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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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 incorporation (I.R.S. Employer Identification No.)
or organization)
2525 SOUTH SEVENTEENTH STREET
WILMINGTON, NORTH CAROLINA 28401
(Address of principal executive offices) (Zip Code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(910) 350-3100
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK $.10 PAR VALUE
---------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of May 21, 1998 (computed by reference to the last reported
sales price of the registrant's common stock on the American Stock Exchange on
such date) was $4,535,128.
The number of shares outstanding as of May 21, 1998 of the registrant's
common stock, par value $.10 per share, was 8,449,752.
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 1998
Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Reeds Jewelers, Inc. (the "Company" or the "Registrant") operates 99
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, and Mills Jewelers offer a wide selection of merchandise,
including diamond rings and jewelry, gold jewelry and chains, gemstone rings,
watches, and other fine jewelry. Most of the diamonds sold by the Company are up
to one carat, with a limited selection of larger diamonds. Gold jewelry items
sold in the Company's stores are primarily 14 carat, and its gemstone rings
contain either precious stones (such as rubies, sapphires, and emeralds) or
semi-precious gems (such as opals, blue topaz, amethyst, and garnets). Watches
offered by the Company represent many popular brand names in a broad range of
price points. Sales by class of similar products that accounted for 10 percent
or more of net sales during each of the last three fiscal years were as follows:
<TABLE>
<CAPTION>
CLASS 1998 1997 1996
- ----- ---- ---- ----
<S> <C> <C> <C>
Diamonds & Precious Gems.................................... 54.9% 54.2% 56.9%
Karat Gold Jewelry & Semi-precious Gems..................... 20.3 21.5 20.9
Watches..................................................... 14.1 13.3 11.9
</TABLE>
Approximately 80% of the products sold by the Company are purchased through
a centralized merchandising department at the Company's headquarters. The
centralization of buying allows the Company to establish long-term relationships
with vendors that provide a continuing source of product supply, consistent
quality control, and competitive pricing. As of February 28, 1998, the Company
operated 98 stores, of which 4 were located in Alabama, 9 in Florida, 6 in
Georgia, 3 in Kansas, 8 in Maryland, 8 in Mississippi, 23 in North Carolina, 1
in Ohio, 2 in Oklahoma, 12 in South Carolina, 5 in Tennessee, 14 in Virginia,
and 3 in West Virginia. Since February 28, 1998, the Company has opened a new
store in Richmond VA. The Company plans to open an additional four to five
stores in the current fiscal year if suitable locations become available. The
Company chooses its locations based upon various demographic factors, 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 28, 1998, the Company's three largest
suppliers accounted for 11.9%, 8.0%, and 6.6%, respectively, of the Company's
total merchandise purchases, with no other supplier
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accounting for more than 5.6%. 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 the Democratic Republic of Congo, South
Africa, Botswana, 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>
1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
NET SALES
First Quarter............................................. 19.7% 20.9% 19.1%
Second Quarter............................................ 19.3 20.4 18.0
Third Quarter............................................. 22.4 22.1 23.6
Fourth Quarter............................................ 38.6 36.6 39.3
NET EARNINGS
First Quarter............................................. (18.0)% 5.9% 11.9%
Second Quarter............................................ 2.6 5.1 13.8
Third Quarter............................................. 3.0 5.9 6.8
Fourth Quarter............................................ 112.4 83.1 67.5
</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
46% of net sales in 1998 and approximately 47% and 49% of net sales during 1997
and 1996, 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
6.3% to $43,629,000 at February 28, 1998 from $41,049,000 at February 28, 1997,
and had increased 3.6% from $39,631,000 at February 29, 1996. The allowance for
doubtful accounts was 7.65% of accounts receivable (prior to allowance for
doubtful accounts) at February 28, 1998 and was 7.5% at the end of February 1997
and 1996. Bad debt expense as a percentage of net sales decreased to 4.0% in the
fiscal year ended February 28, 1998 from 3.6% and 3.8% in the years ended
February 28, 1997 and February 28, 1996, respectively. The Company raised its
allowance to 7.65% early in the fiscal year ended February 28, 1998 in
anticipation of higher losses resulting from the Company's lack of ability to
recover certain losses after terminating its UCC non-filing option.
