<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MAY 31, 1997
COMMISSION FILE NUMBER 0-15247
REEDS JEWELERS, INC.
(Exact name of registrant as specified in its charter)
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)
(910) 350-3100
(Registrant's telephone number, including area code)
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 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 the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of outstanding shares of Common Stock, par value $0.10 per
share, as of June 30, 1997 was 4,224,876.
<PAGE> 2
Part I
Item 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K for the
fiscal year ended February 28, 1997.
2
<PAGE> 3
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, May 31, May 31,
1997 1997 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 696,000 $ 42,000 $ 151,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,079,000, $2,982,000, and $2,839,000 37,970,000 35,996,000 35,389,000
Other 696,000 744,000 814,000
Merchandise inventories 36,089,000 40,269,000 35,478,000
Deferred income taxes 2,118,000 2,089,000 1,926,000
Other 490,000 843,000 443,000
----------- ----------- -----------
Total current assets 78,059,000 79,983,000 74,201,000
Property and equipment 27,606,000 28,306,000 25,495,000
Less: accumulated depreciation and amortization 16,302,000 16,377,000 15,409,000
----------- ----------- -----------
Net property and equipment 11,304,000 11,929,000 10,086,000
Goodwill, net of accumulated amortization of
$1,208,000, $1,320,000, $873,000 7,187,000 7,076,000 7,522,000
Other 969,000 924,000 784,000
----------- ----------- -----------
Total other assets 8,156,000 8,000,000 8,306,000
----------- ----------- -----------
TOTAL ASSETS $97,519,000 $99,912,000 $92,593,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $11,490,000 $15,687,000 $10,140,000
Accrued expenses 4,549,000 4,476,000 4,123,000
Deferred revenue 1,434,000 1,438,000 1,332,000
Income taxes 1,746,000 0 0
Current portion of long-term debt 2,404,000 2,410,000 1,829,000
----------- ----------- -----------
Total current liabilities 21,623,000 24,011,000 17,424,000
Revolving credit note 38,111,000 39,080,000 38,469,000
Long-term debt and subordinated notes payable 661,000 241,000 3,132,000
Subordinated notes payable to shareholders 879,000 879,000 900,000
Deferred income taxes 1,948,000 1,920,000 2,258,000
Deferred revenue 1,102,000 1,075,000 1,033,000
----------- ----------- -----------
Total long-term liabilities 42,701,000 43,195,000 45,792,000
Common stock, par value $0.10 per share;
10,000,000 shares authorized; 4,224,876
shares issued and outstanding at February
28, 1997 and, May 31, 1997; 4,216,406 shares
issued and outstanding at May 31, 1996 422,000 422,000 422,000
Additional paid-in capital 10,925,000 10,925,000 10,898,000
Retained earnings 21,848,000 21,359,000 18,057,000
----------- ----------- -----------
Total shareholders' equity 33,195,000 32,706,000 29,377,000
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $97,519,000 $99,912,000 $92,593,000
=========== =========== ===========
</TABLE>
3
<PAGE> 4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended May 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Net sales $ 20,276,000 $20,701,000
Other (principally finance charges) 2,842,000 2,453,000
------------ -----------
Total revenues 23,118,000 23,154,000
Costs and expenses:
Cost of sales (including
occupancy costs) 12,962,000 12,490,000
Selling, general, and administrative 9,231,000 8,764,000
Bad debt 819,000 680,000
Interest 836,000 868,000
------------ -----------
Total costs and expenses 23,848,000 22,802,000
------------ -----------
Earnings before income taxes (730,000) 352,000
Income taxes (241,000) 116,000
------------ -----------
Net earnings $ (489,000) $ 236,000
============ ===========
Earnings per share $ (0.12) $ 0.06
============ ===========
Weighted average shares outstanding 4,224,876 4,216,406
============ ===========
</TABLE>
4
<PAGE> 5
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended May 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ (489,000) $ 236,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 748,000 666,000
Provision for loss on accounts receivable 819,000 680,000
Loss / (gain) on sale of property and equipment 14,000 1,000
Changes in assets and liabilities:
Accounts receivable 1,107,000 610,000
Merchandise inventories (4,180,000) (5,067,000)
Other assets (32,000) (80,000)
Trade payables 4,168,000 602,000
Accrued expenses 36,000 (780,000)
Deferred revenue 33,000 22,000
Income taxes (1,959,000) (690,000)
----------- -----------
Net cash provided by (used in) operating activities 265,000 (3,800,000)
Cash flows from investing activities:
Purchases of property and equipment (1,276,000) (504,000)
Proceeds from sale of property and equipment 4,000 10,000
----------- -----------
Net cash used in investing activities (1,272,000) (494,000)
Cash flows from financing activities:
Net proceeds from revolving credit note 969,000 4,779,000
Principal payments on debt (616,000) (520,000)
----------- -----------
Net cash provided by financing activities 353,000 4,259,000
----------- -----------
Net decrease in cash (654,000) (35,000)
Cash, beginning of period 696,000 186,000
----------- -----------
Cash, end of period $ 42,000 $ 151,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 848,000 $ 883,000
Income taxes 1,796,000 1,207,000
</TABLE>
5
<PAGE> 6
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. MANAGEMENT'S OPINION
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the
fiscal year ended February 28, 1997.
