<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT to SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 2, 2000. Commission File Number 0-15017
SAMUELS JEWELERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3746316
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2914 Montopolis Dr., Suite 200, Austin, Texas 78741
(512) 369-1400
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock
Warrants
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES. [X] NO. [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a
court. [X] Yes. [ ] No.
As of January 12, 2001, the Registrant had 7,969,185 shares of common stock, par
value $.001 per share, outstanding.
<PAGE> 2
SAMUELS JEWELERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGES
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities and Use of Proceeds 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
</TABLE>
2
<PAGE> 3
ITEM 1.
PART I
SAMUELS JEWELERS, INC.
BALANCE SHEETS
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
December 2, June 3,
2000 2000
----------- -----------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,543 $ 1,960
Accounts receivable, net 6,858 6,446
Merchandise inventories 58,279 61,269
Prepaid expenses and other current assets 3,894 6,129
----------- -----------
Total current assets 71,574 75,804
Property and equipment:
Leasehold improvements, furniture and fixtures 30,975 28,718
Computers and equipment 6,408 6,380
----------- -----------
37,383 35,098
Less: accumulated depreciation and amortization 8,640 6,225
----------- -----------
Net property and equipment 28,743 28,873
Other assets 505 561
Goodwill, net 4,346 4,598
Reorganization value in excess of amounts allocated to
identifiable assets, net 13,866 14,748
----------- -----------
Total assets $ 119,034 $ 124,584
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 29,403 $ 27,350
Accounts payable - trade 19,409 38,742
Accounts payable - related party 14,335 --
Other accrued liabilities 19,078 18,136
----------- -----------
Total current liabilities 82,225 84,228
Notes payable 2,062 2,089
Stockholders' equity:
Common stock; $.001 par value; authorized 20,000,000 shares;
Issued and outstanding, 7,969,185 shares at December 2, 2000,
5,153,900 at June 2, 2000 8 5
Additional paid-in capital 64,107 49,329
Deferred compensation (417) (834)
Notes receivable (2,071) (512)
Accumulated deficit (26,880) (9,721)
----------- -----------
Total stockholders' equity 34,747 38,267
Total liabilities and stockholders' equity $ 119,034 $ 124,584
=========== ===========
</TABLE>
See Notes to Financial Statements.
3
<PAGE> 4
SAMUELS JEWELERS, INC.
STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 2, November 27,
2000 1999
----------- ------------
<S> <C> <C>
Net sales $ 34,381 $ 26,470
Finance and credit insurance fees -- 74
---------- ----------
34,381 26,544
Costs and expenses:
Cost of goods sold, buying and occupancy 25,836 16,893
Selling, general and administrative expenses 16,573 11,907
Depreciation and amortization 2,265 1,808
---------- ----------
44,674 30,608
Operating loss (10,293) (4,064)
Interest expense, net 655 455
---------- ----------
Net loss $ (10,948) $ (4,519)
========== ==========
Basic and diluted loss per share $ (1.37) $ (0.89)
========== ==========
Weighted average shares outstanding 7,966 5,062
========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE> 5
SAMUELS JEWELERS, INC.
STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 2, November 27,
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 63,912 $ 47,601
Finance and credit insurance fees -- 2,331
------------ ------------
63,912 49,932
Costs and expenses:
Cost of goods sold, buying and occupancy 46,174 30,979
Selling, general and administrative expenses 29,627 21,362
Provision for doubtful accounts -- 839
Depreciation and amortization 3,966 3,151
------------ ------------
79,767 56,331
Operating loss (15,855) (6,339)
Interest expense, net 1,304 1,424
------------ ------------
Net loss $ (17,159) $ (7,823)
============ ============
Basic and diluted loss per share $ (2.26) $ (1.55)
============ ============
Weighted average shares outstanding 7,577 5,045
============ ============
</TABLE>
See Notes to Financial Statements.
5
<PAGE> 6
SAMUELS JEWELERS, INC.
STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 2, November 27,
2000 1999
------------ ------------
<S> <C> <C>
Operating activities:
Net loss $ (17,159) $ (7,823)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,549 2,734
Deferred compensation 417 417
Provision for doubtful accounts -- 839
Change in operating assets and liabilities:
Accounts receivable (412) 38,867
Merchandise inventories 2,990 (15,214)
Prepaid expenses and other current assets 2,235 (413)
Other assets 56 14
Accounts payable - trade (19,333) 9,311
Accounts payable - related party 14,335 --
Other accrued liabilities 942 2,590
------------ ------------
Net cash provided by (used in) operating activities (12,380) 31,322
Investing activities:
Purchase of property and equipment (2,285) (5,930)
Acquisition of stores -- (1,274)
------------ ------------
Net cash used in investing activities (2,285) (7,204)
Financing activities:
Net borrowings (repayments) under revolving credit facility 2,026 (22,030)
Notes receivable (1,559) 162
Issuance of common stock 14,781 --
------------ ------------
Net cash provided by (used in) financing activities 15,248 (21,868)
Increase in cash 583 2,250
Cash and cash equivalents at beginning of period 1,960 1,456
------------ ------------
Cash and cash equivalents at end of period $ 2,543 $ 3,706
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,308 $ 1,517
Income taxes -- --
Notes payable issued for acquisition of stores $ -- $ 6,000
</TABLE>
See Notes to Financial Statements.