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Delinquency in the Company's accounts receivable dropped to 8.1% for the fiscal
year ended February 28, 1998 from 8.9% and 9.5% in the fiscal years ended
February 28, 1997 and February 29, 1996, respectively. The Company's policies
and procedures regarding credit authorization, collection, and write-offs have
not changed during the three-year period. Primarily as a result of the higher
accounts receivable, finance charges grew to $7,078,000 in the fiscal year ended
February 28, 1998 from $6,893,000 and $6,604,000 in the fiscal years ended
February 28, 1997 and February 29, 1996, 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 28, 1998, the Company had a total of 780 full-time
equivalent employees. Of these, 166 equivalents were employed in the corporate
headquarters and the remaining 614 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.
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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. The 99 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, insurance, and taxes. The table below sets forth information with
respect to the expiration of leases on locations in operation or committed to by
the Company as of February 28, 1998:
<TABLE>
<CAPTION>
NUMBER OF LEASES
YEAR OF EXPIRATION WHICH EXPIRE
- ------------------ ----------------
<S> <C>
1998.................................................. 3
1999.................................................. 11
2000.................................................. 8
2001.................................................. 13
2002.................................................. 7
2003.................................................. 3
2004.................................................. 7
2005.................................................. 7
2006.................................................. 15
2007.................................................. 15
2008.................................................. 10
</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.
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. Several
plaintiffs have brought a civil action 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.
The Company is actively working toward a negotiated settlement of the action.
The Company has reached a tentative preliminary agreement to settle the action;
however, the terms of such settlement have not been finalized. However, in
anticipation of settling the action on the basis of the tentative preliminary
agreement, the
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Company has recorded a $700,000 charge, approximately $.08 per share, during the
fourth quarter of the fiscal year ended February 28, 1998. There can be no
assurance that the tentative preliminary agreement will be finalized. In such
event, the Company will continue to contest the civil action 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of May 15, 1998 there were 8,449,752 shares outstanding held by 223
shareholders of record plus approximately 300 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. The Company's common
stock trades on the American Stock Exchange under the symbol RJI. The quarterly
high and low sales prices of the Company's common stock (adjusted for the 100%
stock dividend issued on February 20, 1998) for the fiscal years ended February
28, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED FEBRUARY 28, 1998
Fourth Quarter.............................................. $4.3750 $3.1875
Third Quarter............................................... 3.5625 3.2500
Second Quarter.............................................. 4.2500 3.0625
First Quarter............................................... 3.6875 2.8750
FISCAL YEAR ENDED FEBRUARY 28, 1997
Fourth Quarter.............................................. $3.6250 $2.8750
Third Quarter............................................... 4.5000 3.1875
Second Quarter.............................................. 4.5000 3.5000
First Quarter............................................... 4.7500 3.2500
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA AND
NUMBER OF STORES)
<S> <C> <C> <C> <C> <C>
FIVE-YEAR SUMMARY
Net Sales....................................... $102,845 $98,952 $89,801 $77,496 $67,305
Bad Debt Expense................................ 4,092 3,538 3,419 3,000 2,761
Interest Expense................................ 3,457 3,428 3,263 3,040 2,957
Net Earnings.................................... 2,708 4,025 3,212 4,113 3,180
Earnings Per Share.............................. .32 .48 .38 .49 .38
Working Capital................................. 63,305 56,545 52,050 45,815 38,828
Total Assets.................................... 100,986 97,519 88,886 77,401 67,499
Long-Term Debt, Less Current.................... 43,804 39,651 38,019 29,278 25,803
Shareholders' Equity............................ 35,903 33,195 29,143 25,827 21,666
Number of Stores................................ 98 100 96 77 71
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Sales and Other Revenues
At February 28, 1998 the Company operated 98 stores in thirteen states
compared to 100 stores and 96 stores in twelve states at February 28, 1997 and
February 29, 1996, respectively. Total net sales for fiscal 1998 were up 4% to
$102,845,000 from $98,952,000 in fiscal 1997 which were 10% higher than sales of
$89,801,000 in fiscal 1996. Same store sales, or stores open in comparable
periods, were up 1% in 1998, were flat in 1997, and were up 2% in 1996.
Average sales per store increased 3% to $1,032,000 per store in 1998;
average sales per store were $1,004,000 and $1,048,000 in 1997 and 1996,
respectively. Average sales per full-time equivalent employee rose 6% to
$132,000 in 1998 and were 5% higher in 1997 over 1996, increasing to $125,000
from $119,000. Average sales per selling square foot increased 6% to $940 in
1998, after increasing 5% in 1997 to $890 from $846. The increase in sales in
1998 resulted from a 4% increase in the number of sales transactions, with the
average sale unchanged at $145. In 1997, the average sale rose 12% and the
number of sales transactions were down 1% when compared to 1996.
