REEDS JEWELERS INC, 10-K405, 1995-05-30

REEDS JEWELERS INC
10-K405, 1995-05-30
JEWELRY STORES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------

FORM 10-K

<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>

COMMISSION FILE NUMBER 0-15247

---------------------

REEDS JEWELERS, INC.
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
NORTH CAROLINA 56-1441702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2525 SOUTH SEVENTEENTH STREET

WILMINGTON, NORTH CAROLINA 28401
(Address of principal executive
offices) (Zip Code)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(910) 350-3100

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock $.10 Par Value
Title of Class

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 16, 1995 (computed by reference to the last reported
sales price of the registrant's common stock on NASDAQ on such date) was
$6,668,000.

The number of shares outstanding as of May 16, 1995 of the registrant's
common stock, par value $.10 per share, was 3,819,387.

DOCUMENTS INCORPORATED BY REFERENCE

The following document is incorporated by reference into the indicated Part
of the Annual Report of Form 10-K to the extent indicated in such Part:

Part III of the registrant's definitive Proxy Statement for the 1995
Annual Meeting of Shareholders.
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<PAGE> 2

PART I

ITEM 1. BUSINESS

Reeds Jewelers, Inc. (the "Company" or the "Registrant") operates 78
specialty retail jewelry stores primarily in enclosed regional malls located
principally in the sunbelt section of the United States. The Company was
incorporated under the laws of North Carolina in 1984 as part of a
reorganization whereby a number of affiliated corporations under common
ownership became subsidiaries of the Company. The oldest of these affiliated
corporations was incorporated as a North Carolina corporation in 1946.

PRINCIPAL PRODUCTS, MARKETS, AND METHODS OF DISTRIBUTION

The Company's stores, which are operated under the names of Reeds Jewelers
and Mills Jewelers, offer a wide selection of merchandise, including diamond
rings and jewelry, gold jewelry and chains, gemstone rings, watches, and other
fine jewelry. Most of the diamonds sold by the Company are up to one carat, with
a limited selection of larger diamonds. Gold jewelry items sold in the Company's
stores are primarily 14 carat, and its gemstone rings contain either precious
stones (such as rubies, sapphires, and emeralds) or semi-precious gems (such as
opals, blue topaz, amethyst, and garnets). Watches offered by the Company
represent many popular brand names in a broad range of price points. Sales by
class of similar products which accounted for 10 percent or more of net sales
during each of the last three fiscal years were as follows:

<TABLE>
<CAPTION>
CLASS 1995 1994 1993
------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Diamonds & Precious Gems..................................... 52.8% 49.2% 42.6%
Karat Gold Jewelry & Semi-precious Gems...................... 21.9% 22.7% 25.9%
Watches...................................................... 14.3% 16.3% 17.6%
</TABLE>

Approximately 80% of the products sold by the Company are purchased through
a centralized merchandising department at the Company's headquarters. The
centralization of buying allows the Company to establish long-term relationships
with vendors that provide a continuing source of product supply, consistent
quality control, and competitive pricing. As of February 28, 1995, the Company
operated 77 stores, of which 23 were located in North Carolina, 12 in South
Carolina, 10 in Florida, 7 in Virginia, 7 in Mississippi, 6 in Georgia, 4 in
Tennessee, 3 in Oklahoma, 2 in West Virginia, and 1 each in Alabama, Illinois,
and Kansas. Since February 28, 1995, the Company has opened a new store in
Virginia and plans to open an additional five to seven stores in the current
fiscal year if suitable locations become available. The Company chooses its
locations based upon the aggregate amount of jewelry business being done in the
mall being considered and also upon the amount of rent that will be charged for
the location.

The Company's stores range in size from approximately 650 to 2,100 square
feet of selling space. Approximately 75% of the merchandise sold in an
individual store is available in all the Company's stores, and the remainder is
chosen to meet the demand for particular merchandise at an individual store.

SOURCES AND AVAILABILITY OF MERCHANDISE

The Company employs experienced buyers who concentrate on purchasing
specific product lines from many suppliers in the United States and abroad. Most
of the Company's purchases are finished merchandise, which it obtains at
attractive prices and terms. The Company also arranges about 10% of its own
finished goods production by purchasing gold castings for rings, pendants, and
other items from several domestic sources and engaging independent goldsmiths to
polish the castings and set the stones supplied by the Company.

In the fiscal year ended February 28, 1995, the Company's three largest
suppliers accounted for 10.9%, 5.3%, and 5.1%, respectively, of the Company's
total merchandise purchases, with no other supplier accounting for more than
4.7%. Alternate sources exist for all merchandise provided by the Company's
suppliers, with the exception of any particular name brand.

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The supply and price of diamonds are substantially controlled by DeBeers
Consolidated Mines Ltd. ("DeBeers"). The availability of diamonds to DeBeers and
the Company's suppliers is to some extent dependent on the political situation
in diamond producing countries, such as South Africa, Botswana, Zaire,
Australia, and certain countries of the former Soviet Union. Any sustained
interruption in the supply of diamonds from the producing countries could
adversely affect the Company and the retail jewelry industry as a whole. DeBeers
maintains a large inventory of diamonds outside the producing countries,
however, mitigating the impact of volatility in supply from the producing
countries. Although changes in DeBeer's pricing cannot be predicted and could
have an adverse impact on the Company's business, the Company believes DeBeers
has had a stabilizing influence on the world diamond markets.

SEASONALITY

The Company's business is seasonal in nature. The fourth quarter, which
includes the major part of the Christmas selling season, produces higher sales
and earnings than any of the first three quarters. Net sales and net earnings
for each quarter as a percentage of annual net sales and net earnings for the
three most recent fiscal years were:

<TABLE>
<CAPTION>
NET SALES 1995 1994 1993
------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
First Quarter................................................ 19.2% 17.8% 19.1%
Second Quarter............................................... 19.3% 20.6% 20.0%
Third Quarter................................................ 23.6% 23.0% 22.9%
Fourth Quarter............................................... 37.9% 38.6% 38.0%

NET EARNINGS
-------------------------------------------------------------
First Quarter................................................ 8.0% 4.1% 3.3%
Second Quarter............................................... 9.9% 12.2% 0.4%
Third Quarter................................................ 16.6% 12.9% 3.7%
Fourth Quarter............................................... 65.5% 70.8% 92.6%
</TABLE>

PROPRIETARY CREDIT AND OTHER WORKING CAPITAL ITEMS

As is customary in the retail jewelry business, the Company finances some
of its customers' purchases. Proprietary credit sales represented approximately
53% of net sales in 1995 and approximately 52% and 54% of net sales during 1994
and 1993, respectively. The Company operates its centralized credit functions
under its wholly-owned subsidiary, Reeds Financial Services, Inc. ("RFSI"). All
credit extension, collection, and related activities are administered through
RFSI.

The Company extends credit to its customers under a level-pay plan. Finance
charges, subject to rate ceilings imposed by the various state laws, are
assessed on customers account balances. Credit is granted for varying lengths of
time, generally requiring payments of 5% of the individual customer's highest
balance, with minimum payments of $25 per month. Customers are also offered a
layaway plan that allows them to set items aside and pay for them over a period
of up to six months with no interest charges. The Company also provides optional
insurance coverage for all credit purchases.

Accounts receivable (prior to allowance for doubtful accounts) increased
14.5% to $38,248,000 at February 28, 1995 from $33,411,000 at February 28, 1994,
and had increased 8.9% from $30,668,000 at February 28, 1993. The allowance for
doubtful accounts was 7.5% of accounts receivable (prior to allowance for
doubtful accounts) at the end of each of the three fiscal years. Bad debt
expense as a percentage of net sales decreased to 3.9% in the fiscal year ended
February 28, 1995 from 4.1% and 4.7% in the years ended February 28, 1994 and
1993, respectively. The Company maintained its allowance at 7.5% because of the
general economic climate, in spite of having 9.4% less delinquency at February
28, 1995 than at the end of the prior year, when delinquency was 10.5% lower
than at the prior year-end. The Company's policies and procedures regarding
credit authorization, collection, and write-off have not changed during the
three-year period. Primarily as a result of the higher accounts receivable,
finance charges grew to $6,012,000 in the fiscal

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year ended February 28, 1995 from $5,435,000 and $4,967,000 in the fiscal years
ended February 28, 1994 and 1993, respectively.

The Company believes that customer satisfaction is a valuable form of
advertising and therefore stands behind its sales with repair services and
return and trade-in policies. The Company's policy is to accept, in exchange for
a full refund, any item of merchandise returned within thirty days of its
purchase. Diamond jewelry is backed by the Company with a lifetime warranty. The
Company also has a trade-in policy, pursuant to which a customer may exchange a
diamond in partial payment for one of higher value.

CUSTOMERS

As a retail organization, the Company is not dependent upon a single
customer, or a few customers, the loss of any one or more of which would have a
material adverse effect on the business of the Company.

COMPETITION

The retail jewelry industry is highly competitive and fragmented, with a
large number of independent jewelry retailers. According to National Jeweler, a
trade publication, based on the number of units, the Company is the eleventh
largest retail jewelry chain in the United States. However, the jewelry chains
believed by the Company to be the two largest (Zale Corporation and Sterling,
Inc.) are substantially larger than the Company and compete directly with the
Company in a number of markets. Although the Company considers its primary
competition to be other jewelry outlets in the malls in which it operates, it
also competes for customers in various markets with other regional chains,
department stores, discount stores, catalog showrooms, direct mail suppliers,
and television shopping networks.

The Company believes the retail jewelry industry competes primarily on the
basis of reputation, value, service, location, and fashion. Success is
substantially dependent on the experience, training, and enthusiasm of sales
personnel and the ability to respond quickly to the level of consumer demand for
particular items of merchandise. The Company seeks to maintain and increase its
market position by aggressively promoting competitive prices and value, by
offering quality products and services, and by employing superior inventory
replenishment and management information systems.

EMPLOYEES

As of February 28, 1995, the Company had a total of 713 full-time and
part-time employees. Of these, 147 were employed in the corporate headquarters
and the remaining 566 were employed in the stores. Throughout the year, the
Company hires a number of part-time employees, primarily during the holiday
shopping seasons. Approximately 70% of all employees during the year are
full-time and 30% are part-time.

MISCELLANEOUS

The Company has made public no information about any new product that would
require the investment of a material amount of assets or that otherwise is
material.

The Company holds no material patents, trademarks, licenses, franchises, or
concessions.

As a retail organization, the Company maintains no significant amount of
backlog orders.

No portion of the Company's business involves contracts or subcontracts
with the United States government.

The Company has an agreement to receive royalties, which are immaterial in
amount, from sales of a software product to jewelers and other retailers which
the Company and the marketing vendor developed.

Federal, state, and local laws and regulations relating to the protection
of the environment are generally inapplicable to the operations of the Company
and, accordingly, are not expected to have a material effect on the Company's
business.