6
<PAGE> 7
SAMUELS JEWELERS, INC.
NOTES TO FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1. HISTORY AND BASIS OF PRESENTATION
HISTORY
Samuels Jewelers, Inc. ("Samuels" or the "Company") operates a national chain of
specialty retail jewelry stores located in regional shopping malls, power
centers, strip centers and stand-alone stores. The Company sells fine jewelry in
a wide range of styles and prices, with a principal emphasis on diamond and
gemstone jewelry. As of December 2, 2000, the Company operated 199 retail
jewelry stores in 26 states, principally Texas, California, Kentucky, Colorado,
Pennsylvania, Ohio, Utah, Arizona and Indiana. The Company also sells jewelry
online at Samuels.cc, SamuelsJewelers.com and JewelryLine.com. The Company
currently operates under the following four tradenames: "Samuels", "C&H Rauch",
"Schubach" and "Samuels Diamonds". Measured by the number of retail locations,
the Company is the seventh largest specialty retailer of fine jewelry in the
country.
The Company takes its name, "Samuels Jewelers", from a chain of stores founded
in 1891 operated in the San Francisco Bay area. Since 1998 the Company has
consolidated the number of tradenames under which it operates from fourteen to
four and it plans to operate all its stores under either the "Samuels" or
"Samuels Diamonds" name within the next two to three years.
The Company was created in August, 1998 for the purpose of acquiring the assets
of Barry's Jewelers, Inc. ("Barry's" or "Predecessor") as part of Barry's Plan
of Reorganization (the "Plan") which was confirmed by the U.S Bankruptcy Court
on September 16, 1998, and consummated on October 2, 1998 (the
"Reorganization"). On October 2, 1998, as part of its plan of reorganization,
Barry's was merged into Samuels.
BASIS OF PRESENTATION
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
The 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 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 June 2, 2001.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended June 3,
2000.
Each fiscal year of the Company ends on the Saturday closest to May 31. The
second quarter of Fiscal 2001 consisted of the thirteen weeks ended December 2,
2000. The second quarter of Fiscal 2000 consisted of the thirteen weeks ended
November 27, 1999. The six-month period ended December 2, 2000 consisted of the
twenty-six weeks then ended. The six-month period ended November 27, 1999
consisted of the twenty-six weeks then ended.
Certain previously reported amounts were reclassified to conform to current year
presentations.
7
<PAGE> 8
2. NOTES PAYABLE
On October 2, 1998, the Company entered into a three-year, $50 million financing
agreement with Foothill Capital Corporation as a lender and as agent for a
lender group (the "Lenders"). The Lenders committed to make revolving advances
to the Company in amounts determined based on a percentage of eligible
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. Interest charges are payable
monthly. Upon the occurrence and during the continuation of any event of default
under the financing agreement, all obligations will bear interest at a per annum
rate equal to three percentage points above the otherwise applicable interest
rate. As collateral for any and all obligations to the Lenders under the
financing agreement, the Company granted a first priority perfected security
interest in and to substantially all of its owned or thereafter acquired assets,
both tangible and intangible. The financing agreement contains quarterly
covenants which include the Company meeting a minimum level of tangible net
worth and prohibits the payment of dividends. The Company has entered into five
amendments to the Loan and Security Agreement with the Lenders, with the most
recent amendment being as of June 2, 2000. These amendments reduced the total
commitment under the financing agreement from $50 million to $40 million,
allowed for the sale of the Company's credit card accounts, allowed for the
acquisition of stores and adjusted some of the covenants required of the Company
under this financing agreement.
As of December 2, 2000, the Company had direct borrowings of $27.3 million
outstanding under this financing agreement with additional credit available of
approximately $5.7 million. The Company suffered an event of default at the time
of the completion of the financial statements included in this quarterly report
because the Company failed to maintain the required tangible net worth, as
defined in the financing agreement, as of the last day of the quarter covered by
this report (see Note 7. "Subsequent Events").