Other revenues increased $751,000 in 1998 and $1,357,000 in 1997 over each
of the prior years. 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 62%, 64%, and 77% of other revenues in 1998, 1997, and 1996,
respectively, with credit insurance products (property, disability,
unemployment, and life) accounting for 8%, 9%, and 8% in the three years,
respectively. Late fee income was 8% in 1998, 6% in 1997, and 2% in 1996. Income
from extended service agreements accounted for 17%, 17%, and 16% of other
revenues in 1998, 1997, and 1996, respectively. All other revenue items were
less than 5% of the total.
Gross Profit
Gross profit was 37.6% of net sales in 1998, 39.5% in 1997, and 40.3% in
1996. The decrease in gross margins in 1998 was broad-based and resulted
entirely from unfavorable changes in sales mix and merchandise pricing. The
decrease in gross margins in 1997 resulted entirely from higher occupancy costs
that, as a percentage of net sales, were 15% higher on a per store basis than a
year earlier. 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 that is likely to result in further margin erosion during the year
ending February 28, 1999.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses as a percentage of net sales
were 37.3%, 37.2%, and 37.5% in 1998, 1997, and 1996, respectively. In 1998, the
Company reduced advertising expenditures by 1% over the prior year; in 1997,
advertising was raised by 6%. For 1998, 1997, and 1996, advertising represented
4.7%, 5.0%, and 5.2% of net sales, respectively. Compensation expenses rose 3%
in 1998 and accounted for 62% of SG&A expenses; similar expenses increased 11%
in 1997 over 1996, and represented 63% and 62% of total SG&A, respectively
during the two years.
Bad Debt Expense
Bad debt expense increased 16.0% to $4,092,000 (4.0% of net sales) in the
year ended February 28, 1998 from $3,538,000 (3.6% of net sales) in 1997; bad
debt expense in 1996 was $3,419,000 (3.8% of net sales). Actual write-offs as a
percentage of net sales during each of the years were 3.7% in 1998, 3.4% in
1997, and 3.6% in 1996.
The allowance for doubtful accounts at the end of 1998, 1997, and 1996 was
7.65%, 7.5%, and 7.5%, respectively, of customer receivables (prior to the
allowance for doubtful accounts). The Company's policies and procedures
regarding credit authorization, collection, and write-offs have not changed
during the three-
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year period. Delinquent accounts (accounts more than 90 days past due)
represented 8.1%, 8.9%, and 9.5% of the Company's accounts receivable portfolio
on the last day of February 1998, 1997, and 1996, respectively.
Interest Expense
Interest expense decreased to 3.4% of net sales in 1998 from 3.5% in 1997
and 3.6% in 1996. In 1998, the Company's cost of borrowings averaged 7.70%
compared to 8.05% a year earlier, and average outstanding debt was 6% higher
than the year before, resulting in a $29,000 increase in interest expense. The
$165,000 increase in 1997 was caused by a 13% increase in average outstanding
debt from the year before.
Income Taxes
The provision for income taxes was $1,374,000 (33.2% effective rate) in
1998, $1,982,000 (33.0% effective rate) in 1997, and $1,689,000 (32.9% effective
rate) in 1996. The change in effective rates in each of the last two years
resulted primarily from the benefits attributable to the captive insurance
company.
Non-File UCC Insurance Litigation
In May 1998, the Company received a preliminary approval order for a
settlement in this previously discussed action; the final hearing on fairness is
scheduled for July 3, 1998. In anticipation of settling this action, the Company
recorded a $700,000 charge, approximately $ .08 per share, during the fourth
quarter of the fiscal year ended February 28, 1998. Additional background
details are available in Item 3 of our Form 10-K for the year ended February 28,
1998.
Year 2000
The Company is currently undertaking a full review of all its systems to
ensure that they are able to operate efficiently after December 31, 1999. The
Company believes that all of its operating systems will have been modified where
necessary and that the problem does not pose a material operational issue or
expense for the Company. Discussions with the Company's external suppliers are
taking place to ensure that, as far as possible, they are taking similar action
towards Year 2000 compliance with respect to their products and services.
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. Working
capital needs will be financed through funds generated from operations and bank
lines described below. Cash provided by operations in 1998 and 1997 was
$1,630,000 and $1,735,000, respectively; cash used in operations was $413,000 in
1996.