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<PAGE> 5

ITEM 2. PROPERTIES

With the exception of its downtown Wilmington location, which it owns, the
Company occupies its various store premises under lease arrangements which are
generally on a five to ten year basis with monthly payments of normally four to
six percent of sales (generally defined as total receipts, net of returns,
exchanges, and sales taxes), subject to minimum payments. Two of the Company's
stores are leased in a strip shopping center and the remaining 79 leases are for
locations in enclosed regional shopping malls. Under the terms of the typical
lease, the Company is required to maintain and conform its usage to specified
standards, often including required advertising expenditures, and is responsible
for its proportionate share of expenses associated with common area maintenance,
utilities, and taxes. The table below sets forth information with respect to the
expiration of leases on locations in operation or committed to by the Company as
of February 28, 1995:

<TABLE>
<CAPTION>
NUMBER OF LEASES
YEAR OF EXPIRATION WHICH EXPIRE
--------------------------------------------------- ----------------
<S> <C>
1995............................................... 3
1996............................................... 9
1997............................................... 4
1998............................................... 9
1999............................................... 8
2000............................................... 9
2001............................................... 13
2002............................................... 7
2003............................................... 3
2004............................................... 4
2005............................................... 7
2006............................................... 4
2007............................................... 1
</TABLE>

Leases for 9,851 square feet and 7,980 square feet for the Corporate
Headquarters in Wilmington, North Carolina are with related parties and expire
December 31, 2006 and June 30, 1996, respectively. Additional information
regarding these leases is incorporated herein by reference to the information
contained under the heading Certain Relationships and Related Transactions in
Item 13 of Part III of this document.

ITEM 3. LEGAL PROCEEDINGS

The Company is from time to time involved in routine litigation incidental
to the conduct of its business. The Company believes that no currently pending
litigation to which it is a party will have a material adverse effect on its
consolidated financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year covered by this report.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of May 16, 1995 there were 3,819,387 shares outstanding held by
approximately 200 shareholders of record plus approximately 800 non-objecting
beneficial owners whose shares are held in nominee or "street" name by brokers.
The Company has not paid any cash dividends on its stock since its inception,
and has no intention to pay cash dividends in the foreseeable future (See
Footnote 2 to the Consolidated Financial Statements). The Company's common stock
trades on the NASDAQ National Market under the symbol REED. The quarterly high
and low sales prices of the Company's common stock (adjusted for the 10% stock
dividend issued on August 1, 1994) for the fiscal years ended February 28, 1995
and 1994 were as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1995 HIGH LOW
---------------------------------------------------------------- ------- ------
<S> <C> <C>
Fourth Quarter.................................................. $11.500 $7.500
Third Quarter................................................... 11.500 7.000
Second Quarter.................................................. 12.000 9.500
First Quarter................................................... 11.925 9.450

FISCAL YEAR ENDED FEBRUARY 28, 1994
----------------------------------------------------------------
Fourth Quarter.................................................. $11.925 $8.325
Third Quarter................................................... 9.450 5.625
Second Quarter.................................................. 6.075 5.175
First Quarter................................................... 5.625 4.725
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER
OF STORES)
<S> <C> <C> <C> <C> <C>
Net Sales........................ $77,496 $67,305 $58,356 $53,725 $50,878
Bad Debt Expense................. 3,000 2,761 2,716 2,983 2,664
Interest Expense................. 3,040 2,957 3,183 3,595 3,827
Net Earnings..................... 4,113 3,180 2,115 1,103 964
Earnings Per Share............... 1.08 .83 .56 .29 .25
Working Capital.................. 45,815 38,828 37,489 35,973 35,861
Total Assets..................... 77,401 67,499 60,779 57,950 58,763
Long-Term Debt, Less Current..... 29,278 25,803 28,161 30,299 33,080
Shareholders' Equity............. 25,827 21,666 18,486 16,371 15,268
Number of Stores................. 77 71 66 67 65
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Sales and Other Revenues

At February 28, 1995 the Company operated 77 stores in twelve states
compared to 71 stores in eleven states and 66 stores in eleven states at
February 28, 1994 and 1993, respectively. Total net sales for fiscal 1995 were
up 15% to $77,496,000 from $67,305,000 in fiscal 1994 which were 15% higher than
sales of $58,356,000 in fiscal 1993. Same store sales, or stores open in
comparable periods, increased 9% in 1995 compared to increases of 12% and 9% in
1994 and 1993, respectively.

Average sales per store increased 8% to $1,057,000 per store in 1995;
average sales per store were $975,000 and $869,000 in 1994 and 1993,
respectively. Average sales per employee rose 14% to $108,690 in 1995 and were
14% higher in 1994 over 1993, increasing to $95,740 from $84,293. Average sales
per selling square foot increased 5% to $911 in 1995, after rising 8% in 1994 to
$864 from $802. The increase in sales in

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1995 resulted from an increase in the average sales transaction which was up 12%
to $146, while the number of sales transactions increased 3%. The average sales
transaction in 1994 was 11% higher than in 1993, and the number of sales
transactions increased 4% in 1994 compared to 1993.

Other revenues increased $725,000 in 1995 and $770,000 in 1994 over the
prior year. The increases resulted primarily from higher levels of accounts
receivable and the finance charges and credit insurance revenues related
thereto. Finance charges were the primary component in each of the years,
representing 70%, 69%, and 69% of other revenues in 1995, 1994, and 1993,
respectively, with credit insurance products (property, disability,
unemployment, and life) accounting for 11%, 10%, and 9% in the three years,
respectively. Income from extended service agreements accounted for 15%, 12%,
and 8% of other revenues in 1995, 1994, and 1993, respectively. All other
revenue items were less than 5% of the total.

Gross Profit

Gross profit (net of occupancy costs) was 42.2% of net sales in 1995, 42.6%
in 1994, and 42.3% in 1993. More promotional pricing in the diamond and gold
categories in order to build market share caused the decrease in gross margins
in 1995. The increase in gross margins in 1994 resulted from the leveraging of
occupancy costs over higher average sales per store. The Company continues to
enjoy competitive pricing on its purchases of merchandise. The Company also
plans to continue its aggressive approach to building market share by opening
new stores and increasing sales in existing stores, and anticipates that margins
during the year ending February 29, 1996 will be no better than last year.

Selling, General, and Administrative Expenses (SG&A)

Selling, general, and administrative expenses as a percentage of net sales
were 37.5%, 38.4%, and 38.7% in 1995, 1994, and 1993, respectively. In 1995, in
support of the Company's approach to building market share, the Company
increased advertising expenditures by 11% over the prior year; in 1994,
advertising was raised by 24%. For 1995, 1994, and 1993, advertising represented
4.7%, 4.5%, and 4.2% of net sales, respectively. Compensation expenses rose
nearly 15% in 1995 and accounted for 64% of SG&A expenses; similar expenses
increased 13% in 1994 over 1993, and represented 63% and 64% of total SG&A,
respectively during the two years.

Bad Debt Expense

Bad debt expense increased 8.7% to $3,000,000 (3.9% of net sales) in the
year ended February 28, 1995 from $2,761,000 (4.1% of net sales) in 1994; bad
debt expense in 1993 was $2,716,000 (4.7% of net sales). Actual write-offs as a
percentage of net sales during each of the years was 3.4% in 1995, 3.8% in 1994,
and 4.4% in 1993.

The allowance for doubtful accounts at the end of each of the three years
was 7.5% of customer receivables (prior to the allowance for doubtful accounts).
The Company's policies and procedures regarding credit authorization,
collection, and write-off have not changed during the three-year period.
Delinquent accounts (accounts more than 90 days past due) represented 7.7%,
8.5%, and 9.5% of the Company's accounts receivable portfolio at February 28,
1995, 1994, and 1993, respectively.

Interest Expense

Interest expense decreased to 3.9% of net sales in 1995 from 4.4% in 1994
and 5.5% in 1993. About 65% of the $83,000 increase in 1995 was caused by higher
interest rates charged to the Company for its variable rate debt, while 87% of
the $226,000 decrease in 1994 resulted from lower average debt outstanding
throughout the year.

Income Taxes

The provision for income taxes was $2,110,000 (33.9% effective rate) in
1995, $1,789,000 (36.0% effective rate) in 1994, and $1,200,000 (36.2% effective
rate) in 1993. The lower effective rates in each of the

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last two years resulted primarily from the benefits attributable to the captive
insurance company and from a reduction in the Company's state income taxes as a
result of being able to use a portion of the Company's state net operating loss
carryovers.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires cash for purchasing inventory, opening new stores,
making leasehold improvements, and acquiring equipment. Working capital needs
normally peak in the fall as the Company increases inventories to meet
anticipated demand during the all-important Christmas selling season. The
Company's long-term growth strategy will require increasing working capital to
fund capital expenditures, receivables, and inventories for new stores while the
Company makes annual payments through 1998 on its senior secured and senior
subordinated notes. These working capital needs will be financed through funds
generated from operations and bank lines described below. Cash used in
operations was $802,000 in 1995, and cash provided by operations was $2,373,000
in 1994, and $2,037,000 in 1993.

Capital expenditures totaled $2,823,000 in 1995, $1,211,000 in 1994, and
$659,000 in 1993. The Company relocated a store in Hattiesburg MS, and opened
new stores in 1995 in Gainesville and Melbourne FL, Parkersburg WV, Fayetteville
and Asheville NC, Topeka KS, and Atlanta GA. The Company closed a store in
Columbus GA during the year.

Since year end, the Company has opened a new store in Fredricksburg, VA and
plans to open five to seven more new stores in the current fiscal year. The
Company has budgeted $2,700,000 for capital expenditures in the fiscal year
ending February 29, 1996 for new store openings, major and minor remodels, and
for various other equipment. These capital expenditures will be financed through
funds generated from operations and bank lines described below.

Debt

Borrowings under the Company's revolving credit facility averaged $17.0
million in 1995, $12.6 million in 1994, and $11.1 million in 1993. The maximum
borrowings outstanding under the facility at any time during each year were
$22.0 million in 1995, $16.0 million in 1994, and $14.7 million in 1993. At
February 28, 1995, $19.0 million was outstanding under the facility, compared to
$12.2 million and $11.3 million at February 28, 1994 and 1993, respectively.

Since February 28, 1995, the Company has renewed and increased the
revolving credit facility with two commercial banks through June 30, 1996. The
Company's revolving credit facility makes available $22 million at April 1,
1995, increasing throughout the 1996 fiscal year to a maximum of $27 million
through January 31, 1996. For the period from February 1, 1996 through April 30,
1996 and the period from May 1, 1996 to the end of the agreement at June 30,
1996, the Company can borrow up to $24 million and $25 million, respectively.
The Company will pay interest under the revolving credit facility at 30-day
LIBOR plus 165-171 basis points, capped at the bank's prime rate less 0.25%.

The Company also has $5.7 million in senior secured notes with four
insurance companies, with interest payable quarterly at 10.79% and four
remaining annual principal payments of $1.4 million due in October of each year
through 1998. In addition, the Company has $6.9 million in a senior subordinated
note with another insurance company, with interest payable quarterly at 12.11%
and quarterly principal payments of $457,000 through October 1998.

In order to hedge the interest rates related to the senior secured notes
and the senior subordinated note, on May 23, 1994, the Company entered into an
interest rate swap with a major commercial bank as the counterparty. The swap is
for a term of two years ending May 24, 1996 at notional amounts of $15 million
for the first year and reducing to $12 million for the second year,
approximating the outstanding average balances on the senior secured notes and
the senior subordinated note. At the end of each six month period during the
term of the swap, the Company will receive an annualized fixed rate of 6.35% and
will pay the six-month LIBOR rate in effect, at the counterparty's option, at
either the beginning or the end of each six-month period. The risk associated
with this swap is a function of the change in the floating LIBOR rate, which
would have to

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<PAGE> 9

be approximately 130 basis points higher at any determination date than it was
at the time the swap agreement was initiated in order for the Company to have a
net expense for the period. Rates have risen during the first year of the
agreement and resulted in an expense of approximately $8,000 at the first reset
date; the Company expects a similar expense at May 24, 1995, the second reset
date. Management does not expect significant changes in interest rates during
the final year of the agreement, and therefore expects any impact on earnings,
positive or negative, resulting from this agreement to be small.

