<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
<TABLE>
<S> <C>
(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 29, 1996
[ ] 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 SEVENTH STREET 28401
WILMINGTON, NORTH CAROLINA (Zip Code)
(Address of principal executive offices)
</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 9, 1996 (computed by reference to the last reported
sales price of the registrant's common stock on NASDAQ on such date) was
$5,087,935.
The number of shares outstanding as of May 9, 1996 of the registrant's
common stock, par value $.10 per share, was 4,216,406.
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 1996
Annual Meeting of Shareholders.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
Reeds Jewelers, Inc. (the "Company" or the "Registrant") operates 98
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,
Melart Jewelers, Mills Jewelers, and The Jewelry Vault 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 1996 1995 1994
--------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Diamonds and Precious Gems..................................... 56.9% 52.8% 49.2%
Karat Gold Jewelry and Semi-precious Gems...................... 20.9 21.9 22.7
Watches........................................................ 11.9 14.3 16.3
</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 29, 1996, the Company
operated 96 stores, of which 2 were located in Alabama, 10 in Florida, 7 in
Georgia, 1 in Kansas, 12 in Maryland, 7 in Mississippi, 23 in North Carolina, 3
in Oklahoma, 12 in South Carolina, 4 in Tennessee, 12 in Virginia, and 3 in West
Virginia. Since February 29, 1996, the Company has opened two new stores in
Wichita KS and a new store in the Tidewater VA market, and closed one store in
Maryland. The Company plans to open an additional two to three 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 500 to 2,100 square
feet of selling space, and average 1,100 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 29, 1996, the Company's three largest
suppliers accounted for 8.8%, 5.8%, and 5.7%, respectively, of the Company's
total merchandise purchases, with no other supplier
1
<PAGE> 3
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.
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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET SALES
First Quarter.................................................. 19.1% 19.2% 17.8%
Second Quarter................................................. 18.0 19.3 20.6
Third Quarter.................................................. 23.6 23.6 23.0
Fourth Quarter................................................. 39.3 37.9 38.6
NET EARNINGS
First Quarter.................................................. 11.9% 8.0% 4.1%
Second Quarter................................................. 13.8 9.9 12.2
Third Quarter.................................................. 6.8 16.6 12.9
Fourth Quarter................................................. 67.5 65.5 70.8
</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
49% of net sales in 1996 and approximately 53% and 52% of net sales during 1995
and 1994, 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
3.6% to $39,631,000 at February 29, 1996 from $38,248,000 at February 28, 1995,
and had increased 14.5% from $33,411,000 at February 28, 1994. 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 3.8% in the fiscal year ended
February 29, 1996 from 3.9% and 4.1% in the years ended February 28, 1995 and
1994, respectively. The Company maintained its allowance at 7.5%, in spite of an
increase of 23.4% higher delinquency at February 29, 1996 than at the end of the
prior year, when delinquency was 9.4% lower than at the prior year-end; The
negative delinquency trend that evolved during the last fiscal
2
<PAGE> 4
year reflects the experience of other extenders of consumer credit, remains
within historical delinquency ranges for the reserve, and has begun to improve;
as a result, management believes the 7.5% allowance for future write-offs
remains adequate and appropriate. 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 $6,604,000 in the fiscal year ended February
29, 1996 from $6,012,000 and $5,435,000 in the fiscal years ended February 28,
1995 and 1994, 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, the Company is the eleventh largest retail jewelry chain in
the United States, based on the number of locations. 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 29, 1996, the Company had a total of 752 full-time
equivalent employees. Of these, 166 equivalents were employed in the corporate
headquarters and the remaining 586 equivalents 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.
3
<PAGE> 5
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.
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 strip shopping centers and the remaining 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 29, 1996:
<TABLE>
<CAPTION>
NUMBER OF LEASES
YEAR OF EXPIRATION WHICH EXPIRE
--------------------------------------------------------------------- ----------------
<S> <C>
1996.......................................................... 8
1997.......................................................... 6
1998.......................................................... 12
1999.......................................................... 10
2000.......................................................... 10
2001.......................................................... 14
2002.......................................................... 8
2003.......................................................... 3
2004.......................................................... 6
2005.......................................................... 7
2006.......................................................... 12
2007.......................................................... 6
</TABLE>
Leases for 17,831 square feet for the Corporate Headquarters in Wilmington,
North Carolina are with related parties and expire December 31, 2006. 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.
However, a subsidiary of the Company purchases non-file UCC insurance from
an unaffiliated insurance carrier for accounts originated in certain states and
charges its customers in those states a non-file UCC insurance fee equal to the
subsidiary's premium cost for that insurance. Non-file insurance reimburses the
subsidiary for losses on accounts that result from its decision not to file a
UCC financing statement for the collateral securing the account. A civil action
has been brought in the United States District Court for the Middle District of
Georgia, Columbus Division, by several plaintiffs against numerous finance
companies, jewelry retailers, furniture and appliance retailers, and insurance
companies specifically including the Company whereby the plaintiffs have
challenged certain aspects of the Company's non-file insurance practices. If the
non-file insurance practices of the Company were determined to be invalid under
applicable federal law or the laws of certain states, the Company could be
required to refund non-file insurance fees, pay other damages to its former and
current customers in those states and pay fines, penalties, and attorney's fees.