Management of Reeds Jewelers, Inc. believes that the consolidated financial
statements contained herein contain all adjustments necessary to present
fairly the financial position, consolidated results of operations, and cash
flows for the interim period. Management also believes that all adjustments
so made are of a normal and recurring nature.
6
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales of $20,276,000 for the three months ended May 31, 1997 were 2% lower
than the same quarter a year earlier; comparable store sales fell 6%. The
average sales transaction, including repairs, decreased to $133 from $140;
excluding repairs, the average sales transactions decreased to $208 from $220.
We had 102 locations at quarter end compared to 98 a year ago. Total
transactions were 3% higher in the first quarter of this year, but comparable
store transactions were up less than 1%. At quarter end, the Company had a 99.8%
in-stock position on key items compared to 98.5% a year earlier, and was 90.6%
in-stock on its entire basic merchandise mix compared to 90.8% in the first
quarter of last year. The Company spent 12% more on advertising in the first
quarter of 1997 compared to the same quarter in 1996.
Other revenues were 16% higher for the three month period than a year earlier.
The $2,842,000 of other revenues resulted from a 2% increase in finance charge
revenue (61% of other revenues), a 9% increase in revenues from extended service
agreements (16% of other revenues), a 9% increase in credit insurance income (9%
of other revenues), a 386% increase in late fee income (8% of other revenues),
and a 371% increase in various other smaller items (6% of other revenues). The
higher finance charge revenue resulted from customer receivables being higher by
an average of 3% during the first quarter of 1997. The Company generated 2% less
revenues from the sale of extended service agreements in the first quarter of
this year; the net increase in revenues resulted from the recognition of
deferred revenues for previous sales.
Gross profits were 36.1% during the quarter, down from 39.7% in the first
quarter of 1996. About 3% of the margin deterioration resulted from occupancy
costs, 10% from close-out sales, 32% from increased melt of merchandise, and the
remainder from lower margins on merchandise sold.
Selling, general and administrative expenses increased 5%, and as a percentage
of net sales increased to 45.5% from 42.3%. Salaries & wages increased 2% with
payroll at the stores increasing 2% and increasing 1% in the corporate office;
as a percentage of sales, this item increased to 24.0% from 23.1% of net sales.
In the first quarter of 1997, salaries & wages accounted for 52.7% of SG&A
compared to 54.6% a year earlier.
Bad debt expense was 20% higher this year, and rose to 4.0% of net sales from
3.3% of net sales. Gross write-off for bad debts increased 11%, and net
write-off increased 18% compared to the previous year. Delinquency at the end of
the quarter was 1% lower than a year earlier; customer receivables were 2%
higher.
Interest expense was $32,000 lower, and as a percentage of net sales it fell to
4.1% of net sales from 4.2% of net sales. The reduced interest expense resulted
from a 2% decrease in the effective interest rate on borrowings, although the
average level of debt increased 1% in the first quarter of 1997 compared to
1996.
The Company's anticipated tax rate was 33% in the first quarter of both years.
After an income tax benefit of $241,000 in the first quarter of 1997 and income
tax expense of $116,000 in the first quarter of 1996, the Company lost $489,000
and earned $236,000 in the respective quarters. The Company lost $ .12 per share
in the first quarter this year compared to earnings of $ .06 per share in 1996.