The Company also has subordinated notes totaling $900,000 with three
related parties, with interest payable monthly at the prime rate quoted in The
Wall Street Journal. The notes are unsecured and are subordinate to the senior
notes and the existing revolving bank note, which are collateralized by
substantially all of the Company's assets.

Impact of Inflation

The Company generally follows the practice of passing on increases in the
cost of its merchandise to its customers. Increases in labor and other costs
must be recovered through operating efficiencies and improved gross profits.

At this time, management knows of no other material events or uncertainties
which would cause the financial information contained herein not to be
indicative of the operating results or future financial condition of Reeds
Jewelers, Inc.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

For information required by this item, see "Index to Financial Statements
and Financial Statement Schedules" beginning at page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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<PAGE> 10

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated herein by reference
to the information contained under the heading "Election of Directors" in the
Company's Proxy Statement for the 1995 Annual Meeting of Shareholders (except
for the information contained under the subheadings "Committees of the Board of
Directors; Meetings and Compensation of Directors" and "Certain Transactions,"
which is not incorporated herein by reference).

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated herein by reference
to the information contained under the heading "Compensation of Executive
Officers" in the Company's Proxy Statement for the 1995 Annual Meeting of
Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company leases it corporate headquarters from a partnership comprised
of Alan M. Zimmer, Herbert J. Zimmer, Jeffrey L. Zimmer, and Arlene Z.
Schreiber. Alan M. Zimmer is President and Chief Executive Officer of the
Company and Herbert J. Zimmer, Jeffrey L. Zimmer, and Arlene Z. Schreiber are
all Directors. Monthly rental payments under this lease are $13,300. The Company
also pays the related insurance, property taxes, maintenance fees, and utilities
for this location. The lease for this property expires December 31, 2006. Based
on rentals charged for comparable properties in Wilmington, the Company believes
the terms of the lease are no less favorable to the Company than those that
could be obtained from unaffiliated parties.

The Company leases 7,980 square feet of space in an office plaza adjacent
to the Company's headquarters and owned by a partnership comprised of Alan M.
Zimmer, Herbert J. Zimmer, and Jeffrey L. Zimmer. Rental payments for the leased
space housing the Company's accounting, credit, and repair operations are $7,008
per month. The Company also pays the related insurance, property taxes, and
utilities for this location. The lease for this space expires June 30, 1996.
Based on rentals charged, the Company believes the terms of the lease are no
less favorable to the Company than those that could be obtained from
unaffiliated parties.

Alan M. Zimmer, Herbert J. Zimmer, and Jeffrey L. Zimmer, through a
partnership, own property upon which a parking lot for the corporate
headquarters is located. This location has been leased to the Company for an
extended one-year term expiring May 31, 1996 with monthly rentals of $1,184. The
Company also pays the related insurance, property taxes, maintenance fees, and
utilities for this facility. Based on rentals charged for comparable properties
in Wilmington, the Company believes the terms of the lease are no less favorable
than those that could be obtained from unaffiliated parties.

Herbert J. Zimmer and Jeffrey L. Zimmer are partners in the law firm of
Zimmer and Zimmer, which serves as general counsel to the Company. During the
fiscal year ended February 28, 1995, the Company paid Zimmer and Zimmer legal
fees and reimbursement of costs advanced in the amount of $175,000; the Company
paid $186,000 and $167,000 to Zimmer and Zimmer in 1994 and 1993, respectively.

9
<PAGE> 11

Between June 30, 1989 and February 6, 1990, the Company borrowed a total of
$1,370,000 from three of its principal shareholders, of which $470,000 was
repaid as of May 18, 1990. Interest is paid monthly on the amounts borrowed at
the prime rate as quoted each month in The Wall Street Journal. The amounts
remaining outstanding under the notes are $615,000 to Alan M. Zimmer, $185,000
to Arlene Z. Schreiber, and $100,000 to Ronna T. Zimmer (the wife of Herbert J.
Zimmer). These amounts are evidenced by various subordinated notes and are due
upon full payment of all senior obligations or with approval of all senior
lenders.

10
<PAGE> 12

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) AND (2) Financial Statement and Financial Statement Schedule: The
financial statements, financial statement schedule and report
of independent auditors listed in the accompanying index are
filed as part of this annual report.

(a)(3) EXHIBITS:

<TABLE>
<C> <S>
3(a) Charter and Charter Amendments of the Registrant, as amended effective June 28,
1990 (incorporated by reference to the Company's Form 10-K for the fiscal year
ended February 28, 1991, file number 0-15247)
3(b) Bylaws of the Registrant, as amended effective August 10, 1990 (incorporated by
reference to the Company's Form 10-K for the fiscal year ended February 28,
1991, file number 0-15247)
4 Registrant undertakes to furnish the Commission, upon request, a copy of any
instrument defining the rights of holders of long-term debt of the Registrant
and all of its subsidiaries for which consolidated or unconsolidated financial
statements are required to be filed.
10(a) Lease Agreement with Zimmer Brothers, a Partnership, dated February 13, 1986 and
First Amendment dated August 15, 1986 (incorporated by reference to the
Company's Registration Statement on Form S-1, file number 33-10091)
10(b) Second Amendment to Lease Agreement with Zimmer Brothers, a Partnership
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
February 28, 1991, file number 0-15247)
10(c) 1986 Employee Incentive Stock Option Plan (incorporated by reference to the
Company's Registration Statement on Form S-1, file number 33-10091)
10(d) Shareholder Agreement (incorporated by reference to the Company's Registration
Statement on Form S-1, file number 33-10091)
10(e) Consulting Agreement dated May 31, 1987 with Jed Dreifus (incorporated by
reference to the Company's Form 8-K filed with the Commission on June 19, 1987,
file number 0-15247)
10(f) Noncompetition Agreement dated May 28, 1987 with Jed Dreifus (incorporated by
reference to the Company's Form 10-K for the fiscal year ended February 28,
1989, file number 0-15247)
10(g) Lease Agreement with Zimmer Brothers, a Partnership, dated January 22, 1991
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
February 28, 1991, file number 0-15247)
10(h) Master Equipment Lease Agreement dated October 15, 1990 with XL/DATACOMP, INC.
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
February 28, 1991, file number 0-15247)
10(i) Reeds Jewelers 401(k) Profit Sharing Plan and Trust Summary (incorporated by
reference to the Company's Form 10-K for the fiscal year ended February 28,
1993, file number 0-15247)
10(j) 1992 Director Stock Option Plan (incorporated by reference to the Company's Form
10-K for the fiscal year ended February 28, 1993, file number 0-15247)
10(k) Amendment dated March 23, 1987 to 1986 Employee Incentive Stock Option Plan
(incorporated by reference to the Company's Form 10-K for the fiscal year ended
February 28, 1987, file number 0-15247)
10(l) Form of non-qualified supplemental executive retirement plan (incorporated by
reference to the Company's Form 10-K for the fiscal year ended February 28,
1994, file number 0-15247)
10(m) 1994 Stock Option Plan
21 List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP Independent Auditors
27 Financial Data Schedule (For SEC Use Only)
</TABLE>

(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT.

None.

11
<PAGE> 13

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, on the 26th day of
May, 1995.

REEDS JEWELERS, INC.
(Registrant)

By /s/ JAMES R. ROUSE

------------------------------------
(James R. Rouse)
Treasurer and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 26th day of May, 1995.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- - --------------------------------------------- ---------------------------------------------
<C> <S>

/s/ ALAN M. ZIMMER President and Chief Executive Officer and
- - --------------------------------------------- Director
(Alan M. Zimmer)

/s/ WILLIAM R. ZIMMER Chairman of the Board of Directors
- - ---------------------------------------------
(William R. Zimmer)

/s/ JAMES R. ROUSE Treasurer and Chief Financial Officer and
- - --------------------------------------------- Director
(James R. Rouse)

/s/ ALLAN E. METZNER Vice President and Corporate Controller
- - --------------------------------------------- (Principal Accounting Officer)
(Allan E. Metzner)

/s/ ROBERTA G. ZIMMER Secretary and Director
- - ---------------------------------------------
(Roberta G. Zimmer)

/s/ GARLAND WADDY GARRETT Director
- - ---------------------------------------------
(Garland Waddy Garrett)

/s/ ARLENE Z. SCHREIBER Director
- - ---------------------------------------------
(Arlene Z. Schreiber)

/s/ RICHARD F. SHERMAN Director
- - ---------------------------------------------
(Richard F. Sherman)

/s/ HERBERT J. ZIMMER Director
- - ---------------------------------------------
(Herbert J. Zimmer)

/s/ JEFFREY L. ZIMMER Director
- - ---------------------------------------------
(Jeffrey L. Zimmer)
</TABLE>

12
<PAGE> 14

REEDS JEWELERS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1995, FEBRUARY 28, 1994, AND FEBRUARY 28, 1993

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-4
Consolidated Statements of Shareholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
Schedule II -- Valuation and Qualifying Accounts...................................... F-15
</TABLE>

F-1
<PAGE> 15

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Reeds Jewelers, Inc. and Subsidiaries
Wilmington, North Carolina

We have audited the accompanying consolidated balance sheets of Reeds
Jewelers, Inc. and subsidiaries as of February 28, 1995 and 1994 and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended February 28, 1995. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and 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 from
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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reeds Jewelers,
Inc. and subsidiaries as of February 28, 1995 and 1994, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended February 28, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Raleigh, North Carolina
March 29, 1995, except Note 11
as to which date is March 31, 1995

F-2
<PAGE> 16

REEDS JEWELERS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 28,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 134,000 $ 254,000
Accounts receivable:
Customers, less allowance of $2,869,000 in 1995 and
$2,510,000 in 1994....................................... 35,379,000 30,901,000
Other...................................................... 838,000 726,000
Merchandise inventories....................................... 26,438,000 22,230,000
Deferred income taxes......................................... 1,840,000 1,567,000
Other......................................................... 365,000 444,000
------------ ------------
Total current assets............................................ 64,994,000 56,122,000
Property, plant and equipment:
Land and building............................................. 71,000 71,000
Furniture and equipment....................................... 12,647,000 10,925,000
Leasehold improvements........................................ 8,175,000 7,664,000
------------ ------------
20,893,000 18,660,000
Less accumulated depreciation and amortization................ (11,270,000) (10,038,000)
------------ ------------
9,623,000 8,622,000
Other assets:
Goodwill, net of accumulated amortization of $536,000 in 1995
and $469,000 in 1994....................................... 2,189,000 2,257,000
Deferred income taxes, net of valuation allowance of $200,000
in 1995 and 1994........................................... 215,000 154,000
Miscellaneous................................................. 380,000 344,000
------------ ------------
2,784,000 2,755,000
------------ ------------
Total assets.................................................... $ 77,401,000 $ 67,499,000
=========== ===========

LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable.............................................. $ 8,567,000 $ 8,369,000
Accrued compensation.......................................... 2,469,000 1,264,000
Accrued expenses.............................................. 2,054,000 1,889,000
Deferred revenue.............................................. 1,074,000 921,000
Income taxes (Note 7)......................................... 1,702,000 1,538,000
Current portion of long-term debt and subordinated notes
payable (Note 2)........................................... 3,313,000 3,313,000
------------ ------------
Total current liabilities....................................... 19,179,000 17,294,000
Revolving credit note (Note 2).................................. 19,000,000 12,212,000
Long-term debt and subordinated notes payable, less current
portion (Note 2).............................................. 9,378,000 12,691,000
Subordinated notes payable to shareholders (Note 2)............. 900,000 900,000
Deferred income taxes........................................... 2,211,000 1,934,000
Deferred revenue................................................ 906,000 802,000
------------ ------------
51,574,000 45,833,000
Commitments (Note 4)
Shareholders' equity (Notes 8 and 9):
Common stock, par value $.10 per share, authorized 10,000,000
shares, issued and outstanding 3,819,387 and 3,462,500
shares in 1995 and 1994, respectively...................... 382,000 346,000
Additional paid-in capital.................................... 7,406,000 3,447,000
Retained earnings............................................. 18,039,000 17,873,000
------------ ------------
Total shareholders' equity...................................... 25,827,000 21,666,000
------------ ------------
Total liabilities and shareholders' equity...................... $ 77,401,000 $ 67,499,000
=========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE> 17

REEDS JEWELERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Income before income taxes.......................... 6,223,000 4,969,000 3,315,000
Income taxes (Note 7)............................... 2,110,000 1,789,000 1,200,000
------------ ------------ ------------
Net income.......................................... $ 4,113,000 $ 3,180,000 $ 2,115,000
========== ========== ==========

Earnings per common share........................... $ 1.08 $ .83 $ .56
========== ========== ==========

Weighted average shares outstanding................. 3,817,000 3,808,750 3,808,750
========== ========== ==========
</TABLE>

See accompanying notes.