A specific amount claimed is not set forth and is not determinable at this time.
There exists a possibility that
4
<PAGE> 6
the final resolution of this issue could result in the Company recording an
additional obligation. In the opinion of management, the claim is without merit
and the Company is contesting this suit vigorously.
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.
5
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 9, 1996 there were 4,216,406 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
dividends issued on June 1, 1995 and August 1, 1994) for the fiscal years ended
February 29, 1996 and February 28, 1995 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
FISCAL YEAR ENDED FEBRUARY 29, 1996
FOURTH QUARTER.................................................... $10.500 $5.250
THIRD QUARTER..................................................... 12.250 9.750
SECOND QUARTER.................................................... 10.500 8.250
FIRST QUARTER..................................................... 9.545 7.727
FISCAL YEAR ENDED FEBRUARY 28, 1995
Fourth Quarter.................................................... $10.455 $6.818
Third Quarter..................................................... 10.455 6.364
Second Quarter.................................................... 10.909 8.636
First Quarter..................................................... 10.841 8.591
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND
NUMBER OF STORES)
<S> <C> <C> <C> <C> <C>
FIVE-YEAR SUMMARY
Net Sales.................................... $89,801 $77,496 $67,305 $58,356 $53,725
Bad Debt Expense............................. 3,419 3,000 2,761 2,716 2,983
Interest Expense............................. 3,263 3,040 2,957 3,183 3,595
Net Earnings................................. 3,212 4,113 3,180 2,115 1,103
Earnings Per Share........................... .76 .98 .76 .50 .26
Working Capital.............................. 51,870 45,815 38,828 37,489 35,973
Total Assets................................. 88,886 77,401 67,499 60,779 57,950
Long-Term Debt, Less Current................. 38,019 29,278 25,803 28,161 30,299
Shareholders' Equity......................... 29,143 25,827 21,666 18,486 16,371
Number of Stores............................. 96 77 71 66 67
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales and Other Revenues
At February 29, 1996 the Company operated 96 stores in twelve states
compared to 77 stores in twelve states and 71 stores in eleven states at
February 28, 1995 and 1994, respectively. Total net sales for fiscal 1996 were
up 16% to $89,801,000 from $77,496,000 in fiscal 1995 which were 15% higher than
sales of $67,305,000 in fiscal 1994. Same store sales, or stores open in
comparable periods, increased 2% in 1996 compared to increases of 9% and 12% in
1995 and 1994, respectively.
Average sales per store decreased 1% to $1,048,000 per store in 1996;
average sales per store were $1,057,000 and $975,000 in 1995 and 1994,
respectively. Average sales per full-time equivalent employee fell
6
<PAGE> 8
2% to $119,000 in 1996 and were 6% higher in 1995 over 1994, increasing to
$121,000 from $114,000. Average sales per selling square foot dropped 7% to $846
in 1996, after rising 5% in 1995 to $911 from $864. The increase in sales in
1996 resulted from an increase in the average sales transaction which was flat
at $146, while the number of sales transactions increased 16%. The average sales
transaction in 1995 was 12% higher than in 1994, and the number of sales
transactions increased 3% in 1995 compared to 1994.
Other revenues increased $725,000 in 1996 and $725,000 in 1995 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 71%, 70%, and 69% of other revenues in 1996, 1995, and 1994,
respectively, with credit insurance products (property, disability,
unemployment, and life) accounting for 8%, 11%, and 10% in the three years,
respectively. Income from extended service agreements accounted for 16%, 15%,
and 12% of other revenues in 1996, 1995, and 1994, respectively. All other
revenue items were less than 5% of the total.
Gross Profit
Gross profit (net of occupancy costs) was 40.3% of net sales in 1996, 42.2%
in 1995, and 42.6% in 1994. The decrease in gross margins in 1996 resulted
primarily as a result of the acquisition of The Melart Jewelers, Inc.; in
addition to having higher occupancy costs in the Melart stores, the Company
reduced gross margins in those stores in order to make room for a more desirable
merchandise mix. More promotional pricing in the diamond and gold categories
implemented to build market share caused the decrease in gross margins in 1995.
The Company continues to enjoy competitive pricing on its purchases of
merchandise. The Company 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 28, 1997 will return to
the level enjoyed in 1995.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses as a percentage of net sales
were 37.5%, 37.5%, and 38.4% in 1996, 1995, and 1994, respectively. In 1996, in
support of the Company's approach to building market share, the Company
increased advertising expenditures by 27% over the prior year; in 1995,
advertising was raised by 11%. For 1996, 1995, and 1994, advertising represented
5.2%, 4.7%, and 4.5% of net sales, respectively. Compensation expenses rose 13%
in 1996 and accounted for 62% of SG&A expenses; similar expenses increased 15%
in 1995 over 1994, and represented 64% and 63% of total SG&A, respectively
during the two years.