The Company generally follows the practice of passing on price changes to its
customers. As a result, management believes its operations have not been
materially affected by inflationary forces during the periods reported herein.
7
<PAGE> 8
Liquidity and Capital Resources
Working capital decreased 1% to $55,972,000 at May 31, 1997 from $56,777,000 at
May 31, 1996; 94% of the $805,000 decrease resulted from the net of increases of
$4,791,000 in merchandise inventories and $5,547,000 in accounts payable. The
ratio of current assets to current liabilities as of May 31, 1997 was 3.3 to 1,
compared to 4.3 to 1 a year earlier.
Customer receivables, net of allowance for doubtful accounts, were $35,996,000
and $35,389,000 at May 31, 1997 and 1996, respectively. The 2% increase resulted
from an 4% decrease in proprietary credit sales, (such sales fell to 50% of net
sales from 51% a year earlier) and the 20% increase in bad debt expense. The
decrease in the mix of credit sales resulted from the decision of our customers
to pay by cash; cash sales were up slightly. The Company processed 19% fewer
credit applications and approved 15% less in the first quarter of this year
compared to the same period last year. Credit extension policies and criteria
remained consistent during each of the two periods.
Merchandise inventories at the end of the first quarter were 14% higher than a
year earlier --- $40,269,000 compared to $35,478,000. The investment in
inventories on a per store basis is up 9% from a year earlier. The Company is
attempting to achieve a 100% in-stock position on key items and a 98%-100%
in-stock position on core items. Approximately 52% of the Company's sales are of
items designated as key or core. At May 31, 1997, the Company was 99.8% in-stock
on key items and 94.6% in-stock on core items, and 90.6% in-stock on its entire
plan of basic merchandise.
Capital expenditures for leaseholds, equipment, furniture and fixtures were
$1,276,000 during the three months ended May 31, 1997, compared to $504,000 for
the same period a year earlier. During the quarter, the Company opened stores in
Dothan AL, Owings Mills MD, and St. Clairesville OH and closed a store in
Hagerstown MD. The Company plans to open 4 more stores during the year and
expects to close five additional stores before the end of the fiscal year.
Management plans to invest approximately $3,500,000 in capital expenditures
during the current fiscal year.
In June 1997, the Company increased its revolving credit facility with two
commercial banks to $45,000,000 and extended its expiration to July 31, 2000;
pricing, covenants, and other terms were unchanged. Interest is paid under the
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; the rate is set quarterly. As of May 1, 1997, the Company's rate was
30-day LIBOR plus 180 basis points; the current rate is effective through
September 30, 1996.
In addition, the Company has $2,351,000 in a senior subordinated note with an
insurance company, with interest payable quarterly at 12.31% and quarterly
principal payments of $457,000 through April 1998; however, the Company has
arranged to retire the entire balance of this note on July 1, 1997. The Company
also has subordinated notes totaling $879,000 with three related parties, with
interest payable monthly at the prime rate as 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.
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 31, 1997, the Company
has received no payments under the agreement.
8
<PAGE> 9
At this time, management believes its credit lines are adequate to support its
plans for the current year and knows of no other material events or
uncertainties which would cause the financial information herein not to be
indicative of the operating results or future financial condition of Reeds
Jewelers, Inc.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. 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 previously purchased 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 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 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
Not applicable.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements 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.
REEDS JEWELERS, INC.
July 1, 1997 /s/ James R. Rouse
------------ ------------------
James R. Rouse
Treasurer and
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REEDS JEWELERS, INC. FOR THE THREE MONTHS ENDED MAY 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 38,978
<ALLOWANCES> 2,982
<INVENTORY> 40,269
<CURRENT-ASSETS> 79,983
<PP&E> 28,306
<DEPRECIATION> 16,377
<TOTAL-ASSETS> 99,912
<CURRENT-LIABILITIES> 24,011
<BONDS> 39,321
0
0
<COMMON> 422
<OTHER-SE> 32,284
<TOTAL-LIABILITY-AND-EQUITY> 99,912
<SALES> 20,276
<TOTAL-REVENUES> 23,118
<CGS> 12,962
<TOTAL-COSTS> 12,962
<OTHER-EXPENSES> 9,231
<LOSS-PROVISION> 819
<INTEREST-EXPENSE> 836
<INCOME-PRETAX> (730)
<INCOME-TAX> (241)
<INCOME-CONTINUING> (489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489)
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