F-4
<PAGE> 18

REEDS JEWELERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at March 1, 1992................. $346,000 $ 3,447,000 $12,578,000 $16,371,000
Net income for 1993.................... 2,115,000 2,115,000
-------- ----------- ----------- -----------
Balance at February 28, 1993............. 346,000 3,447,000 14,693,000 18,486,000
Net income for 1994.................... 3,180,000 3,180,000
-------- ----------- ----------- -----------
Balance at February 28, 1994............. 346,000 3,447,000 17,873,000 21,666,000
EXERCISE OF STOCK OPTIONS FOR COMMON
STOCK............................... 1,000 47,000 -- 48,000
10% STOCK DIVIDEND (NOTE 8)............ 35,000 3,912,000 (3,947,000) --
NET INCOME FOR 1995.................... 4,113,000 4,113,000
-------- ----------- ----------- -----------
BALANCE AT FEBRUARY 28, 1995............. $382,000 $ 7,406,000 $18,039,000 $25,827,000
======== ========= ========== ==========
</TABLE>

See accompanying notes.

F-5
<PAGE> 19

REEDS JEWELERS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 4,113,000 $ 3,180,000 $ 2,115,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization............... 1,724,000 1,497,000 1,745,000
Provision for deferred income taxes......... (57,000) -- (143,000)
Loss (gain) on sale of property and
equipment................................. 166,000 -- (52,000)
Changes in operating assets and liabilities:
Accounts receivable....................... (4,590,000) (2,662,000) (2,151,000)
Merchandise inventories................... (4,208,000) (4,547,000) (1,371,000)
Other current and miscellaneous assets.... 43,000 (38,000) 15,000
Accounts payable.......................... 198,000 3,508,000 312,000
Accrued expenses.......................... 1,370,000 564,000 700,000
Deferred revenue.......................... 257,000 360,000 528,000
Income taxes.............................. 164,000 511,000 339,000
------------ ------------ ------------
Net cash (used in) provided by operating
activities..................................... (820,000) 2,373,000 2,037,000

INVESTING ACTIVITIES
Purchases of property and equipment.............. (2,823,000) (1,211,000) (659,000)
Proceeds from disposal of property and
equipment...................................... -- -- 178,000
------------ ------------ ------------
Net cash used in investing activities............ (2,823,000) (1,211,000) (481,000)

FINANCING ACTIVITIES
Proceeds from exercise of stock options.......... 48,000 -- --
Net proceeds from revolving credit note.......... 6,788,000 954,000 473,000
Principal payments on debt....................... (3,313,000) (2,610,000) (1,689,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 3,523,000 (1,656,000) (1,216,000)

Net (decrease) increase in cash and cash
equivalents.................................... (120,000) (494,000) 340,000
Cash and cash equivalents at beginning of year... 254,000 748,000 408,000
------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 134,000 $ 254,000 $ 748,000
=========== =========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest....................................... $ 3,107,000 $ 3,006,000 $ 3,217,000
=========== =========== ===========
Income taxes................................... $ 2,003,000 $ 1,278,000 $ 639,000
=========== =========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE> 20

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

Description of Business

Reeds Jewelers, Inc. and subsidiaries (the "Company") are specialty
retailers of fine jewelry, selling to the general public through retail outlets
in twelve states in the United States. Substantially all of the Company's
accounts receivable are due from individual customers in these states.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries, all of which are wholly owned. Significant intercompany
accounts and transactions have been eliminated in consolidation.

Reclassification

Certain 1994 and 1993 amounts in the accompanying financial statements have
been reclassified to conform with 1995 classifications. These reclassifications
had no impact on net income or shareholders' equity amounts previously reported.

Merchandise Inventories

Merchandise inventories are carried at the lower of cost or market using
the first-in, first-out (FIFO) method.

Accounts Receivable

Accounts receivable include installment amounts maturing more than one year
from the balance sheet dates, in accordance with trade practice. Interest rates
on these balances vary by state. The Company's exposure to credit loss in the
event that payment is not received for revenue recognized equals the outstanding
accounts receivable balance less the value received for any merchandise
repossessed due to uncollectible accounts. Although the Company does not require
collateral for unpaid balances, the Company's credit losses have consistently
been within management's expectations.

Property, Plant, and Equipment

Property, plant, and equipment is stated at cost. Depreciation is computed
by the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is provided using the
straight-line method over the useful life of the improvement or the remaining
lease term, whichever is shorter. The estimated useful lives are as follows:

<TABLE>
<S> <C>
Building............................................... 40 years
Furniture and equipment................................ 5-10 years
Leasehold improvements................................. 5-10 years
</TABLE>

Goodwill

Goodwill represents the excess cost over the fair value of net assets
acquired, recorded at cost and is being amortized on a straight-line basis over
40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If such a review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired, over the remaining amortization period, the
Company will reduce goodwill by the estimated shortfall of cash flows.

F-7
<PAGE> 21

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ACCOUNTING POLICIES -- CONTINUED
Earnings Per Common Share

Earnings per common share is based on the weighted average number of shares
of common stock outstanding during each year. In accordance with APB No. 15
"Earnings Per Share", the weighted average number of shares of common stock
outstanding for all periods presented has been adjusted to reflect the increase
in the number of shares outstanding as a result of the stock dividend described
in Note 8. Earnings per common share does not give effect to the stock options
described in Note 9 because they do not have a material dilutive effect.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.

Deferred Revenue

For the fiscal years ended February 28, 1995, 1994, and 1993, in accordance
with FASB Technical Bulletin 90-1, "Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts", revenue from these contracts was
deferred and recognized in income on a straight-line basis over the contract
period. This deferred revenue has been separated into its current and long-term
portions on the balance sheet. Commission costs that are directly related to the
acquisition of these contracts are deferred and charged to expense in proportion
to the revenue recognized. All other costs, such as costs of services performed
under the contracts, general and administrative expenses, and advertising
expenses, are charged to expense as incurred.

Income Taxes

Effective March 1, 1993, the Company adopted the provisions of the
Financial Accounting Standards Board Statement 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, the liability method is used in accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Prior to
the adoption of SFAS 109, income tax expense was determined using the liability
method prescribed by SFAS 96.

2. LONG-TERM DEBT AND NOTES PAYABLE

Long-term debt at February 28, 1995 and 1994 consisted of the following:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Senior notes payable in annual principal installments of
$1,429,000 from October 1995 through October 1998;
interest payable quarterly at 10.79%.................. $ 5,715,000 $ 7,143,000
Senior subordinated note, unsecured, payable in
quarterly principal installments of $457,000 from
April 1995 through October 1998; interest payable
quarterly at 12.11%................................... 6,857,000 8,686,000
Other................................................... 119,000 175,000
----------- -----------
12,691,000 16,004,000
Less current portion.................................... 3,313,000 3,313,000
----------- -----------
$ 9,378,000 $12,691,000
========== ==========
</TABLE>

F-8
<PAGE> 22

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. LONG-TERM DEBT AND NOTES PAYABLE -- CONTINUED
The aggregate maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
YEAR ENDING FEBRUARY
------------------------------------------------------
<S> <C>
1996.................................................. $ 3,313,000
1997.................................................. 3,320,000
1998.................................................. 3,258,000
1999.................................................. 2,800,000
-----------
$12,691,000
===========
</TABLE>

The Company also has subordinated notes payable to shareholders totaling
$900,000 at February 28, 1995 and 1994 with interest at prime (9% at February
28, 1995). These notes are unsecured and subordinate to the revolving credit
note and the senior notes payable and are due upon full payment of all senior
obligations or with approval of all senior lenders, and are therefore classified
as long-term liabilities.

On June 30, 1994, the Company replaced its revolving credit facility with a
new revolving credit facility (the "revolver"), expiring June 30, 1996, with two
commercial banks. This revolving credit facility provides that the Company can
borrow up to $22,000,000 from July 1 through December 31 and $19,000,000 from
January 1 through June 30 during the term of the facility based on specified
percentages of eligible inventory and accounts receivable. Commitment fees of
.125% of the average unused commitment are payable quarterly; however, during
any quarter in which the average outstanding balance exceeds two-thirds of the
maximum commitment, no commitment fee is charged. Borrowings outstanding under
the new revolver bear interest at the Company's option, at the 30-day LIBOR rate
plus 165 basis points (6.125% at February 28, 1995) or the bank's prime rate
less 0.25%. The Company had $19,000,000 outstanding on this revolver at February
28, 1995. On March 31, 1995, the Company entered into an amendment to the
revolver which is further described in Note 11.

Under the terms of the previous revolving credit arrangement, the Company
could borrow up to $13,000,000 based on specified percentages of eligible
inventory and accounts receivable with interest at prime plus 0.25%. The Company
had $12,212,000 outstanding on this revolver at February 28, 1994.

Both the revolving credit agreement and the senior notes payable are
collateralized by substantially all of the Company's assets.

The various loan agreements contain financial covenants including those
that limit dividend payments and additional borrowings and prohibit new store
openings if an event of default exists.

3. INTEREST RATE SWAP AGREEMENT

In order to hedge the interest rates related to the senior secured notes
and the senior subordinated notes, on May 24, 1994, the Company entered into an
interest rate swap (the "swap") with a major commercial bank as the
counterparty. The swap is for a term of two years ending May 24, 1996 at
notional amounts of $15,000,000 for the first year and reducing to $12,000,000
for the second year, approximating the outstanding average balances on the
senior secured notes and the senior subordinated note. At the end of each six
month period during the term of the swap, the Company will receive an annualized
fixed rate of 6.35% and will pay the six-month LIBOR rate in effect at the
counterparty's option at either the beginning or the end of each six month
period. The Company records the differential (the fixed rate less six month
LIBOR rate) as a reduction or as an increase in interest expense depending on
whether the differential is positive or negative. The related amount payable to
the counterparty is included in other liabilities. Interest expense included in
the financial statements includes approximately $8,000 of additional interest
expense related to this agreement.