Bad Debt Expense
Bad debt expense increased 14.0% to $3,419,000 (3.8% of net sales) in the
year ended February 29, 1996 from $3,000,000 (3.9% of net sales) in 1995; bad
debt expense in 1994 was $2,761,000 (4.1% of net sales). Actual write-offs as a
percentage of net sales during each of the years were 3.6% in 1996, 3.4% in
1995, and 3.8% in 1994.
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 9.5%,
7.7%, and 8.5% of the Company's accounts receivable portfolio at February 29,
1996, February 28, 1995 and 1994, respectively.
Interest Expense
Interest expense decreased to 3.6% of net sales in 1996 from 3.9% in 1995
and 4.4% in 1994. In 1996, the average outstanding debt was 12% higher than the
year before, resulting in a $223,000 increase in interest expense; 65% of the
$83,000 increase in 1995 was caused by higher interest rates charged to the
Company for its variable rate debt.
7
<PAGE> 9
Income Taxes
The provision for income taxes was $1,689,000 (32.9% effective rate) in
1996, $2,110,000 (33.9% effective rate) in 1995, and $1,789,000 (36.0% effective
rate) in 1994. The lower effective rates in each of the 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 subordinated notes.
These working capital needs will be financed through funds generated from
operations and bank lines described below. Cash used in operations was $413,000
in 1996 and $802,000 in 1995, and cash provided by operations was $2,373,000 in
1994.
Capital expenditures totaled $2,351,000 (plus $1,755,000 related to the
acquisition of The Melart Jewelers, Inc.) in 1996, $2,823,000 in 1995, and
$1,211,000 in 1994. In addition to the Melart acquisition, the Company opened
five new stores in 1996 in Tuscaloosa AL, Albany GA, High Point NC,
Fredericksburg VA, and Clarksburg WV. It closed stores in Washington DC,
Carbondale IL, Hyattsville MD, Fayetteville NC, and Winchester VA during the
year.
Since year end, the Company has opened two new stores in Wichita KS and a
new store in the Tidewater VA area, and plans to open three to four more new
stores in the current fiscal year. The Company has budgeted $3,500,000 for
capital expenditures in the fiscal year ending February 28, 1997 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 $23.6
million in 1996, $17.0 million in 1995, and $12.6 million in 1994. The maximum
borrowings outstanding under the facility at any time during each year were
$33.7 million in 1996, $22.0 million in 1995, and $16.0 million in 1994. At
February 29, 1996, $33.7 million was outstanding under the facility, compared to
$19.0 million and $12.2 million at February 28, 1995 and 1994, respectively.
On December 21, 1995, the Company entered into a revolving credit facility
with two commercial banks through July 31, 1998. The Company's revolving credit
facility makes available $40 million during the entire period. The Company will
pay interest under the revolving credit facility at 30-day LIBOR plus 160-200
basis points or at the banks' prime rate plus 37 1/2 to 62 1/2 basis points,
depending upon the Company's debt-to-worth ratio. As of May 1, 1996, the
Company's rate was reduced from 30-day LIBOR plus 200 basis points to 30-day
LIBOR plus 180 basis points.
In addition, the Company has $5.0 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 cap the interest expense related to the revolving credit
facility, on February 2, 1996, the Company purchased an interest rate cap with a
major commercial bank as the counterparty. The cap is for a term of two years
ending February 2, 1998 at a notional amount of $30 million, approximating 80%
of the expected outstanding average balance on the revolving credit facility. At
the end of each month during the term of the cap, if the 30-day LIBOR rate
exceeds 6.00%, the Company will receive a payment for the difference between the
30-day LIBOR rate and 6.00% times the $30 million notional amount for the 30-day
period. The Company paid $78,000 to purchase the cap and has no further
obligations for any payments during the term. As of May 1, 1996, the Company has
received no payments under the agreement.
8
<PAGE> 10
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
revolving bank note, which is 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.
9
<PAGE> 11
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 1996 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 1996 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 1996 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases its corporate headquarters, consisting of 17,831 square
feet of office space and 155 parking spaces, 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 the lease are $23,127, escalating to $23,520 on
January 1, 1999, and rising to $23,929 on January 1, 2003. The Company also pays
the related insurance, property taxes, maintenance fees, and utilities for this
location. The leases for these facilities expire 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.
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 29, 1996, the Company paid Zimmer and Zimmer legal
fees and reimbursement of costs advanced in the amount of $175,000; the Company
paid $175,000 and $186,000 to Zimmer and Zimmer in 1995 and 1994, respectively.
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 Schedules: The financial
statements, financial statement schedules and reports of independent auditors
listed in the accompanying index are filed as part of this annual report.