In November 1999, the Company acquired C&H Rauch, Inc. ("Rauch"), a 40-store
jewelry chain with stores principally located in Kentucky and Ohio. In
conjunction with this acquisition, the Company issued three promissory notes due
and payable for $2.0 million each in January 2000, 2001 and 2002. These notes
have a stated interest rate of 7% per annum with interest due and payable
beginning January 15, 2000 and on each successive six-month anniversary
thereafter until the notes are paid in full. Upon the occurrence and during the
continuation of an event of default under the notes, Samuels' payment
obligations may bear interest at a per annum rate of 15%. Samuels may offset its
payment obligations under these notes to the extent and in the event any
liabilities arise that were not accounted for and not disclosed in the unaudited
balance sheet of Rauch as of October 31, 1999. The Company timely paid the
promissory note due January 2000. Pursuant to its right of offset, the Company
has not made a payment of principal or interest as of the date of this report
since January 15, 2000 (see Note 7. "Subsequent Events").
8
<PAGE> 9
3. ACCOUNTS RECEIVABLE
On August 30, 1999, the Company sold its then existing credit card accounts to
World Financial Network National Bank ("WFN") pursuant to an agreement that
called for the Company to transfer its approximately $46.8 million outstanding
accounts receivable to WFN at face value, less a holdback reserve of
approximately $9.4 million to be held by WFN. The Company also entered into a
third-party credit program with WFN that generally requires WFN to calculate
each month the total amount of receivables outstanding and then retain or pay
out, as applicable, an amount such that the holdback reserve is maintained at a
constant percentage of receivables outstanding. The holdback reserve is intended
to protect WFN against charged-off accounts and will be returned to the Company
at the end of the program. The Company has recorded the holdback reserve net of
a valuation allowance that reflects management's estimate of losses based on
past performance. Under the agreement WFN otherwise pays the Company the
proceeds for sales on the credit accounts promptly after the sale. The
third-party credit card program has an initial term of five years, but provides
the parties the option to extend the agreement beyond such initial term. The
Company used the net proceeds of approximately $37.4 million from the sale of
its then existing credit card accounts at August 30, 1999 to reduce the balance
then outstanding under Samuels' financing agreement with the Lenders. The
Company no longer has customer receivables.
Since the sale, WFN has offered credit to Samuels' customers. Sales on the
Company's private label credit cards accounted for approximately 38.2% and 37.1%
of sales in the second quarter and first six months of Fiscal 2001,
respectively, compared to 36.1% and 41.5% for the second quarter and first six
months of Fiscal 2000, respectively.
4. SALE OF EQUITY
In July 2000, the Company completed the sale of 2,795,940 shares of its common
stock, par value $.001 per share, to several purchasers pursuant to a private
offering by the Company. The purchasers of such common stock included funds
controlled by DDJ Capital Management, LLC, certain vendors of the Company and
directors and officers of the Company. The Company sold the shares at a price of
$5.25 per share for an aggregate purchase price of approximately $14.8 million.
The Company conducted the private offering and sold the 2,795,940 shares under
an exemption from registration of such shares under the Securities Act of 1933,
as amended (the "Securities Act"), provided in Section 4(2) of the Securities
Act and pursuant to Rule 506 under Regulation D of the Securities Act. Such
exemption was available to the Company because it was primarily made available
only to "accredited investors", as such term is defined under Section 502 of the
Securities Act. As part of the purchase agreements for such sales of common
stock, the Company agreed to register such stock under the Securities Act of
1933, as amended, for resale pursuant to a shelf registration statement.
5. NOTES RECEIVABLE
As part of the purchase of the Company's common stock by certain officers of the
Company, the Company permitted each such officer to purchase common stock in
return for a combination of a promissory note for up to 90% of such officer's
purchase price of the common stock and cash. The notes generally require payment
in full by the seventh anniversary of the date of the respective loan of amounts
for the purchase price of the common stock, but require mandatory annual
prepayments of principal and accrued interest in varying amounts. In connection
with the officers' financing of the purchase price for the common stock, the
Company adopted a Deferred Compensation Plan whereby eligible employees of the
Company may elect, on an annual basis, to have up to 50% of base salary and up
to 100% of any bonuses withheld and entered into a book entry account of the
Company. The respective officer is permitted to suspend, in the aggregate, the
obligation for payment of the mandatory prepayment amounts under the promissory
note given in return for the purchase price of the common stock if the withheld
amounts under the Deferred Compensation Plan are equal or greater in the
aggregate than the aggregate amount of mandatory prepayments that would have
been required under such promissory note. As of December 2, 2000, the
9
<PAGE> 10
aggregate outstanding amount under these notes was approximately $1.7 million,
which is shown as an offset of stockholders' equity on the balance sheet.
On October 2, 1998, the Company issued 250,000 restricted shares of common stock
to certain key executives as part of their employment agreements. These grants
vest 25% per year, commencing on the grant date and each of the first three
anniversaries thereof. The Company made loans, and agreed to issue more loans as
shares vest, to help defray the tax expense of the stock grants. These notes
bear interest at the applicable federal short-term rate when issued and are
payable in quarterly installments over the stock's three-year vesting schedule.