F-9
<PAGE> 23

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. LEASES

The Company leases retail store facilities under operating lease agreements
which provide for base and percentage rentals with terms normally ranging from
five to ten years. Percentage rentals are based on sales performance in excess
of specified minimums, plus executory costs including taxes and maintenance.
Certain of the leases contain fixed renewal options. The Company also leases
various equipment on a short-term basis throughout the year.

The corporate offices and related facilities are leased from certain
shareholders under operating lease agreements. The leases expire at various
times through 2006. Aggregate monthly payments for these leases total
approximately $21,000. Annual rent of approximately $255,000 was paid to
shareholders during the years ended February 28, 1995, 1994, and 1993.

Total rent expense was $6,586,000, $5,778,000, and $5,398,000 including
percentage rent of $677,000, $479,000, and $335,000 for the years ended February
28, 1995, 1994, and 1993, respectively. Future minimum lease payments are as
follows:

<TABLE>
<S> <C>
1996.................................................. $ 5,090,000
1997.................................................. 4,966,000
1998.................................................. 4,634,000
1999.................................................. 3,855,000
2000.................................................. 3,408,000
Thereafter............................................ 8,331,000
-----------
$30,284,000
===========
</TABLE>

5. PROFIT SHARING AND 401(K) SAVINGS PLAN

The Company has a contributory profit sharing and 401(k) savings plan
covering substantially all employees who meet certain age and employment
criteria. Contributions are made on a discretionary basis as authorized by the
Board of Directors. The Company's contributions to the profit sharing and 401(k)
savings plan totaled $240,000, $150,000, and $135,000 for the years ended
February 28, 1995, 1994, and 1993, respectively.

6. RELATED PARTY LEGAL FEES

The Company incurred legal fees with a firm whose principals are
shareholders and members of the Board of Directors of the Company of
approximately $175,000, $186,000, and $167,000 for the years ended February 28,
1995, 1994, and 1993, respectively.

F-10
<PAGE> 24

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 109 (SFAS 109), "Accounting for Income Taxes" in
February 1992. This pronouncement is effective for fiscal years beginning after
December 15, 1992. Accordingly, the Company adopted the provisions of the new
standard in its financial statements for the year ended February 28, 1994. The
adoption of SFAS 109, effective March 1, 1993, had no material cumulative effect
on the Company's financial position or results of operations.

The provision for income taxes for the years ended February 28, 1995, 1994,
and 1993 consists of the following:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current expense:
Federal................................... $1,795,000 $1,602,000 $1,213,000
State..................................... 372,000 186,000 130,000
---------- ---------- ----------
2,167,000 1,788,000 1,343,000
Deferred (benefit) expense:
Federal................................... (43,000) 1,000 (138,000)
State..................................... (14,000) -- (5,000)
---------- ---------- ----------
(57,000) 1,000 (143,000)
---------- ---------- ----------
$2,110,000 $1,789,000 $1,200,000
========== ========== ==========
</TABLE>

A reconciliation of the provision for income taxes to income tax expense,
computed by applying the statutory federal income tax rate to pre-tax earnings
at February 28, 1995, 1994, and 1993, is as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Income tax expense at statutory federal rate... $2,116,000 $1,689,000 $1,130,000
Increase (decrease) resulting from:
Tax attributable to captive insurance
company income not taxed for federal
purposes................................ (378,000) (231,000) (184,000)
State income taxes, net of federal income
tax benefit............................. 227,000 166,000 155,000
Other..................................... 145,000 165,000 99,000
---------- ---------- ----------
$2,110,000 $1,789,000 $1,200,000
========== ========== ==========
</TABLE>

F-11
<PAGE> 25

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. INCOME TAXES -- CONTINUED
The tax effects of temporary differences at February 28, 1995 that give
rise to significant portions of deferred tax assets and deferred tax liabilities
are presented below:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $2,211,000 $1,934,000
---------- ----------
Total deferred tax liabilities.............................. 2,211,000 1,934,000
Deferred tax assets:
Deferred revenue.......................................... 719,000 615,000
Net operating loss carryforwards.......................... 58,000 70,000
Accrued expenses.......................................... 300,000 238,000
Reserves.................................................. 1,178,000 998,000
---------- ----------
Total deferred tax assets................................... 2,255,000 1,921,000
Valuation allowance for deferred tax assets................. (200,000) (200,000)
---------- ----------
Net deferred tax asset...................................... 2,055,000 1,721,000
---------- ----------
Net deferred tax liabilities................................ $ 156,000 $ 213,000
========== ==========
</TABLE>

The Company's deferred income tax expense results from the following:

<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
-------------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Excess (deficiency) of tax over financial
reporting:
Depreciation.................................. $ 251,000 $ 160,000 $ 181,000
Deferred revenue.............................. (92,000) (129,000) (275,000)
Vacation accrual.............................. (13,000) (20,000) 20,000
Reserves...................................... (158,000) (78,000) (99,000)
Other items, net.............................. (45,000) 68,000 30,000
--------- --------- ---------
$ (57,000) $ 1,000 $(143,000)
========= ========= =========
</TABLE>

At February 28, 1995, certain companies of the consolidated group have
state net operating loss carryforwards, expiring through 2006, of $1,715,000 for
tax return purposes.

8. STOCK DIVIDEND

On July 13, 1994, the Company declared a ten percent stock dividend to
shareholders of record as of August 1, 1994. On August 15, 1994 the Company
issued 347,167 shares of common stock in conjunction with this dividend.
Accordingly, amounts equal to the fair market value (based on quoted market
prices, as adjusted) of the additional shares issued have been charged to
retained earnings and credited to common stock and additional paid-in capital.

Earnings per common share, weighted average shares outstanding, and all
stock option activity have been restated to reflect the ten percent stock
dividend.

9. STOCK OPTION PLAN

Under the 1986 Employee Incentive Stock Option Plan (the "1986 Plan"),
options were authorized to be granted to key employees to purchase 50,000 shares
of common stock at a price not less than the fair market

F-12
<PAGE> 26

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. STOCK OPTION PLAN -- CONTINUED
value at the date of grant. In July 1994, the Company amended the 1986 Plan to
terminate all future grants of options. Options outstanding under the 1986 Plan
are exercisable under the original terms of the agreement.

Under the 1992 Director Stock Option Plan (the "1992 Plan"), options were
authorized to be granted to nonemployee directors to purchase 10,000 shares of
common stock at a price not less than the fair market value at the date of
grant. In July 1994, the Company amended the 1992 Plan to terminate all future
grants of options. Options outstanding under the 1992 Plan are exercisable under
the original terms of the agreement.

On July 13, 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, options to purchase 200,000 shares of common stock
(amended to 220,000 shares of common stock as described in Note 8) may be
granted to key employees and non-employee directors. The 1994 Plan allows for
the grant of "incentive" and "nonqualified" options that allow the holder to
purchase shares of common stock at a price not less than the fair market value
at the date of grant. The 1994 Plan permits the grant of options for a term of
up to ten years. Vesting terms for options granted under the 1994 Plan are
determined at the discretion of the Compensation Committee. During fiscal 1995,
the Company granted options for 143,000 shares of common stock with vesting
terms of 20% per year and options for 6,710 shares of common stock which vested
immediately.

Stock option activity, as restated for the stock dividend described in Note
8, under each of these plans for the years ended February 28, 1995, 1994, and
1993 were as follows:

<TABLE>
<CAPTION>
1986 AND 1992 PLANS 1994 PLAN
----------------------------- -------------------------------
NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE
--------- --------------- --------- -----------------
<S> <C> <C> <C> <C>
Options outstanding at
March 1, 1992........... 27,500 $2.95 to $6.59 -- $--
Granted................. 4,400 $2.95 -- --
Exercised............... -- -- -- --
Cancelled............... -- -- -- --
--------- --------------- --------- -----------------
Options outstanding at
February 28, 1993....... 31,900 $2.95 to $6.59 -- --
Granted................. 22,990 $5.68 to $6.25 -- --
Exercised............... -- -- -- --
Cancelled............... -- -- -- --
--------- --------------- --------- -----------------
Options outstanding at
February 28, 1994....... 54,890 $2.95 to $6.59 -- --
Granted................. -- -- 149,710 $11.02 to $12.13
Exercised............... (10,670) $2.95 to $6.59 -- --
Cancelled............... (440) $5.68 -- --
--------- --------------- --------- -----------------
Options outstanding at
February 28, 1995....... 43,780 $2.95 to $6.59 149,710 $11.02 to $12.13
======= ============== ======== ================
Options exercisable at
February 28, 1995....... 43,780 $2.95 to $6.59 6,710 $11.02
======= ============== ======== ================
Options available for
grant at February 28,
1995.................... -- 70,290
======= ========
</TABLE>

At February 28, 1995, the Company has reserved 264,000 shares of common
stock for future issuance related to the stock option plans.

F-13
<PAGE> 27

REEDS JEWELERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. PURCHASE COMMITMENT

At February 28, 1995, the Company has firm purchase commitments with a
vendor to purchase $2,000,000 of inventory during the period from March 1, 1995
to February 28, 1996.

11. SUBSEQUENT EVENTS

On March 31, 1995 the Company entered into an amendment of its revolving
credit facility with the two commercial banks. The amendment calls for the
revolver to increase to $22,000,000 effective April 1, 1995 and increasing
throughout the 1996 fiscal year to a maximum of $27,000,000 through January 31,
1996. For the period from February 1, 1996 to April 30, 1996 and the period from
May 1, 1996 to the end of the agreement (June 30, 1996), the Company can borrow
up to $24,000,000 and $25,000,000, respectively. The LIBOR rate of interest was
also modified increasing the rate from 30-day LIBOR plus 165 basis points to 30-
day LIBOR plus 171 basis points, adjustable downward to 30-day LIBOR plus 165
basis points based on the Company meeting certain conditions. All other terms
remained essentially the same.

12. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for
the years ended February 28, 1995 and 1994 (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
1995
--------------------------------------------
NET SALES................................... $14,860 $14,996 $18,273 $29,367
GROSS PROFIT................................ 6,079 6,187 7,676 12,796
NET EARNINGS................................ 331 406 681 2,695
EARNINGS PER SHARE*......................... .08 .11 .18 .71
------- ------- ------- -------

1994
--------------------------------------------
Net sales................................... $11,995 $13,848 $15,467 $25,995
Gross profit................................ 5,081 5,680 6,405 11,470
Net earnings................................ 132 388 409 2,251
Earnings per share*......................... .03 .10 .11 .59
------- ------- ------- -------
</TABLE>

- - ---------------

* Because of rounding, the quarterly earnings per share data may not add to the
earnings per share as computed for the year.