Capital expenditures totaled $3,141,000 in 1998, $3,222,000 in 1997, and
$2,351,000 (plus $1,755,000 related to the acquisition of The Melart Jewelers,
Inc.) in 1996. The Company opened new stores in 1998 in Dothan AL, Orlando FL,
Columbia MD, Owings Mills MD, Meridian MS, St. Clairesville OH, and Newport News
VA. It closed stores in Pensacola FL, Tallahassee FL, Baltimore MD, Frederick
MD, Hagerstown MD, Landover MD, Bartlesville OK, Georgetown SC, and Norfolk VA
during the fiscal year.
Since year-end, the Company has opened a new store in Richmond VA and plans
to open four to five more new stores in the current fiscal year. The Company has
budgeted $4,500,000 for capital expenditures in the fiscal year ending February
28, 1999 for new store openings, major and minor remodels, and various other
equipment. These capital expenditures will be financed through funds generated
from operations and bank lines described below.
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Debt
Borrowings under the Company's revolving credit facility averaged $43.0
million in 1998, $35.0 million in 1997, and $23.6 million in 1996. The maximum
borrowings outstanding under the facility at any time during each year were
$49.4 million in 1998, $43.0 million in 1997, and $33.7 million in 1996. At
February 28, 1998, $42.9 million was outstanding under the facility, compared to
$38.1 million and $33.6 million at February 28, 1997 and February 29, 1996,
respectively.
On December 21, 1995, the Company entered into a revolving credit agreement
with two commercial banks whereby the Company could borrow up to $40,000,000
based on specified percentages of eligible inventory and accounts receivable. In
June 1997, the Company increased its revolving credit facility to $45,000,000
and extended its expiration to July 31, 2000; covenants and other terms remained
unchanged. In May 1998, the Company and the banks agreed to an additional
seasonal increase to $50,000,000 from May 10 through December 31, 1998. The
Company pays 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, 1998, the
Company's rate was 30-day LIBOR plus 160 basis points.
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 swap was 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. During the entire term, the
Company received no payments under the agreement.
The Company also has subordinated notes totaling $879,000 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.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in the statement.
Accordingly, the Company hereby identifies the following important factors that
could cause the Company's actual financial results to differ materially from
those projected by the Company in forward-looking statements: (i) unexpected
changes in the marketing and pricing strategies of competitors; (ii) adverse
changes in the political environments of countries providing raw materials for
the jewelry industry; (iii) lack of available locations on terms acceptable to
the Company; (iv) significant changes in interest rates; and (v) loss of key
executives.
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
that would cause the financial information contained herein not to be indicative
of the operating results or future financial condition of Reeds Jewelers, Inc.
8
<PAGE> 10
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.
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 1998 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 1998 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 1998 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 28, 1998, 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 $175,000 to Zimmer and Zimmer in 1997 and 1996, 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 and $21,000 was repaid in June 1996. 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
$594,000 to Alan M. Zimmer, $185,000 to Arlene Z. Schreiber, and $100,000 to
Ronna T. Zimmer (the wife of Herbert J. Zimmer). These
9
<PAGE> 11
amounts are evidenced by various subordinated notes and are due upon full
payment of all senior obligations or with approval of all senior lenders.
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>
<S> <C> <C>
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) -- 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(f) -- 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(g) -- 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(h) -- 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(i) -- Form of non-qualified supplemental executive retirement plan
(incorporated by reference to the Company's Form 10-K for
the fiscal year ended February 28, 1994, file number
0-15247)
10(j) -- 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(k) -- 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)
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C> <C>
21 -- List of Subsidiaries of the Registrant
23 -- Consent of Ernst & Young LLP
27 -- Financial data schedule (for SEC use only)
</TABLE>
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT.
None.
11
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of May
1998.
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 27th day of May 1998.