If, however, the executive is employed on the quarterly due date, a bonus in the
amount of the principal then due is then payable. The deferred compensation
expense is amortized over the remaining vesting period. As of December 2, 2000,
the aggregate outstanding amount under these notes was approximately $0.4
million, which is shown as an offset of stockholders' equity on the balance
sheet.
6. ACCOUNTS PAYABLE - RELATED PARTY
During the second quarter of Fiscal 2001, certain funds advised by DDJ Capital
Management, LLC ("DDJ Capital"), beneficial owner of approximately 49 percent of
the Company's outstanding Common Stock, entered into agreements with several of
the Company's vendors to purchase accounts receivable, totaling approximately
$14.3 million, that are owed to such vendors by the Company. As part of these
purchases, the Company agreed and acknowledged the amounts owed under the
respective vendor's accounts receivables. DDJ Capital retains all of the rights
of the vendors regarding collection of such receivables.
7. SUBSEQUENT EVENTS
Store Closures. Prior to January 12, 2001, the Company closed 13 stores where
the leases had expired or were near expiration. Management expects to close an
additional 15 under-performing stores during the remainder of the third quarter.
Default Under Financing Agreement. Under the terms of the Company's financing
agreement with the Lenders with Foothill Capital Corporation as a lender and
agent (see Note 2. "Notes Payable"), the Company suffered an event of default at
the time of the completion of the financial statements included in this
quarterly report because the Company failed to maintain the required tangible
net worth, as defined in the financing agreement, as of the last day of the
quarter covered by this report. Upon the occurrence of such event of default,
the Lenders under the financing agreement have the right to do the following (in
addition to other customary remedies): declare all amounts, including principal
and interest, outstanding due and payable; cease providing additional credit;
terminate the financing agreement and sell all collateral it holds at either a
public or private sale. Many of the Lenders rights only require that a
concurrent notice of such action be provided to the Company.
Upon the occurrence and during the continuation of an event of default under the
financing agreement, the Company is obliged to pay interest at a rate three
percentage points above the otherwise applicable interest rate.
The Company currently is in discussion with its Lenders regarding this event of
default.
Inability to Make Payment on Rauch Notes. During any time period in which the
Company has suffered an event of default and such event of default is continuing
under the financing agreement with Foothill Capital Corporation, the Company is
not permitted to make any payments related to the notes issued to Rauch. (See
Note 2. "Notes Payable"). Additionally, its financing agreement requires that
the Company have excess availability, after giving effect to the payment on such
notes, of $5 million on the date such payment is made and for the thirty-day
period preceding such date. Since the Company has suffered an event of default
under the financing agreement that is continuing on the date of this report, and
has otherwise failed to maintain the required excess availability, the Company
is prohibited from making the scheduled payment of principal on the Rauch note
due on January 15, 2001 and the interest due on that date on both of the Rauch
notes that remain outstanding.
10
<PAGE> 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
PRIVATE SECURITIES LITIGATION REFORM ACT. This Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and the Company intends that such forward-looking statements be subject to
the safe harbors created thereby.
OVERVIEW. The following discussion presents information about the financial
condition, liquidity and capital resources, and results of operations of the
Company as of and for the quarters and six-month periods ended December 2, 2000
and November 27, 1999. This information should be read in conjunction with the
audited financial statements of the Company and the notes thereto as reported on
the Company's Annual Report on Form 10-K for the fiscal year ended June 3, 2000.
THREE MONTHS ENDED DECEMBER 2, 2000, COMPARED TO THE THREE MONTHS ENDED NOVEMBER
27, 1999
STORE ACTIVITY
The following table sets forth selected store data with respect to the quarters
ended December 2, 2000, and November 27, 1999:
<TABLE>
<CAPTION>
December 2, November 27,
2000 1999
------------ ------------
<S> <C> <C>
Number of stores at beginning of quarter .... 198 123
Acquired during the quarter ............... -- 48
Opened during the quarter ................. 2 10
Closed during the quarter ................. (1) --
------------ ------------
Total at quarter end .............. 199 181
============ ============
Percentage increase (decrease) in sales of
comparable stores ......................... 5.1% 4.0%
Average sales per comparable store (in
thousands) .................................. $ 202 $ 195
Private label credit sales mix .............. 38.2% 36.1%
Equivalent store weeks ...................... 2,589 1,874
Equivalent weekly average store sales (in
thousands) .................................. $ 13.3 $ 14.1
</TABLE>
RESULTS OF OPERATIONS
Net sales for the quarter ended December 2, 2000 were $34.4 million, an increase
of $7.9 million, or 29.9%, as compared to net sales of $26.5 million for the
quarter ended November 27, 1999. Equivalent store weeks were 2,589 for the
quarter this year as compared to 1,874 for the quarter last year. Equivalent
weekly sales were $13.3 thousand for the quarter ended December 2, 2000 as
compared to $14.1 thousand for the quarter ended November 27, 1999. This 6.0%
decrease in equivalent weekly sales is primarily due to acquiring stores during
Fiscal 2000 with lower average sales volume than those stores already in the
Samuels portfolio. Comparable store sales (the 112 stores open for the same
period in both the current and preceding year) were $22.7 million during the
quarter this year as compared to $21.6 million for the same period last year.