F-14
<PAGE> 28

SCHEDULE II

REEDS JEWELERS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED FEBRUARY 28, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- - ----------------------------------- ------------ ----------------------- ------------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD
- - ----------------------------------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Year ended February 28, 1995:
Allowance for doubtful accounts.... $ 2,510,000 $3,000,000 $ -- $ 2,641,000 $2,869,000
Valuation allowance for deferred
tax assets....................... 200,000 -- -- -- 200,000
----------- ---------- -------- ----------- ----------
$ 2,710,000 $3,000,000 $ -- $ 2,641,000 $3,069,000
=========== ========== ======== =========== ==========
Year ended February 28, 1994:
Allowance for doubtful accounts.... $ 2,301,000 $2,761,000 $ -- $ 2,552,000 $2,510,000
Valuation allowance for deferred
tax assets....................... -- -- 200,000(2) -- 200,000
----------- ---------- --------- ----------- ----------
$ 2,301,000 $2,761,000 $ -- $ 2,552,000 $2,710,000
=========== ========== ======== =========== ==========
Year ended February 28, 1993:
Allowance for doubtful accounts.... $ 2,134,000 $2,716,000 $ -- $$2,549,000 $2,301,000
Valuation allowance for deferred
tax assets....................... -- -- -- -- --
----------- ---------- -------- ----------- ----------
$ 2,134,000 $2,716,000 $ -- $ 2,549,000 $2,301,000
=========== ========== ======== =========== ==========
</TABLE>

- - ---------------

(1) Uncollectible accounts written off
(2) Initial adoption of FAS No. 109 "Accounting for Income Taxes"

F-15

<PAGE> 1

EXHIBIT 10(m)

1994 STOCK OPTION PLAN
OF
REEDS JEWELERS, INC.

A-1
<PAGE> 2

1994 STOCK OPTION PLAN
OF
REEDS JEWELERS, INC.

1. PURPOSE.

The purpose of the 1994 Stock Option Plan of Reeds Jewelers, Inc. (the
"Plan") is to encourage and enable selected key employees of Reeds Jewelers,
Inc. (the "Corporation") and its subsidiaries and nonemployee Directors of the
Corporation to acquire or to increase their holdings of common stock of the
Corporation (the "Common Stock") in order to promote a closer identification of
their interests with those of the Corporation and its shareholders, thereby
further stimulating their efforts to enhance the efficiency, soundness,
profitability, growth and shareholder value of the Corporation. This purpose
will be carried out through the granting of incentive stock options ("Incentive
Options") and nonqualified stock options ("Nonqualified Options") to selected
key employees and the granting of Nonqualified Options to members of the Board
of Directors (individually, a "Director") who are not employees of the
Corporation or a related corporation. (Incentive Options and Nonqualified
Options shall be referred to herein collectively as "Options." Incentive Options
and Nonqualified Options granted to selected key employees may be referred to
herein as "Employee Options." Options granted to Directors may be referred to
herein as "Director Options.")

2. ADMINISTRATION OF THE PLAN.

(a) The Plan shall be administered by the Compensation Committee of
the Board of Directors of the Corporation (the "Committee"), each member of
which shall be a "disinterested person," as such term is defined in Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Committee shall be comprised of no fewer than the
minimum number of disinterested persons as may be required by Rule 16b-3.

(b) Any action of the Committee with respect to the Plan may be taken
by a written instrument signed by all of the members of the Committee and
any such action so taken by written consent shall be as fully effective as
if it had been taken by a majority of the members at a meeting duly held
and called. Subject to the provisions of the Plan, including but not
limited to Section 2(c), and unless authority to grant Employee Options is
delegated to the Chief Executive Officer as provided in Section 2(d), the
Committee shall have full and final authority in its discretion to take any
action with respect to the Plan including, without limitation, the
authority (i) to determine all matters relating to Options, including
selection of individuals to be granted Options, the types of Options, the
number of shares of Common Stock subject to an Option, and all terms,
conditions, restrictions and limitations of an Option; (ii) to prescribe
the form or forms of the Agreements evidencing any Options granted under
the Plan; (iii) to establish, amend and rescind rules and regulations for
the administration of the Plan; and (iv) to construe and interpret the Plan
and Agreements evidencing Options granted under the Plan, to establish and
interpret rules and regulations for administering the Plan and to make all
other determinations deemed necessary or advisable for administering the
Plan.

(c) Notwithstanding Section 2(b), to the extent necessary to comply
with Rule 16b-3, provisions in the Plan relating to the selection of
recipients of Director Options and the amount, price and timing of Director
Options shall not be subject to the discretion of the Committee, the Chief
Executive Officer or any other person.

(d) Notwithstanding Section 2(b), the Committee may delegate to the
Chief Executive Officer of the Corporation the authority to grant Employee
Options, and to make any or all of the determinations reserved for the
Committee in the Plan and summarized in subsection (b)(i) with respect to
such Options, to any individual who, at the time of said grant or other
determination is not deemed to be an officer or Director of the Corporation
within the meaning of Section 16 of the Exchange Act and is otherwise
eligible under Section 5.

A-2
<PAGE> 3

3. EFFECTIVE DATE.

The effective date of the Plan shall be July 13, 1994 (the "Effective
Date"). Options may be granted under the Plan on and after the effective date,
but not after July 12, 2004.

4. SHARES OF STOCK SUBJECT TO THE PLAN.

The shares of Common Stock that may be issued pursuant to Options shall not
exceed in the aggregate 200,000 shares of authorized but unissued shares of the
Corporation. The Corporation hereby reserves sufficient authorized shares of
Common Stock to meet the grant of Options hereunder. Any shares subject to an
Option which is subsequently forfeited, expires or is terminated may again be
the subject of an Option granted under the Plan; provided, that if an Option
shall be accepted for surrender by the Committee pursuant to the terms of the
Plan, the shares subject thereto shall not thereafter be available for the
granting of other Options. If there is any change in the shares of Common Stock
because of a merger, consolidation or reorganization involving the Corporation
or a related corporation, or if the Board of Directors of the Corporation
declares a stock dividend or stock split distributable in shares of Common
Stock, or if there is a change in the capital stock structure of the Corporation
or a related corporation affecting the Common Stock, the number of shares of
Common Stock reserved for issuance under the Plan shall be correspondingly
adjusted, and the Committee shall make such adjustments to Options or to any
provisions of this Plan as the Committee deems equitable to prevent dilution or
enlargement of Options.

5. ELIGIBILITY.

An Option may be granted only to an individual who satisfies the following
eligibility requirements on the date the Option is granted:

(a) With respect to the grant of Employee Options, the individual is
an employee of the Corporation or a related corporation. For this purpose,
an individual shall be considered to be an "employee" only if there exists
between the individual and the Corporation or a related corporation the
legal and bona fide relationship of employer and employee. In determining
whether such a relationship exists, the regulations of the United States
Treasury Department relating to the determination of the employment
relationship for the purpose of collection of income tax on wages at the
source shall be applied.

(b) With respect to the grant of an Employee Option, the individual,
being otherwise eligible to receive an Option under this Section 5, (i) is
a key employee of the Corporation or a related corporation; and (ii) is
selected by the Committee as an individual to whom an Option shall be
granted (an "Optionee"). For the purposes herein, a "key employee" shall
mean an employee of the Corporation or a related corporation who makes
significant and important contributions to the Corporation or a related
corporation. The Committee shall determine which employees qualify as key
employees.

(c) With respect to the grant of Incentive Options, the individual
does not own, immediately before the time that the Incentive Option is
granted, stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Corporation; provided, that an
individual owning more than ten percent of the total combined voting power
of all classes of stock of the Corporation or a related corporation may be
granted an Incentive Option if the price at which the option may be
exercised is greater than or equal to 110% of the fair market value of the
shares of Corporation's stock subject to the option on the date the option
is granted, and the period of the option does not exceed five years. For
this purpose, an individual will be deemed to own stock which is
attributable to him under Section 424(d) of the Internal Revenue Code of
1986, as amended (the "Code").

(d) With respect to the grant of a Director Option, the individual
shall be eligible to receive such an Option under the provisions of Section
7 herein.

6. EMPLOYEE OPTIONS.

(a) GRANT OF OPTIONS. Subject to the limitations of the Plan, the
Committee may in its sole and absolute discretion grant Options to such
eligible key employees in such numbers, upon such terms and at

A-3
<PAGE> 4

such times as the Committee shall determine. Both Incentive Options and
Nonqualified Options may be granted under the Plan.

(b) OPTION PRICE. The price per share at which an Option may be
exercised (the "Option Price") shall be not less than the fair market value
per share of the shares on the date the Option is granted. For this
purpose, the following rules shall apply:

(i) An Option shall be considered to be granted on the date that
the Committee acts to grant the Option, or on any later date specified
by the Committee as the effective date of the Option.

(ii) The fair market value of the shares shall be determined in
good faith by the Committee and shall be the closing price as reported
in the NASDAQ National Market System on the date the Option is granted,
or, if there is no transaction on such date, then on the trading date
nearest preceding the date the Option is granted for which closing price
information is available; provided that, if the Common Stock is not
included in the NASDAQ National Market System on the date the Option is
granted, the fair market value shall be determined in accordance with
the applicable provisions of Section 20.2031-2 of the Federal Estate Tax
Regulations, or in any other manner consistent with the Code and
accompanying regulations.

(iii) In no event shall there first become exercisable by the
Optionee in any one calendar year Incentive Options granted by the
Corporation or any related corporation with respect to shares having an
aggregate fair market value (determined at the time an Incentive Option
is granted) greater than $100,000.

(i) The period during which an Option may be exercised (the "Option
Period") shall be determined by the Committee at the time the Option is
granted. Such period shall not extend more than ten years from the date
on which the Option is granted. Any Option or portion thereof not
exercised before expiration of the Option Period shall terminate.

(ii) An Option may be exercised by giving written notice to the
Corporation at such place as the Committee shall direct. Such notice
shall specify the number of shares to be purchased pursuant to an Option
and the aggregate purchase price to be paid therefor, and shall be
accompanied by the payment of such purchase price. Such payment shall be
in the form of cash or shares owned by the Optionee at the time of
exercise, or in any combination of cash and shares; provided, that the
Committee may, in its sole and absolute discretion and subject to such
terms and conditions as it deems appropriate, permit all or a portion of
the purchase price to be paid by (i) funds borrowed from the Corporation
or a related corporation, (ii) delivery of a promissory note for all or
part of the purchase price, (iii) delivery of written notice of exercise
to the Committee and delivery to a broker of written notice of exercise
and irrevocable instructions to promptly deliver to the Corporation the
amount of sale or loan proceeds to pay the Option Price, or (iv) a
combination of such methods. Shares tendered in payment on the exercise
of an Option shall be valued at their fair market value on the date of
exercise, as determined by the Committee by applying the provisions of
Section 6(b)(ii).

(iii) No Option shall be exercised unless the Optionee is, at the
time of exercise, an employee, as described in Section 5(a), and has
been an employee continuously since the date the Option was granted,
subject to Section 9 herein and the following:

(A) The employment relationship of an Optionee shall be treated
as continuing intact for any period that the Optionee is on military
or sick leave or other bona fide leave of absence; provided, that the
period of such leave does not exceed ninety days or, if longer, as
long as the Optionee's right to reemployment is guaranteed either by
statute or by contract. The employment relationship of an Optionee
shall also be treated as continuing intact while the Optionee is not
in active service because of disability; provided, that shares
acquired by the Optionee pursuant to exercise of an Incentive Option
shall be subject to Sections 421 and 422 of the Code only if and to
the extent that such exercise occurs within twelve months less one
day following

A-4
<PAGE> 5

the date the Optionee's employment is considered to be terminated
because of such disability under Section 422. The Committee shall
determine whether there is a disability within the meaning of this
section.

