By:
----------------------------
Title:
-------------------------
SUNROCK CAPITAL CORP.,
a Delaware corporation
By:
----------------------------
Title:
-------------------------
4
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Samuels Jewelers Inc.
(formerly known as Barry's Jewelers, Inc.) on Form S-1 of our report dated
August 25, 1998 (which report expresses an unqualified opinion and includes
explanatory paragraphs referring to Barry's Jewelers, Inc.'s ability to continue
as a going concern as a result of the filing for reorganization under Chapter 11
of the Federal Bankruptcy Code), appearing in the Prospectus, which is part of
this Registration Statement, and of our report dated August 25, 1998 relating to
the financial statement schedules appearing elsewhere in this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Los Angeles, California
May 19, 1999