This is an increase of $1.1 million, or 5.1%, in comparable store sales. This
increase in comparable sales resulted primarily from a 11.6% increase in the
average ticket from $284 to $317 and the inclusion of several additional days of
the Christmas holiday selling season in the current fiscal year which were not
included in the prior year's quarter.
Finance and credit insurance fees are no longer generated by Samuels due to the
sale of the credit card accounts to a third party as of August 30, 1999. Revenue
from these fees totaled $74.0 thousand during the quarter ended November 27,
1999.
Cost of goods sold, buying and occupancy expenses were $25.8 million for the
quarter ended December 2, 2000, as compared to $16.9 million for the same
quarter last year. The increase in cost of goods sold,
11
<PAGE> 12
buying and occupancy expenses resulted primarily from the increase in the number
of stores in operation as well as a $1.3 million accrual for estimated payments
due to vendors (resulting from reconciliation of consigned inventory). Cost of
goods sold, buying and occupancy expenses were 75.1% of net sales for the
quarter ended December 2, 2000 and 63.8% of net sales for the prior year
quarter. The cost of goods sold, buying and occupancy expenses increased as a
percentage of sales primarily as a result of a $1.3 million accrual for
estimated payments due to vendors and lower margins being obtained on the sale
of merchandise due to competitive discounting.
Selling, general and administrative expenses were $16.6 million for the quarter
ended December 2, 2000, as compared to $11.9 million in the same quarter last
year. The increase was primarily due to the overall increase in the number of
stores in operation, the write-off of uncollectable credit card receivables, an
increase in costs associated with the private label credit card program, and
accrued costs resulting from the Company's reduction of its home office staff.
Selling, general and administrative expenses as a percentage of net sales were
48.2% for the quarter ended December 2, 2000 and 45.0% for the quarter ended
November 27, 1999. The increase as a percentage of net sales resulted primarily
from the items discussed above, but the effect was offset somewhat by the
selling, general and administrative expenses being spread over a larger sales
volume.
Depreciation and amortization was $2.3 million for the quarter ended December 2,
2000, compared with $1.8 million for the same quarter in the prior year. This
increase of $0.5 million, or 25.3% is primarily due to the increase in the
number of stores operated by the Company and the amortization of goodwill
associated with store acquisitions.
Net interest expense was $0.7 million for the quarter ended December 2, 2000, an
increase of $0.2 million, or 44.0%, from $0.5 million for the quarter ended
November 27, 1999. This increase is generally due to the fact that there was a
larger average loan balance outstanding under Samuels' bank agreement with a
higher interest rate in effect during the recent quarter as compared to the same
quarter in the previous year, and additional indebtedness outstanding for the
Rauch acquisition.
SIX MONTHS ENDED DECEMBER 2, 2000, COMPARED TO THE SIX MONTHS ENDED NOVEMBER 27,
1999
STORE ACTIVITY
The following table sets forth selected store data with respect to the six
months ended December 2, 2000, and November 27, 1999:
<TABLE>
<CAPTION>
December 2, November 27,
2000 1999
----------- -----------
<S> <C> <C>
Number of stores at beginning of period ...... 198 116
Acquired during the period ................. -- 54
Opened during the period ................... 4 12
Closed during the period ................... (3) (1)
----------- -----------
Total at period end ................ 199 181
=========== ===========
Percentage increase (decrease) in sales of
Comparable stores .......................... 0.7% 3.5%
Average sales per comparable store (in
thousands) ................................... $ 379 $ 381
Private label credit sales mix ............... 37.1% 41.5%
Equivalent store weeks ....................... 5,165 3,397
Equivalent weekly average store sales (in
thousands) ................................... $ 12.4 $ 14.0
</TABLE>
RESULTS OF OPERATIONS
Net sales for the six months ended December 2, 2000 were $63.9 million, an
increase of $16.3 million, or 34.3%, as compared to net sales of $47.6 million
for the six months ended November 27, 1999. Equivalent store weeks were 5,165
for the six months this year as compared to 3,397 for the six-month period last
year. Equivalent weekly sales were $12.4 thousand for the six months ended
December 2, 2000, as
12
<PAGE> 13
compared to $14.0 thousand for the six months ended November 27, 1999. This
11.7% decrease in equivalent weekly sales is primarily due to acquiring stores
with lower average sales volume than those stores already in the Samuels
portfolio. Comparable store sales (the 112 stores open for the same period in
both the current and preceding year) were $42.2 million during the six-month
period in Fiscal 2001 as compared to $42.1 million for the same period in Fiscal
2000. This is an increase of $0.3 million, or 0.7%, in comparable store sales.
This increase in comparable sales resulted primarily from an 8.4% increase in
the average ticket from $283 to $307 and the inclusion of several additional
days of the Christmas holiday selling season in the six-month period for the
current fiscal year which were not included in the prior year.