(A)(3) EXHIBITS:
<TABLE>
<C> <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 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)
</TABLE>
11
<PAGE> 13
<TABLE>
<C> <C> <S>
10(m) -- 1994 Stock Option Plan (incorporated by reference to the Company's Form 10-K for
the fiscal year ended February 28, 1995, file number 0-15247)
10(n) -- Stock Purchase Agreement between Reeds Jewelers, Inc. and the Shareholders of The
Melart Jewelers, Inc. dated September 29, 1995 (incorporated by reference to the
Company's Form 10-Q for the fiscal quarter ended August 31, 1995, file number
0-15247)
21 -- List of Subsidiaries of the Registrant
</TABLE>
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT.
None.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 9th day of May,
1996.
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 9th day of May, 1996.
<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/ ARLENE Z. SCHREIBER Director
- ---------------------------------------------
(Arlene Z. Schreiber)
/s/ RICHARD F. SHERMAN Director
- ---------------------------------------------
(Richard F. Sherman)
/s/ GARLAND WADDY GARRETT Director
- ---------------------------------------------
(Garland Waddy Garrett)
/s/ HERBERT J. ZIMMER Director
- ---------------------------------------------
(Herbert J. Zimmer)
/s/ JEFFREY L. ZIMMER Director
- ---------------------------------------------
(Jeffrey L. Zimmer)
</TABLE>
13
<PAGE> 15
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 1996, FEBRUARY 28, 1995, AND FEBRUARY 28, 1994
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<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-16
</TABLE>
F-1
<PAGE> 16
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 29, 1996 and February 28, 1995
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended February 29, 1996. 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 of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reeds Jewelers,
Inc. and subsidiaries at February 29, 1996 and February 28, 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended February 29, 1996, 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, 1996
F-2
<PAGE> 17
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 186,000 $ 134,000
Accounts receivable:
Customers, less allowance of $2,934,000 in 1996 and
$2,869,000 in 1995.......................................... 36,697,000 35,379,000
Other........................................................ 705,000 838,000
Merchandise inventories......................................... 30,411,000 26,438,000
Deferred income taxes........................................... 1,923,000 1,840,000
Other........................................................... 392,000 365,000
------------ ------------
Total current assets.................................... 70,314,000 64,994,000
Property, plant, and equipment:
Land and building............................................... 71,000 71,000
Furniture and equipment......................................... 13,934,000 12,647,000
Leasehold improvements.......................................... 11,128,000 8,175,000
------------ ------------
25,133,000 20,893,000
Less accumulated depreciation and amortization.................. 14,955,000 11,270,000
------------ ------------
10,178,000 9,623,000
Other assets:
Goodwill, net of accumulated amortization of $762,000 in 1996
and $536,000 in 1995......................................... 7,633,000 2,189,000
Deferred income taxes, net of valuation allowance of $202,000 in
1996 and $200,000 in 1995.................................... 277,000 215,000
Miscellaneous................................................... 484,000 380,000
------------ ------------
8,394,000 2,784,000
------------ ------------
Total assets............................................ $ 88,886,000 $ 77,401,000
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 9,572,000 $ 8,567,000
Accrued compensation............................................ 2,158,000 2,469,000
Accrued expenses................................................ 2,517,000 2,054,000
Deferred revenue................................................ 1,307,000 1,074,000
Income taxes (Note 6)........................................... 999,000 1,702,000
Current portion of long-term debt and subordinated notes payable
(Note 2)..................................................... 1,891,000 3,313,000
------------ ------------
Total current liabilities............................... 18,444,000 19,179,000
Revolving credit note (Note 2).................................... 33,691,000 19,000,000
Long-term debt and subordinated notes payable, less current
portion
(Note 2)........................................................ 3,428,000 9,378,000
Subordinated notes payable to shareholders (Note 2)............... 900,000 900,000
Deferred income taxes............................................. 2,250,000 2,211,000
Deferred revenue.................................................. 1,030,000 906,000
------------ ------------
59,743,000 51,574,000
Commitments and contingencies (Notes 2, 3, and 11)
Shareholders' equity (Notes 7 and 8):
Common stock, par value $.10 per share, authorized 10,000,000
shares, 4,216,400 shares issued and outstanding in 1996,
3,819,400 shares issued and outstanding in 1995.............. 422,000 382,000
Additional paid-in capital...................................... 10,898,000 7,406,000
Retained earnings............................................... 17,823,000 18,039,000
------------ ------------
Total shareholders' equity.............................. 29,143,000 25,827,000
------------ ------------
Total liabilities and shareholders' equity.............. $ 88,886,000 $ 77,401,000
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 18
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales......................................... $ 89,801,000 $ 77,496,000 $ 67,305,000
Other (principally finance charges)............... 9,331,000 8,606,000 7,881,000
------------ ------------ ------------
99,132,000 86,102,000 75,186,000
Costs and expenses:
Cost of sales (including occupancy)............... 53,606,000 44,758,000 38,669,000
Selling, general, and administrative.............. 33,716,000 29,081,000 25,830,000
