Jan. 13 (Bloomberg) -- Shane Co., the family-owned jewelry retailer that sought bankruptcy yesterday, told a U.S. judge the company’s decline was triggered partly by delays and cost overruns for a $36 million SAP AG inventory-management system.

SAP, the world’s biggest maker of business-management software, took almost three years to install and implement the system instead of one year, while costs “ballooned” to $36 million from a projected maximum of $10 million, Shane said in papers filed yesterday in U.S. Bankruptcy Court in Denver.

Shane, based in Centennial, Colorado, became “substantially overstocked with inventory, and with the wrong mix of inventory” when Walldorf, Germany-based SAP finished the system in September 2007, according to the filing. The software “adversely affected sales” through the first nine months of 2008, it said.

Shane, with 23 stores in 14 states, blamed the Chapter 11 filing primarily on the U.S. recession and a 32 percent decline in holiday sales from 2007. U.S. retailers suffered from what was the worst holiday-shopping season in four decades, triggered by rising unemployment and declines in credit, according to the International Council of Shopping Centers.

SAP spokesman Saswato Das said today by telephone that the company was “assessing the situation” and couldn’t provide additional comment. No legal claims against SAP were made in the court filing.

Owner’s Loan

Shane, which said it’s one of the 10 biggest U.S. jewelry retailers, plans to reorganize the company with a $10.5 million loan from an entity partly controlled by the retailer’s owner, Tom Shane, according to Caroline Fuller, the company’s lawyer. Tom Shane earlier loaned the company $20 million, Fuller said today in an e-mail.

Shane’s assets and debt both exceed $100 million, the company said in its bankruptcy petition. The retailer projected sales of no more than $210 million for 2008, compared with sales of $275 million in 2007, court papers show.

During the past two years, as Shane’s debt grew, the company fired at least 177 workers, closed two stores and abandoned an “ill-advised” plan to open other locations, according to court papers. The company also abandoned a plan to relocate to a larger headquarters, it said.

Shane owes $15 million on a term loan arranged by Crystal Capital Fund LP and secured by a second lien on its assets, court papers show. The company owes another $12.6 million to a vendor under a three-year supply agreement, while total unsecured trade debt is $49 million, it said.

‘Full Functionality’

The SAP system didn’t become “stable and functional” until the fall of 2008 and still doesn’t operate as initially planned, Shane said in the court filing. The retailer now employs eight contractors to modify the SAP system and “bring it to full functionality,” it said.

Shane owes as much as $26.2 million to its 20 biggest unsecured creditors, court papers show. The largest unsecured creditor in the case is New York-based Dison Gems Inc., with a $4.7 million claim, the company said. Shane’s 6,000 creditors include 550 employees as well as 4,600 customers who placed special orders or made layaway deposits on future purchases.

The company, formerly Western Stone & Metal Corp., said on its retail Web site that its customers “pay no middleman markup” because Shane buys diamonds and other gems directly from cutters in Antwerp, Belgium, Tel Aviv, Bangkok and Bombay.

Shane’s products include wedding rings with 14 diamonds for $700 and 18-inch white gold necklaces with a trio of 1.25 carat diamonds for $3,295, according to its Web site. The company also sells loose diamonds and has a collection for men.

More than two dozen retailers filed for bankruptcy last year, including Circuit City Stores Inc., Linens ‘n Things Inc., Mervyn’s LLC, KB Toys Inc. and Sharper Image Corp.

The case is Shane Co., 09-10367, U.S. Bankruptcy Court, District of Colorado (Denver).

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: January 13, 2009 19:17 EST