Finance and credit insurance fees are no longer generated by Samuels due to the
sale of the credit card accounts to a third party as of August 30, 1999. Revenue
from these fees totaled $2.3 million during the six months ended November 27,
1999.
Cost of goods sold, buying and occupancy expenses were $46.2 million for the six
months ended December 2, 2000, as compared to $31.0 million for the same period
last year. The increase in cost of goods sold, buying and occupancy expenses
resulted primarily from the increase in the number of stores in operation as
well as a $1.3 million accrual for estimated payments due to vendors (resulting
from reconciliation of consigned inventory). Cost of goods sold, buying and
occupancy expenses were 72.2% of net sales for the six months ended December 2,
2000 and 65.1% of net sales for the prior year period. The cost of goods sold,
buying and occupancy expenses increased as a percentage of sales primarily as a
result of a $1.3 million accrual for estimated payments due to vendors and lower
margins being obtained on the sale of merchandise due to competitive
discounting.
Selling, general and administrative expenses were $29.6 million for the six
months ended December 2, 2000, as compared to $21.4 million in the same period
last year. The increase was primarily due to the overall increase in the number
of stores in operation, the write-off of uncollectable credit card receivables,
an increase in costs associated with the Company's private label credit card
program, and accrued costs resulting from the Company's reduction of its home
office staff. Selling, general and administrative expenses as a percentage of
net sales were 46.4% for the period ended December 2, 2000 and 44.9% for the six
months ended November 27, 1999. The increase as a percentage of net sales
resulted primarily from the charges discussed above, which were offset somewhat
by the selling, general and administrative expenses being spread over a larger
sales volume.
The provision for doubtful accounts is no longer being recorded because Samuels'
credit card accounts were sold on August 30, 1999. For the six months ended
November 27, 1999, the provision for doubtful accounts was $0.8 million
Depreciation and amortization was $4.0 million for the six months ended December
2, 2000, compared with $3.2 million for the same period in the prior year. This
increase of $0.8 million, or 25.9%, is primarily due to the increase in the
number of stores operated by the Company and additional amortization related to
store acquisitions.
Net interest expense was $1.3 million for the six months ended December 2, 2000,
a decrease of $0.1 million, or 8.4%, from $1.4 million for the six months ended
November 27, 1999. This reduction is generally due to the fact that the proceeds
from the sale of Samuels' existing credit card accounts were used to reduce the
amounts outstanding under Samuels' bank agreement. The effects of the reduction,
however, were offset by additional indebtedness incurred by the Company to
acquire stores and increase inventory levels and by higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's operations require working capital for funding the
purchase of inventory, making lease payments and funding of normal operating
expenses. The seasonality of the Company's business requires a significant
build-up of inventory for the Christmas holiday selling period. These
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<PAGE> 14
seasonal inventory needs generally must be funded during the late summer and
fall months for the necessary lead-time to obtain the additional inventory.
During the second quarter of Fiscal 2001, certain funds advised by DDJ Capital
Management, LLC ("DDJ Capital"), beneficial owner of approximately 49 percent of
the Company's outstanding Common Stock, entered into agreements with several of
the Company's vendors to purchase accounts receivable, totaling approximately
$14.3 million, that are owed to such vendors by the Company. DDJ Capital retains
all of the rights of the vendors regarding collection of such receivables.
As of December 2, 2000, owned inventory was $58.3 million as compared to $61.3
million as of June 3, 2000.
The Company reported cash flow used in operating activities of $12.4 million for
the six months ended December 2, 2000, as compared to cash flow provided by
operating activities of $31.3 million for the comparable period last year. The
change in the use of cash flow in operating activities is primarily due to the
sales of the Company's existing credit card accounts during Fiscal 2000 which
produced net proceeds of $37.4 million, an increase in inventory levels during
Fiscal 2000 associated with store acquisitions, an increase in accounts payable
during Fiscal 2000 associated with store acquisitions, and the funding of
additional net operating losses during Fiscal 2001.
The Company acquired $2.3 million in property and equipment during the six-month
period, consisting mostly of leasehold improvements associated with the opening
of four new stores and minor remodeling of existing stores.
The Company had cash and cash equivalents of $2.5 million as of December 2,
2000, as compared to $2.0 million as of June 3, 2000.