Interest.......................................... 3,263,000 3,040,000 2,957,000
Bad debt.......................................... 3,419,000 3,000,000 2,761,000
------------ ------------ ------------
94,004,000 79,879,000 70,217,000
------------ ------------ ------------
Income before income taxes and extraordinary item... 5,128,000 6,223,000 4,969,000
Income taxes (Note 6)............................... 1,689,000 2,110,000 1,789,000
------------ ------------ ------------
Net income before extraordinary item................ 3,439,000 4,113,000 3,180,000
------------ ------------ ------------
Extraordinary item -- loss on early extinguishment
of debt, net of income tax benefit of $151,000.... (227,000) -- --
------------ ------------ ------------
Net income.......................................... $ 3,212,000 $ 4,113,000 $ 3,180,000
========== ========== ==========
Net income per common share:
Income before extraordinary item.................. $ .82 $ .98 $ .76
Extraordinary item -- loss on early extinguishment
of debt........................................ (.06) .00 .00
========== ========== ==========
Net income.......................................... $ .76 $ .98 $ .76
========== ========== ==========
Weighted average shares outstanding................. 4,207,703 4,198,700 4,189,625
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 19
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 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 7).............. 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
EXERCISE OF STOCK OPTIONS FOR COMMON
STOCK................................. 2,000 102,000 -- 104,000
10% STOCK DIVIDEND (NOTE 7).............. 38,000 3,390,000 (3,428,000) --
NET INCOME FOR 1996...................... -- -- 3,212,000 3,212,000
-------- ----------- ----------- -----------
BALANCE AT FEBRUARY 29, 1996............... $422,000 $10,898,000 $17,823,000 $29,143,000
======== ========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 20
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 3,212,000 $ 4,113,000 $ 3,180,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 2,290,000 1,724,000 1,497,000
Provision for deferred income taxes........... -- (57,000) --
Loss on sale of property and equipment........ 116,000 166,000 --
Changes in operating assets and liabilities:
Accounts receivable......................... 3,080,000 (4,590,000) (2,662,000)
Merchandise inventories..................... (1,456,000) (4,208,000) (4,547,000)
Other current and miscellaneous assets...... 74,000 43,000 (38,000)
Accounts payable............................ (1,526,000) 198,000 3,508,000
Accrued expenses............................ (5,749,000) 1,370,000 564,000
Deferred revenue............................ 357,000 257,000 360,000
Income taxes................................ (811,000) 164,000 511,000
------------ ------------ ------------
Net cash (used in) provided by operating
activities............................. (413,000) (820,000) 2,373,000
INVESTING ACTIVITIES
Purchases of property and equipment................ (2,351,000) (2,823,000) (1,211,000)
Acquisition of The Melart Jewelers, Inc............ (1,755,000) -- --
------------ ------------ ------------
Net cash used in investing activities.............. (4,106,000) (2,823,000) (1,211,000)
FINANCING ACTIVITIES
Proceeds from exercise of stock options............ 104,000 48,000 --
Net proceeds from revolving credit note............ 14,691,000 6,788,000 954,000
Principal payments on debt......................... (10,224,000) (3,313,000) (2,610,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. 4,571,000 3,523,000 (1,656,000)
Net increase (decrease) in cash and cash
equivalents...................................... 52,000 (120,000) (494,000)
Cash and cash equivalents at beginning of year..... 134,000 254,000 748,000
------------ ------------ ------------
Cash and cash equivalents at end of year........... $ 186,000 $ 134,000 $ 254,000
=========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest......................................... $ 3,407,000 $ 3,107,000 $ 3,006,000
=========== ========== ==========
Income taxes..................................... $ 2,291,000 $ 2,003,000 $ 1,278,000
=========== ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 21
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.
Extraordinary Loss
The extraordinary loss of $227,000, net of income tax benefit of $151,000,
represents the write-off of loan origination fees and prepayment penalties paid
on the early extinguishment of debt.
Reclassification
Certain 1995 and 1994 amounts in the accompanying financial statements have
been reclassified to conform with 1996 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. As of February 29, 1996, the Company had
no significant concentrations of credit risk with individual customers.
Interest Rate Management
The Company enters into various interest rate swaps and caps in managing
its interest rate risk. Payments to or from counterparties are recorded as
adjustments to interest expense.
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
F-7
<PAGE> 22
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ACCOUNTING POLICIES -- CONTINUED
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
15-40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If 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.
Earnings Per Common Share
Earnings per common share is based on the weighted average number of shares
of common stock outstanding during the 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 7. Earnings per common share does not give effect to the stock options
described in Note 8 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 29, 1996, and February 28, 1995 and
1994, 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.
Advertising Costs
Statement of Position 93-7 "Reporting on Advertising Costs" was implemented
by the Company during the year ended February 29, 1996. The adoption of this
statement did not have a material impact on the financial statements. The
Company expenses advertising costs as incurred. Total advertising expense was
approximately $4,621,000, $3,659,000, and $3,286,000 for 1996, 1995, and 1994,
respectively.