(B) If the employment of an Optionee is terminated because of
retirement, which shall mean termination on or after the date of his
retirement under the early, normal or delayed retirement provisions
of any tax-qualified retirement plan maintained by the Corporation
(or pursuant to the retirement provisions of an employment agreement
between the Corporation and the employee) (herein, "retirement"), or
if the Optionee dies while he is an employee or after retirement, the
Option may be exercised only to the extent exercisable on the date of
the Optionee's retirement or death (the "termination date"), except
that the Committee, in its sole and absolute discretion, may
accelerate the date that any Option which was not otherwise
exercisable on the termination date shall be exercisable in whole or
in part, without any obligation to accelerate such date with respect
to other Options granted to the Optionee or to accelerate such date
with respect to Options granted to any other Optionee, or to treat
all Optionees similarly situated in the same manner. The Option must
be exercised, if at all, prior to the earlier of: (1) the close of
the period of twelve months next succeeding the termination date, or
(2) the close of the Option period. In the event of the Optionee's
death, such Option shall be exercisable by such person or persons as
shall have acquired the right to exercise the Option by will or by
the laws of intestate succession.

(C) If the employment of the Optionee is terminated for any
reason other than as provided in subparagraph (B) above, his Option
may be exercised only to the extent exercisable on the date of such
termination of employment, except that the Committee, in its sole and
absolute discretion, may accelerate the date that any Option which
was not otherwise exercisable on the date of such termination of
employment shall be exercised in whole or in part, without any
obligation to accelerate such date with respect to other Options
granted to the Optionee or to accelerate such date with respect to
Options granted to any other Optionee, or to treat all Optionees
similarly situated in the same manner. The Option must be exercised,
if at all, prior to the earlier of: (1) the close of the period of
three months less one day next succeeding the date of termination of
employment, or (2) the close of the Option Period. If the Optionee
dies following such termination of employment and prior to the
earlier of the dates specified in (1) and (2) in the immediately
preceding sentence, the Optionee shall be treated as having died
while employed under subparagraph (B) above (treating for this
purpose the Optionee's date of termination of employment as the
termination date).

(iv) A certificate or certificates for shares of Common Stock
acquired upon exercise of an Option shall be issued in the name of the
Optionee and distributed to the Optionee (or his beneficiary) as soon as
practicable following receipt of notice of exercise. An Optionee or his
legal representative, legatees or distributees shall not be deemed to be
the holder of any shares subject to an Option unless and until the
certificates for such shares are issued to him or them under the Plan.

(d) RESTRICTIONS ON TRANSFER AND DISPOSITION OF OPTIONS AND
SHARES. Except to the extent, if any, as may be permitted by the Code,
Rule 16b-3 under the Exchange Act or any successor statutes or rules:

(i) Options shall not be transferable other than by will, the laws
of intestate succession or pursuant to a qualified domestic relations
order (as defined by the Code, or Title I of the Employee Retirement
Income Security Act ("ERISA"), or the rules thereunder). The designation
of a beneficiary does not constitute a transfer. An option shall be
exercisable during the Optionee's lifetime only by him or by his
guardian or legal representative.

(ii) If an Optionee is subject to Section 16 of the Exchange Act,
shares of Common Stock acquired upon exercise of an Option may not,
without the consent of the Committee, be disposed of by the Optionee
until the expiration of six months after the date the Option was
granted.

A-5
<PAGE> 6

7. DIRECTOR OPTIONS.

(a) GRANT OF INITIAL DIRECTOR OPTIONS. Each nonemployee Director who
is newly-elected or appointed to the Board of Directors on or after the
Effective Date of the Plan shall receive a Director Option for 2,000 shares
of Common Stock (an "Initial Director Option"). An Initial Director Option
shall be deemed granted following the close of business of the Corporation
on the date of the annual or special meeting of shareholders at which the
Director was initially elected or the date of the Board of Directors
meeting at which the Director was initially appointed.

(b) GRANT OF ANNUAL DIRECTOR OPTIONS. Commencing with the 1994 annual
meeting of shareholders and for each annual meeting thereafter, each
nonemployee Director who will continue to serve as a Director of the
Corporation after the meeting and who served as a Director of the
Corporation immediately prior to the meeting shall receive an annual
Director Option for 1,000 shares of Common Stock (an "Annual Director
Option") following the close of business of the Corporation on the date of
the annual meeting of shareholders.

(c) OPTION PRICE. The price at which an Option may be exercised (the
"Option Price") shall be equal to the fair market value of the Common Stock
as determined in accordance with Section 6(b)(ii) of the Plan.

(d) OPTION PERIOD AND LIMITATIONS ON THE RIGHT TO EXERCISE DIRECTOR
OPTIONS.

(i) The Option Period shall be ten years from the date of grant. An
Option may be exercised in whole or in part at any time or from time to
time during the Option Period. Any Option or portion thereof not
exercised before the expiration of the Option Period shall terminate.
Except as provided in Section 7(d)(iii), no Director Option shall be
exercised unless the recipient of the Option is, at the time of
exercise, a Director as described in Section 5, and has been a Director
continuously since the date the Option was granted. Any Director Option
held by a Director who does not remain a Director for reasons other than
death, disability or retirement shall terminate.

(ii) A Director Option may be exercised by giving written notice to
the Corporation at such place as the Committee may direct. Such notice
shall specify the number of shares to be purchased pursuant to an Option
and the aggregate purchase price to be paid therefor, and shall be
accompanied by the payment of such purchase price. Payment shall be in
the form of (i) cash or shares owned by the Director at the time of
exercise, or in any combination of cash and shares, (ii) funds borrowed
from the Corporation or a related corporation, (iii) delivery of a
promissory note for all or part of the purchase price, (iv) delivery of
written notice of exercise to the Committee and delivery to a broker of
written notice of exercise and irrevocable instructions to promptly
deliver to the Corporation the amount of sale or loan proceeds to pay
the Option Price, or (v) a combination of such methods. Shares tendered
in payment on the exercise of an Option shall be valued at their fair
market value on the date of exercise, as determined by applying the
provisions of Section 6(b)(ii).

(iii) DEATH, DISABILITY OR RETIREMENT OF A DIRECTOR.

(A) If a Director dies while in service as a Director or
following his disability or retirement as described below, and if,
when that death occurs, all or part of the recipient's Director
Option is outstanding, any portion of the Option which could have
been exercised immediately before the Director's death shall be
exercisable at any time within one year after the Director's death by
the executor or administrator of the Director's estate, or by such
person or persons as may acquire all or part of such Option by will
or by the laws of intestate succession; provided, that no Option may
be exercised after the close of the Option Period.

(B) If a recipient of a Director Option becomes disabled while
in service as a Director, any portion of the Director Option which
could have been exercised immediately before the commencement of the
disability may be exercised at any time during the Option Period.

(C) If a Director retires from service as a Director in
accordance with the policies of the Corporation then in effect
relating to the retirement of Directors, any portion of a Director

A-6
<PAGE> 7

Option which could have been exercised immediately before retirement
may be exercised at any time during the Option Period.

(iv) A certificate or certificates for shares of Common Stock
acquired upon exercise of an Option shall be issued in the name of the
Director and distributed to the Director (or his beneficiary) as soon as
practicable following receipt of notice of exercise. A Director or his
legal representative, legatees or distributees shall not be deemed to be
the holder of any shares subject to an Option unless and until the
certificates for such shares are issued to him or them under the Plan.

(e) RESTRICTIONS ON TRANSFER AND DISPOSITION OF OPTIONS AND
SHARES. Except to the extent, if any, as may be permitted by the Code,
Rule 16b-3 under the Exchange Act or any successor statutes or rules:

(i) A Director Option shall not be transferable other than by will,
the laws of intestate succession or pursuant to a qualified domestic
relations order (as defined by the Code or Title I of ERISA, or the
rules thereunder). The designation of a beneficiary does not constitute
a transfer. A Director Option shall be exercisable during the Director's
lifetime only by him or by his guardian or legal representative.

(ii) Shares acquired upon exercise of a Director Option shall not
be disposed of by a Director until the expiration of six months after
the date the Director Option was granted.

(f) NONEMPLOYEE DIRECTORS. For the purposes herein, a "nonemployee
Director" shall mean a Director who is an employee of the Corporation or a
related corporation at the time of grant of a Director Option and has never
served as a senior officer of the Corporation or a related corporation.

(g) AMENDMENT OF DIRECTOR OPTIONS TERMS. The provisions of the Plan
relating to the number of shares of Common Stock subject to a Director
Option and the timing of such Options may not be amended more than once
every six months, other than to comport with changes in the Code, ERISA or
the rules thereunder.

8. WITHHOLDING.

The Committee shall require any recipient of shares upon the exercise of a
Nonqualified Option to pay to the Corporation in cash the amount of any tax or
other amount required by any governmental authority to be withheld and paid over
by the Corporation to such authority for the account of such recipient.
Notwithstanding the foregoing, the recipient may satisfy such obligation in
whole or in part, and any other local, state or federal income tax obligations
relating to such an Option, by electing (the "Election") to have the Corporation
withhold shares of Common Stock from the shares to which the recipient is
entitled. The number of shares to be withheld shall have a fair market value as
of the date that the amount of tax to be withheld is determined (the "Tax Date")
as nearly equal as possible to (but not exceeding) the amount of such
obligations being satisfied. The following rules shall apply with respect to
Elections:

(a) Each Election must be made in writing to the Committee prior to
the Tax Date. The Committee may reject any Election, in whole or in part,
or may suspend or terminate the right to make an Election. An Election,
once made by the recipient and accepted by the Committee, shall be
irrevocable.

(b) Notwithstanding the foregoing, if a recipient is subject to
Section 16 of the Exchange Act, then, to the extent necessary to comply
with Rule 16b-3, (i) no Election shall be made within six months of the Tax
Date to which the Election relates; or (ii)(A) the Election by the
recipient to have the Corporation withhold shares, as well as the
withholding of shares (unless the date of such withholding of shares is
automatic or fixed in advance and is outside the control of the recipient),
shall be made during a period beginning on the third business day following
the date of release for publication of the Corporation's quarterly or
annual summary statements of revenues and earnings and ending on the
twelfth business day following such date, and (B) the right to make an
Election is held for six months prior to the date of cash settlement.

A-7
<PAGE> 8

9. NO RIGHT OR OBLIGATION OF CONTINUED EMPLOYMENT.

Nothing contained in the Plan shall require the Corporation or a related
corporation to continue to employ an Optionee or to continue an individual as a
member of the Board of Directors of the Corporation, nor shall any such
individual be required to remain in the employment of the Corporation or a
related corporation or on the Board of Directors of the Corporation. Except as
otherwise provided in the Plan, Options granted under the Plan to employees of
the Corporation shall not be affected by any change in the duties or position of
the participant, as long as such individual remains an employee of the
Corporation or a related corporation.

10. RETIREMENT PLANS.

In no event shall any amounts accrued, distributable or payable under the
Plan be treated as compensation for the purpose of determining the amount of
contributions or benefits to which any person shall be entitled under any
retirement plan sponsored by the Corporation or a related corporation that is
intended to be a qualified plan within the meaning of Section 401(a) of the
Code.

11. CERTAIN DEFINITIONS.

For purposes of the Plan, the following terms shall have the meaning
indicated:

(a) "Agreement" means any written agreement or agreements between the
Corporation and the recipient of an Option pursuant to the Plan relating to
the terms, conditions and restrictions of Options.

(b) "Disability" shall mean a determination that the individual is
considered disabled under any plans or policies of the Corporation
providing for long-term disability benefits to employees, or, in the
absence of such plans or policies, the inability of an individual to
perform the duties and responsibilities of the position held by the
individual as a result of any medically determinable physical or mental
impairment which can be expected to result in death or to be of continuous
duration.