The Company expects to close 28 under-performing stores in the third quarter,
comprised of 13 stores where the leases have expired or are near expiration, and
15 stores where early termination of the leases was negotiated with the
respective landlords. The transfer of inventory from these closed stores will
reduce required purchases during the third quarter for the remaining stores.
FINANCING TRANSACTIONS. On October 2, 1998, the Company entered into a
three-year, $50 million financing agreement with Foothill Capital Corporation as
a lender and as agent for a lender group (the "Lenders"). The Lenders committed
to make revolving advances to the Company in amounts determined based on a
percentage of eligible 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. Interest
charges are payable monthly. Upon the occurrence and during the continuation of
any event of default under the financing agreement, all obligations will bear
interest at a per annum rate equal to three percentage points above the
otherwise applicable interest rate. As collateral for any and all obligations to
the Lenders under the financing agreement, the Company granted a first priority
perfected security interest in and to substantially all of its owned or
thereafter acquired assets, both tangible and intangible. The financing
agreement contains quarterly covenants which include the Company meeting a
minimum level of tangible net worth and prohibits the payment of dividends. The
Company has entered into five amendments to the Loan and Security Agreement with
the Lenders, with the most recent being as of June 2, 2000. These amendments
reduced the total commitment under the financing agreement from $50 million to
$40 million, allowed for the sale of the Company's credit card accounts, allowed
for the acquisition of stores and adjusted some of the covenants required of the
Company under this financing agreement.
As of December 2, 2000, the Company had direct borrowings of $27.3 million
outstanding with additional credit available of approximately $5.7 million.
Under the terms of the Company's financing agreement, the Company suffered an
event of default at the time of the completion of the financial statements
included in this quarterly report because the Company failed to maintain the
required tangible net worth, as defined in the financing agreement, as of the
last day
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<PAGE> 15
of the quarter covered by this report. Upon the occurrence of such event of
default, the Lenders under the financing agreement have the right to do the
following (in addition to other customary remedies): declare all amounts,
including, principal and interest, outstanding due and payable; cease providing
additional credit; terminate the financing agreement and sell all collateral it
holds at either a public or private sale. Many of the Lenders' rights only
require that a concurrent notice of such action be provided to the Company.
Upon the occurrence and during the continuation of an event of default under the
financing agreement, the Company is obligated to pay interest at a rate three
percentage points higher above the otherwise applicable interest rate.
The Company is currently in discussion with its Lenders regarding this event of
default, which is continuing as of the date of this report.
In November 1999, the Company acquired C&H Rauch, Inc. ("Rauch"), a 40-store
jewelry chain with stores principally located in Kentucky and Ohio. In
conjunction with this acquisition, the Company issued three promissory notes due
and payable for $2.0 million each in January 2000, 2001 and 2002. These notes
have a stated interest rate of 7% per annum with interest due and payable
beginning January 15, 2000 and on each successive six-month anniversary
thereafter until the notes are paid in full. Upon the occurrence and during the
continuation of an event of default under the notes, Samuels' payment
obligations may bear interest at a per annum rate of 15%. Samuels may offset its
payment obligations under these notes to the extent and in the event any
liabilities arise that were not accounted for and not disclosed in the unaudited
balance sheet of Rauch as of October 31, 1999.
The Company timely paid the promissory note due January 2000. Pursuant to its
right of offset, the Company has not made a payment of principal or interest as
of the date of this report since January 15, 2000.
During any time period in which the Company has suffered an event of default and
such event of default is continuing under the financing agreement with Foothill
Capital Corporation, the Company is not permitted to make any payments related
to the notes issued to Rauch. Additionally, its financing agreement requires
that the Company have excess availability, after giving effect to the payment on
such notes, of $5 million on the date such payment is made and for the
thirty-day period preceding such date. Since the Company has suffered an event
of default under the financing agreement that is continuing on the date of this
report, and has otherwise failed to maintain the required excess availability,
the Company is prohibited from making the scheduled payment of principal on the
note due January 15, 2001 and the interest due on that date on both of the notes
that remain outstanding.
In July 2000, the Company completed the sale of 2,795,940 shares of its common
stock, par value $.001 per share, to several purchasers pursuant to a private
offering by the Company. The Company sold the shares at a price of $5.25 per
share and raised approximately $13.0 million, which is being used to fund the
increased working capital needs created by the Company's recent growth.