F-8
<PAGE> 23
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ACCOUNTING POLICIES -- CONTINUED
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
and nonemployee directors with an exercise price not less than the fair value of
the shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and accordingly, recognizes no compensation expense for the stock option grants.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which
provides an alternative to APB No. 25 in accounting for stock based compensation
issued to employees. SFAS 123 provides for a fair value based method of
accounting for employee stock options and similar equity instruments. However,
for companies that continue to account for stock based compensation arrangements
under APB No. 25, SFAS 123 requires disclosure of the pro forma effect on net
income and earnings per share as if the fair value method prescribed by SFAS 123
has been applied. The disclosure requirements are effective for fiscal years
beginning after December 31, 1995, or upon initial adoption of the statement, if
earlier. The Company plans to continue to account for stock based compensation
arrangements under APB No. 25 and plans to adopt the pro forma disclosure
requirements of SFAS 123 during the year ending February 28, 1997.
Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed. The Company will adopt Statement 121 in
the first quarter of the fiscal year ending February 28, 1997 and, based on
current circumstances, does not believe the effect of adoption will be material.
2. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt at February 29, 1996 and February 28, 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<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
Senior subordinated note, unsecured, payable in quarterly
principal installments of $457,000 from April 1995 through
October 1998; interest payable quarterly at 12.11%........ 5,029,000 6,857,000
Other....................................................... 290,000 119,000
---------- ----------
5,319,000 12,691,000
Less current portion...................................... 1,891,000 3,313,000
---------- ----------
$3,428,000 $9,378,000
========= =========
</TABLE>
F-9
<PAGE> 24
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 28,
-------------------------------------------------------------------------
<S> <C>
1997................................................................ $1,891,000
1998................................................................ 2,056,000
1999................................................................ 1,372,000
----------
$5,319,000
=========
</TABLE>
The Company also has subordinated notes payable to shareholders totaling
$900,000 at February 29, 1996 and February 28, 1995 with interest at prime
(8.25% at February 29, 1996). 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 December 21, 1995, the Company entered into a revolving secured credit
agreement (the "revolver") whereby the Company can borrow up to $40,000,000
based on specified percentages of eligible inventory and accounts receivable
with interest payable monthly, at an interest rate ranging from the 30-day LIBOR
rate plus 1.6% to 2.0% or prime plus .38% to .63%, based on the Company's
debt-to-worth ratio. The revolver expires on July 31, 1998; therefore, the
revolver is classified as a long-term liability. The Company had $33,691,000
outstanding on this revolver at February 29, 1996.
To limit increases in interest expense due to changes in the 30-day LIBOR
rate, the Company paid $78,000 on February 2, 1996 to purchase a two-year,
$30,000,000 interest rate protection agreement. The interest rate protection
agreement limits the Company's exposure to 30-day LIBOR of 6.0% (7.6% to 8.0%
with the 1.6% to 2.0% spread). The initial premium paid to acquire the interest
rate protection agreement is being amortized as an increase to interest expense
over the two-year term of the agreement. No payments have been received from the
counterparty as of February 29, 1996.
The revolving credit agreement is 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. 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 December 31,
2006. Aggregate monthly payments for these leases total approximately $23,000.
Annual rent of approximately $255,000 was paid to shareholders during the years
ended February 29, 1996 and February 28, 1995 and 1994.
F-10
<PAGE> 25
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES -- CONTINUED
Total rent expense was $8,038,000, $6,586,000, and $5,778,000 including
percentage rent of $830,000, $677,000, and $479,000 for the years ended February
29, 1996 and February 28, 1995 and 1994, respectively. Future minimum lease
payments are as follows:
<TABLE>
<S> <C>
1997.................................................................... $ 6,959,000
1998.................................................................... 6,547,000
1999.................................................................... 5,846,000
2000.................................................................... 5,207,000
2001.................................................................... 4,323,000
Thereafter.............................................................. 10,333,000
-----------
$39,215,000
==========
</TABLE>
4. 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 $176,000, $240,000, and $150,000 for the years ended
February 29, 1996, February 28, 1995 and 1994, respectively.
5. 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, $175,000, and $186,000 for the years ended February 29,
1996, February 28, 1995 and 1994, respectively.