(c) "Parent" or "parent corporation" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporations ending with the
Corporation if each corporation other than the Corporation owns stock
possessing fifty percent or more of the total combined voting power of all
classes of stock in another corporation in the chain.

(d) "Predecessor" or "predecessor corporation" means a corporation
which was a party to a transaction described in Section 425(a) of the Code
(or which would be so described if a substitution or assumption under that
Section had occurred) with the Corporation, or a corporation which is a
parent or subsidiary of the Corporation, or a predecessor of any such
corporation.

(e) "Related corporation" means any parent, subsidiary or predecessor
of the Corporation.

(f) "Subsidiary" or "subsidiary corporation" means any corporation
(other than the Corporation) in an unbroken chain of corporations beginning
with the Corporation if each corporation other than the last corporation in
the unbroken chain owns stock possessing fifty percent or more of the total
combined voting power of all classes of stock in another corporation in the
chain.

12. AMENDMENT AND TERMINATION OF THE PLAN.

The Plan may be amended or terminated at any time by the Board of Directors
of the Corporation; provided, that such amendment or termination shall not,
without the consent of the recipient of an Option, adversely affect the rights
of the recipient with respect to an Option previously granted; and provided
further, that approval by the shareholders of the Corporation shall be required
for any amendment which would (i) increase the number of shares of Common Stock
which may be issued under the Plan, except to the extent of adjustments pursuant
to Section 4; (ii) permit the granting of Options to any member of the Committee
(except for nondiscretionary Director Options granted hereunder); or (iii)
materially change the requirements for eligibility to be a recipient of an
Option. Notwithstanding the foregoing, shareholder approval shall be required
for any other amendments which require such approval in order to secure an
exemption from Section 16(b) of the Exchange Act.

A-8
<PAGE> 9

13. RESTRICTIONS ON SHARES.

The Committee may impose such restrictions on any shares representing
Options hereunder as it may deem advisable, including without limitation
restrictions under the Securities Act of 1933, as amended, and under any Blue
Sky or securities laws applicable to such shares. The Committee may cause a
restrictive legend to be placed on any certificate issued pursuant to an Option
hereunder in such form as may be prescribed from time to time by applicable laws
and regulations or as may be advised by legal counsel.

14. APPLICABLE LAW.

The Plan shall be governed by and construed in accordance with the laws of
the State of North Carolina.

15. SHAREHOLDER APPROVAL.

The Plan is subject to approval by the shareholders of the Corporation on
or before July 13, 1994. Options granted prior to such shareholder approval
shall be conditioned upon and shall be effective only upon approval of the Plan
by such shareholders on or before such date.

16. PREDECESSOR PLAN.

As of the Effective Date of the Plan, no further options may be granted
under the 1986 Employee Incentive Stock Option Plan of Reeds Jewelers, Inc. or
the 1992 Director Stock Option Plan of Reeds Jewelers, Inc. (the "Predecessor
Plans"). The Predecessor Plans shall continue in effect and shall be applicable
with respect to all options granted pursuant to such Predecessor Plans prior to
the Effective Date.

17. SECTION 16(b) COMPLIANCE.

It is the intention of the Corporation that the Plan shall comply in all
respects with Rule 16b-3 under the Exchange Act, and, if any Plan provision is
later found not to be in compliance with Section 16 of the Exchange Act, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of it meeting the requirements of Rule 16b-3. Notwithstanding
anything in the Plan to the contrary, the Committee, in its sole and absolute
discretion, may bifurcate the Plan so as to restrict, limit or condition the use
of any provision of the Plan to participants who are officers or Directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other participants.

18. CHANGE OF CONTROL.

(a) Notwithstanding any other provision of the Plan to the contrary,
in the event of a Change of Control (as defined in Section 18(b) herein):

(i) All Options outstanding as of the date of such Change of
Control shall become fully exercisable, whether or not then otherwise
exercisable.

(ii) Notwithstanding the foregoing, in the event of a merger, share
exchange, reorganization or other business combination affecting the
Corporation or a related corporation, the Committee may, in its sole and
absolute discretion, determine that any or all Options granted pursuant
to the Plan shall not become exercisable on an accelerated basis, if the
Board of Directors or the surviving or acquiring corporation, as the
case may be, shall have taken such action, including but not limited to
the grant of substitute options, as in the opinion of the Committee is
equitable or appropriate to protect the rights and interests of
participants under the Plan. For the purposes herein, the Committee
authorized to make the determinations provided for in this Section
18(a)(ii) shall be appointed by the Board of Directors, two-thirds of
the members of which shall have been Directors of the Corporation prior
to the merger, share exchange, reorganization or other business
combinations affecting the Corporation or a related corporation.

(iii) Notwithstanding the foregoing, any recipient of an Option who
is subject to Section 16 of the Exchange Act may not sell or otherwise
dispose of shares of Common Stock subject to an Option for a period of
six months following the date of grant of the Option.

A-9
<PAGE> 10

(b) For the purposes herein, as "Change of Control" shall be deemed to
have occurred on the earliest of the following dates:

(i) The date any entity or person shall have become the beneficial
owner of, or shall have obtained voting control over, thirty percent or
more of the outstanding Common Stock of the Corporation;

(ii) The date the shareholders of the Corporation approve a
definitive agreement (A) to merge or consolidate the Corporation with or
into another corporation, in which the Corporation is not the continuing
or surviving corporation or pursuant to which any shares of Common Stock
of the Corporation would be converted into cash, securities or other
property of another corporation, other than a merger of the Corporation
in which holders of Common Stock immediately prior to the merger have
the same proportionate ownership of Common Stock of the surviving
corporation immediately after the merger as immediately before, or (B)
to sell or otherwise dispose of substantially all the assets of the
Corporation; or

(iii) The date there shall have been a change in a majority of the
Board of Directors of the Corporation within a twelve month period
unless the nomination for election by the Corporation's shareholders of
each new director was approved by the vote of two-thirds of the
directors then still in office who were in office at the beginning of
the twelve month period.

(For the purposes herein, the term "person" shall mean any individual,
corporation, partnership, group, association or other person, as such term is
defined in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, other than
the Corporation, a subsidiary of the Corporation or any employee benefit plan(s)
sponsored or maintained by the Corporation or any subsidiary thereof, and the
term "beneficial owner" shall have the meaning given the term in Rule 13d-3
under the Exchange Act.)

A-10
<PAGE> 11

REEDS JEWELERS, INC.

1994 STOCK OPTION AGREEMENT

THIS AGREEMENT made the day of , 19 , between REEDS
JEWELERS, INC., a North Carolina corporation (the "Corporation"),
and (the "Optionee");

R E C I T A L S:

In furtherance of the purposes of the 1994 Stock Option Plan of Reeds
Jewelers, Inc. (the "Plan"), the terms of which are incorporated herein by
reference, the Corporation and the Optionee hereby agree as follows:

1. The rights and duties of the Corporation and the Optionee under
this Agreement shall in all respects be subject to and governed by the
provisions of the Plan.

2. The Corporation hereby grants to the Optionee pursuant to the Plan,
as a matter of separate inducement and agreement in connection with his
services, and not in lieu of any salary or other compensation for his
services, the right and option (the "Option") to purchase all or any part
of an aggregate of ( ) shares (the "Shares") of the
common stock of the Corporation at a purchase price of $ . The
Option will expire if not exercised in full before the day of
, 19 .

3. Subject to the provisions of the Plan, the Option shall be
exercisable on the date or dates shown on Schedule A to the extent of the
number of Shares set forth on Schedule A beside each date. To the extent
that the Option which is exercisable is not exercised, such Option shall
accumulate and be exercisable by the Optionee in whole or in part at any
time prior to expiration of the Option. Upon the exercise of the Option in
whole or in part, the Optionee shall pay the option price to the
Corporation in accordance with the provisions of the Plan, and the
Corporation shall as soon thereafter as practicable deliver to the Optionee
a certificate or certificates for the shares purchased.

4. Nothing contained in this Agreement or the Plan shall require the
Corporation or a related corporation to continue the services of the
Optionee for any particular period of time, nor shall it require the
Optionee to remain in the service of the Corporation or such related
corporation for any particular period of time. Except as otherwise
expressly provided in the Plan, all rights of the Optionee under the Plan
with respect to the unexercised portion of this Option shall terminate
immediately upon termination of the services of the Optionee with the
Corporation or a related corporation.

5. This Option shall not be transferable (including by pledge or
hypothecation) other than by will, the laws of intestate succession, or
pursuant to a qualified domestic relations order (as defined by the
Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act, as amended, or the rules thereunder). The
designation of a beneficiary does not constitute a transfer. This Option
shall be exercisable during the optionee's lifetime only by the Optionee.

6. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective executors, administrators,
next-of-kin, successors and assigns.

7. This Agreement shall be governed by and construed in accordance
with the laws of the State of North Carolina.

A-11
<PAGE> 12

IN WITNESS WHEREOF, this Agreement has been executed on behalf of the
Corporation and by the Optionee on the date and year first above written.

REEDS JEWELERS, INC.

By:
--------------------------------------
President and Chief Executive
Officer

ATTEST:

- - ---------------------------------------------------
Secretary

[Corporate Seal]

OPTIONEE

--------------------------------------

Name:
--------------------------------------

A-12
<PAGE> 13

REEDS JEWELERS, INC.

1994 STOCK OPTION AGREEMENT

SCHEDULE A

Optionee:
Date option granted:
Date option expires:
Number of Shares subject to option:
Option price (per share):

<TABLE>
<CAPTION>
NONQUALIFIED
DATE INSTALLMENT NUMBER OF SHARES OR INCENTIVE
FIRST EXERCISABLE IN INSTALLMENT STOCK OPTION
------------------ ---------------- -------------
<S> <C> <C>

</TABLE>

A-13

<PAGE> 1

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

Reeds Jewelers of North Carolina, Inc.
Reeds Corporate Services, Inc.
Reeds Financial Services, Inc.
Reeds Insurance Services, Ltd.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-81458) pertaining to the 1986 Employee Incentive Stock Option
Plan, in the Registration Statement (Form S-8 No. 33-81454) pertaining to the
1992 Director Stock Option Plan, and in the Registration Statement (Form S-8 No.
33-82100) pertaining to the 1994 Stock Option Plan of Reeds Jewelers, Inc. of
our report dated March 29, 1995, except Note 11 as to which date is March 31,
1995, with respect to the consolidated financial statements and schedule of
Reeds Jewelers, Inc. included in the Annual Report (Form 10-K) for the year
ended February 28, 1995.

ERNST & YOUNG LLP

Raleigh, North Carolina
May 23, 1995

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> FEB-28-1995
<CASH> 134
<SECURITIES> 0
<RECEIVABLES> 38,248
<ALLOWANCES> 2,869
<INVENTORY> 26,438
<CURRENT-ASSETS> 64,994
<PP&E> 20,893
<DEPRECIATION> 11,270
<TOTAL-ASSETS> 77,401
<CURRENT-LIABILITIES> 19,179
<BONDS> 29,278
<COMMON> 382
0
0
<OTHER-SE> 25,445
<TOTAL-LIABILITY-AND-EQUITY> 77,401
<SALES> 77,496
<TOTAL-REVENUES> 86,102
<CGS> 44,758
<TOTAL-COSTS> 44,758
<OTHER-EXPENSES> 29,081
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 3,040
<INCOME-PRETAX> 6,223
<INCOME-TAX> 2,110
<INCOME-CONTINUING> 4,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,113
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.06

</TABLE>