CREDIT PROGRAM. On August 30, 1999, the Company sold its then existing credit
card accounts to WFN pursuant to an agreement that called for the Company to
transfer its approximately $46.8 million outstanding accounts receivable to WFN
at face value, less a holdback reserve of approximately $9.4 million. The
Company simultaneously entered into a third-party credit program that generally
requires WFN to calculate monthly the total amount of receivables outstanding
and then retain or pay out, as applicable, an amount such that the holdback
reserve is maintained at a constant percentage of receivables outstanding. The
holdback reserve is intended to protect WFN against charged-off accounts and
will be returned to the Company at the end of the program. The Company has
recorded the holdback reserve net of a valuation allowance that reflects
management's estimate of losses based on past performance. Under the agreement
WFN otherwise pays the Company the proceeds for sales on the credit accounts
promptly after the sale. The third-party credit card program has an initial term
of five years, but provides the parties the option to extend the agreement
beyond such initial term unless the parties otherwise agree. The Company used
the net proceeds of approximately $37.4 million from the sale of its then
existing credit card accounts
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<PAGE> 16
at August 30, 1999 to reduce the balance then outstanding under Samuels'
financing agreement with the Lenders.
Since the sale, WFN has offered credit to Samuels' customers. Receivables from
the Company's private label credit cards are held and owned by WFN, subject to
the above-described terms. As of December 2, 2000, the holdback reserve, net of
a valuation allowance of $3.7 million, was $6.1 million.
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<PAGE> 17
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk in the form of interest rate risk. As of
December 2, 2000, the Company had $27.3 million outstanding under its revolving
line of credit. This revolving line is priced with a variable rate based on
LIBOR or a base rate plus, in each case, an applicable margin. See "Note 2.
Notes Payable". An increase or decrease in interest rates would affect the
interest costs relating this revolving line of credit. The Company has no
interest rate swaps or other hedging facilities relating to its revolving line
of credit.
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<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved from time to time in legal proceedings of a
character normally incident to its business. The Company believes that
its potential liability in any such pending or threatened proceedings,
either individually or in the aggregate, will not have a material
effect on the financial condition or results of operations of the
Company.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Under the terms of the Company's financing agreement, the Company
suffered an event of default at the time of the completion of the
financial statements included in this quarterly report because the
Company failed to maintain the required tangible net worth, as defined
in the financing agreement, as of the last day of the quarter covered
by this report. Upon the occurrence of such event of default, the
Lenders under the financing agreement have the right to do the
following (in addition to other customary remedies): declare all
amounts, including, principal and interest, outstanding due and
payable, cease providing additional credit, terminate the financing
agreement and sell all collateral it holds at either a public or
private sale. Many of the Lenders rights only require that a concurrent
notice of such action be provided to the Company.
Upon the occurrence and during the continuation of an event of default
under the financing agreement, the Company is obligated to pay interest
at a rate three percentage points higher above the otherwise applicable
interest rate.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on November 6,
2000. Proxies were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended. At the meeting, Samuels'
stockholders voted on the election of directors and the ratification of
its appointment of certified public accountants.
The stockholders elected David B. Barr, David J. Breazzano, David H.
Eisenberg, Wendy T. Landon, Randy N. McCullough and Jerry Winston to
serve until the 2001 annual meeting of stockholders. The votes for the
election of such directors was as follows:
<TABLE>
<CAPTION>
Votes Abstentions or
Name Votes For Against Non-Votes
--------------------------- ------------ ---------- ----------------
<S> <C> <C> <C>
David B. Barr 4,730,817 0 822,305
David J. Breazzano 4,730,817 0 822,305
David H. Eisenberg 4,730,817 0 822,305
Wendy T. Landon 4,730,817 0 822,305
Randy N. McCullough 4,730,817 0 822,305
Jerry Winston 4,730,817 0 822,305
</TABLE>
The stockholders of the Company voted on and approved the ratification
of the appointment of certified public accountants with 5,550,422 votes
cast for ratification, no votes against ratification and 2,700
non-votes or abstaining.
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<PAGE> 19
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
3.1 Certificate of Incorporation of Samuels Jewelers, Inc. (1)
3.2 By-Laws of Samuels Jewelers, Inc. (1)
(1) Incorporated by reference to the Company's Current Report on
Form 8-K filed October 6, 1998.
(b) Reports on Form 8-K:
The Company filed a Report on Form 8-K on November 21, 2000 that
incorporated by reference in their entirety two press releases issued
by the Company on November 17, 2000. One press release disclosed the
Company's October sales results, and the other disclosed the Company's
commencement of a search for a new chief financial officer.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SAMUELS JEWELERS, INC.
January 16, 2001 By: /s/ RANDY N. MCCULLOUGH
-------------------------------------
Randy N. McCullough
President and Chief Executive Officer
January 16, 2001 By: /s/ ROBERT J. HERMAN
-------------------------------------
Robert J. Herman
Vice President--Finance
(Principal Accounting Officer)
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation of Samuels Jewelers, Inc. (1)
3.2 By-Laws of Samuels Jewelers, Inc. (1)
</TABLE>
(1) Incorporated by reference to the Company's Current Report on Form
8-K filed October 6, 1998.