6. 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 29, 1996, and
February 28, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal...................................... $1,278,000 $1,795,000 $1,602,000
State........................................ 366,000 372,000 186,000
---------- ---------- ----------
1,644,000 2,167,000 1,788,000
Deferred:
Federal...................................... (85,000) (43,000) 1,000
State........................................ (21,000) (14,000) --
---------- ---------- ----------
(106,000) (57,000) 1,000
---------- ---------- ----------
$1,538,000 $2,110,000 $1,789,000
========= ========= =========
</TABLE>
F-11
<PAGE> 26
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- CONTINUED
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 29, 1996 and February 28, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income tax expense at statutory federal rate... $1,627,000 $2,116,000 $1,689,000
Increase (decrease) resulting from:
Tax attributable to captive insurance company
income not taxed for federal purposes..... (170,000) (378,000) (231,000)
State income taxes, net of federal income tax
benefit................................... 237,000 227,000 166,000
Other........................................ (156,000) 145,000 165,000
---------- ---------- ----------
$1,538,000 $2,110,000 $1,789,000
========= ========= =========
</TABLE>
The tax effects of temporary differences at February 29, 1996 and February
28, 1995 that give rise to significant portions of deferred tax assets and
deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.............................. $2,250,000 $2,211,000
---------- ----------
Total deferred tax liabilities............................ 2,250,000 2,211,000
Deferred tax assets:
Deferred revenue........................................ 844,000 719,000
Net operating loss carryforwards........................ 53,000 58,000
Accrued expenses........................................ 311,000 300,000
Reserves................................................ 1,194,000 1,178,000
---------- ----------
Total deferred tax assets................................. 2,402,000 2,255,000
Valuation allowance for deferred tax assets............... (202,000) (200,000)
---------- ----------
Net deferred tax asset.................................... 2,200,000 2,055,000
---------- ----------
Net deferred tax liabilities.............................. $ 50,000 $ 156,000
========= =========
</TABLE>
The Company's deferred income tax expense results from the following:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
-------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Excess of tax over financial reporting:
Depreciation.................................. $ 44,000 $ 251,000 $ 160,000
Deferred revenue.............................. (125,000) (92,000) (129,000)
Vacation accrual.............................. (15,000) (13,000) (20,000)
Reserves...................................... (16,000) (158,000) (78,000)
Other items, net.............................. 6,000 (45,000) 68,000
--------- --------- ---------
$(106,000) $ (57,000) $ 1,000
========= ========= =========
</TABLE>
At February 29, 1996, certain companies of the consolidated group have
state net operating loss carryovers, expiring through 2006, of $1,597,000 for
tax return purposes.
F-12
<PAGE> 27
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK DIVIDEND
On May 8, 1995, the Company declared a ten percent stock dividend to
shareholders of record as of May 11, 1995. On June 1, 1995 the Company issued
381,894 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.
8. 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 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 242,000 shares of common stock
(as adjusted for the 1994 and 1995 stock dividends) may be granted to key
employees and nonemployee 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 1996, the Company
granted options for 10,000 shares of common stock with vesting terms of 20% per
year and options for 12,830 shares of common stock which vested immediately.
F-13
<PAGE> 28
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLAN -- CONTINUED
Stock option activity, as restated for the stock dividend described in Note
7, under each of these plans for the years ended February 29, 1996 and February
28, 1995 and 1994 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,
1993............................... 35,090 $2.68 to $5.99 -- --
Granted............................ 25,289 $5.16 to $5.68 -- --
Exercised.......................... -- -- -- --
Cancelled.......................... -- -- -- --
--------- -------------- --------- ----------------
Options outstanding at February 28,
1994............................... 60,379 $2.68 to $5.99 -- --
Granted............................ -- -- 164,681 $10.02 to $11.03
Exercised.......................... (11,737) $2.68 to $5.99 -- --
Cancelled.......................... (484) $5.16 -- --
--------- -------------- --------- ----------------
Options outstanding at February 28,
1995............................... 48,158 $2.68 to $5.99 164,681 $10.02 to $11.03
Granted............................ -- -- 22,830 $ 9.00 to $11.03
Exercised.......................... (9,075) $2.68 to $5.99 (6,050) $10.02 to $11.03
Cancelled.......................... (242) $2.68 to $5.99 (24,784) $10.02 to $11.03
--------- -------------- --------- ----------------
Options outstanding at February 29,
1996............................... 38,841 $2.68 to $5.99 156,677 $ 9.00 to $11.03
======= ============ ======= ==============
Options exercisable at February 29,
1996............................... 38,841 $2.68 to $5.99 80,248 $ 9.00 to $11.03
======= ============ ======= ==============
Options available for grant at
February 29, 1996.................. -- 79,273
======= =======
</TABLE>
At February 29, 1996, the Company has reserved 274,791 shares of common
stock for future issuance related to the stock option plans.
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair values were determined by
management using available market information and appropriate valuation
methodologies. Considerable judgment is necessary to interpret market data and
develop estimated fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company should realize upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value. The carrying amounts and estimated fair value of the
Company's financial instruments at February 29, 1996 were as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
Cash and cash equivalents............................... $ 186,000 $ 186,000
Accounts receivable..................................... 37,402,000 37,402,000
Notes payable to banks.................................. 5,319,000 5,485,000
Subordinated notes payable to shareholders.............. 900,000 900,000
Revolving credit note payable........................... 33,691,000 33,691,000
Interest rate cap....................................... 78,000 131,000
</TABLE>
The fair values for the Company's fixed rate notes payable were estimated
using discounted cash flow analysis, based on the Company's estimated
incremental borrowing rate at February 29, 1996, for similar types
F-14
<PAGE> 29
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS -- CONTINUED
of borrowing arrangements. The carrying amounts of the Company's variable rate
borrowings approximate fair value.
The fair values of the Company's interest rate cap agreement represents the
estimated amount the Company would receive or pay to terminate or replace the
financial instrument at current market rates.
Disclosures about the fair value of financial instruments are based on
relevant information available to the Company at February 29, 1996. Although
management is not aware of any factors that would have a material effect on the
fair value amounts reported herein, such amounts have not been revalued since
that date and current estimates of fair value may significantly differ from the
amounts presented.
10. ACQUISITION
Effective September 30, 1995, the Company acquired all of the issued and
outstanding common shares of The Melart Jewelers, Inc. in a business combination
accounted for as a purchase for $2.2 million. The results of operations of The
Melart Jewelers, Inc. are included in the consolidated operations of the Company
from the date of acquisition. Goodwill of approximately $5.7 million associated
with the transaction is being amortized using the straight-line method over 15
years.
The following unaudited pro forma summary of consolidated results of
operations has been prepared as if the above acquisition had been acquired as of
March 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
FEBRUARY 29, FEBRUARY 28,
1996 1995
------------ ------------
<S> <C> <C>
Net revenues.......................................... $107,628,000 $105,078,000
Net income before extraordinary item.................. 2,423,000 4,021,000
Extraordinary item.................................... 227,000 --
------------ ------------
Net income............................................ $ 2,196,000 $ 4,021,000
=========== ===========
</TABLE>
These pro forma results do not purport to be indicative of the results that
would have actually been obtained if the respective business had been acquired
as of March 1, 1994 or of results that may occur in the future.
11. CONTINGENCIES
A subsidiary of the Company purchases non-file UCC insurance from an
unaffiliated insurance carrier for accounts originated in certain states and
charges its customers in those states a non-file UCC insurance fee equal to the
subsidiary's premium cost for that insurance. Non-file insurance reimburses the
subsidiary for losses on accounts that result from its decision not to file a
UCC financing statement for the collateral securing the account. A civil action
has been brought by several plaintiffs against numerous finance companies,
jewelry retailers, furniture and appliance retailers, and insurance companies,
specifically including the Company whereby the plaintiffs have challenged
certain aspects of the Company's non-file insurance practices. If the non-file
insurance practices of the Company were determined to be invalid under
applicable federal law or the laws of certain states, the Company could be
required to refund non-file insurance fees, pay other damages to its former and
current customers in those states, and pay fines, penalties, and attorney's
fees. A specific amount claimed is not set forth and is not determinable at this
time. There exists a possibility that the final resolution of this issue could
result in the Company recording an additional obligation. In the opinion of
management, the claim is without merit and the company is contesting this suit
vigorously.
F-15
<PAGE> 30
SCHEDULE II
REEDS JEWELERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995 AND 1994
<TABLE>
<CAPTION>
COLUMN C
COLUMN B ADDITIONS COLUMN E
------------ ----------------------- ----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D 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 29, 1996:
Allowance for doubtful
accounts...................... $ 2,869,000 $3,533,000 -- $ 3,468,000 $2,934,000
Valuation allowance for deferred
tax assets.................... 200,000 -- 2,000(2) -- 202,000
------------ ---------- ---------- ------------- ----------
$ 3,069,000 $3,533,000 $ 2,000 $ 3,468,000 $3,136,000
========= ========= ======== ========== =========
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(3) -- 200,000
------------ ---------- ---------- ------------- ----------
$ 2,301,000 $2,761,000 $200,000 $ 2,552,000 $2,710,000
========= ========= ======== ========== =========
</TABLE>
- ---------------
(1) Uncollectible accounts written off
(2) State net operating losses
(3) Initial adoption of FAS No. 109 "Accounting for Income Taxes"
F-16
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF THE REGISTRANT
Reeds Corporate Services, Inc.
Reeds Insurance Services Ltd.
Reeds Financial Services, Inc.
Reeds Jewelers of North Carolina, Inc.
The Melart Jewelers, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REEDS JEWELERS, INC. FOR THE YEAR ENDED FEBRUARY 29,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 186
<SECURITIES> 0
<RECEIVABLES> 39,631
<ALLOWANCES> 2,934
<INVENTORY> 30,411
<CURRENT-ASSETS> 70,314
<PP&E> 25,133
<DEPRECIATION> 14,955
<TOTAL-ASSETS> 88,886
<CURRENT-LIABILITIES> 18,444
<BONDS> 38,019
0
0
<COMMON> 422
<OTHER-SE> 28,721
<TOTAL-LIABILITY-AND-EQUITY> 88,886
<SALES> 89,801
<TOTAL-REVENUES> 99,132
<CGS> 53,606
<TOTAL-COSTS> 53,606
<OTHER-EXPENSES> 33,716
<LOSS-PROVISION> 3,419
<INTEREST-EXPENSE> 3,263
<INCOME-PRETAX> 5,128
<INCOME-TAX> 1,689
<INCOME-CONTINUING> 3,439
<DISCONTINUED> 0
<EXTRAORDINARY> (227)
<CHANGES> 0
<NET-INCOME> 3,212
<EPS-PRIMARY> .76
<EPS-DILUTED> .76
</TABLE>