<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
- -----------------------------------------------------
James R. Rouse
/s/ ALLAN E. METZNER Vice President and Corporate Controller
- ----------------------------------------------------- (Principal Accounting Officer)
Allan E. Metzner
/s/ ROBERTA G. ZIMMER Secretary and Director
- -----------------------------------------------------
Roberta G. Zimmer
/s/ GARLAND WADDY GARRETT Director
- -----------------------------------------------------
Garland Waddy Garrett
/s/ FENTON N. HORD Director
- -----------------------------------------------------
Fenton N. Hord
/s/ ARLENE Z. SCHREIBER Director
- -----------------------------------------------------
Arlene Z. Schreiber
/s/ RICHARD F. SHERMAN Director
- -----------------------------------------------------
Richard F. Sherman
/s/ HERBERT J. ZIMMER Director
- -----------------------------------------------------
Herbert J. Zimmer
/s/ JEFFREY L. ZIMMER Director
- -----------------------------------------------------
Jeffrey L. Zimmer
</TABLE>
12
<PAGE> 14
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28, 1997, AND FEBRUARY 29, 1996
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-17
</TABLE>
F-1
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Reeds Jewelers, Inc. and Subsidiaries
Wilmington, North Carolina
We have audited the accompanying consolidated balance sheets of Reeds
Jewelers, Inc. and subsidiaries as of February 28, 1998 and February 28, 1997
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended February 28, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Reeds Jewelers,
Inc. and subsidiaries as of February 28, 1998 and February 28, 1997, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended February 28, 1998, 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 30, 1998
F-2
<PAGE> 16
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 996,000 $ 696,000
Accounts receivable:
Customers, less allowance of $3,338,000 in 1998 and
$3,079,000 in 1997..................................... 40,291,000 37,970,000
Other................................................... 627,000 696,000
Merchandise inventories................................... 36,466,000 36,089,000
Deferred income taxes..................................... 2,577,000 2,118,000
Other..................................................... 582,000 490,000
------------ -----------
Total current assets............................... 81,539,000 78,059,000
Property, furniture and equipment:
Land and building......................................... 83,000 83,000
Furniture and equipment................................... 17,196,000 16,628,000
Leasehold improvements.................................... 10,776,000 10,895,000
------------ -----------
28,055,000 27,606,000
Less accumulated depreciation and amortization............ 16,351,000 16,302,000
------------ -----------
11,704,000 11,304,000
Other assets:
Goodwill, net of accumulated amortization of $1,654,000 in
1998 and $1,208,000 in 1997............................. 6,741,000 7,187,000
Deferred income taxes, net of valuation allowance of
$178,000 in 1998 and $220,000 in 1997................... 406,000 300,000
Miscellaneous............................................. 596,000 669,000
------------ -----------
7,743,000 8,156,000
------------ -----------
Total assets....................................... $100,986,000 $97,519,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 9,369,000 $11,490,000
Accrued compensation...................................... 2,586,000 2,539,000
Accrued expenses.......................................... 2,671,000 1,901,000
Deferred revenue.......................................... 1,548,000 1,434,000
Income taxes (Note 6)..................................... 1,998,000 1,746,000
Current portion of long-term debt and subordinated notes
payable (Note 2)........................................ 62,000 2,404,000
------------ -----------
Total current liabilities.......................... 18,234,000 21,514,000
Revolving credit note (Note 2).............................. 42,914,000 38,111,000
Long-term debt and subordinated notes payable, less current
portion (Note 2).......................................... 11,000 661,000
Subordinated notes payable to shareholders (Note 2)......... 879,000 879,000
Deferred income taxes....................................... 1,768,000 1,948,000
Deferred revenue............................................ 1,222,000 1,102,000
Other long-term liabilities................................. 55,000 109,000
------------ -----------
65,083,000 64,324,000
Commitments and contingencies (Notes 3 and 11)
Shareholders' equity (Notes 7 and 8):
Common stock, par value $.10 per share, 10,000,000 shares
authorized, 8,449,752 shares issued and outstanding in
1998, 4,224,900 shares issued and outstanding in 1997... 844,000 422,000
Additional paid-in capital................................ 10,503,000 10,925,000
Retained earnings......................................... 24,556,000 21,848,000
------------ -----------
Total shareholders' equity......................... 35,903,000 33,195,000
------------ -----------
Total liabilities and shareholders' equity......... $100,986,000 $97,519,000
============ ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 17
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 28,
--------------------------- FEBRUARY 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Net sales........................................... $102,845,000 $ 98,952,000 $89,801,000
Other (principally finance charges)................. 11,439,000 10,688,000 9,331,000
------------ ------------ -----------
114,284,000 109,640,000 99,132,000
Costs and expenses:
Cost of sales (including occupancy)................. 64,206,000 59,829,000 53,606,000
Selling, general and administrative................. 38,388,000 36,838,000 33,716,000
Interest............................................ 3,457,000 3,428,000 3,263,000
Bad debt............................................ 4,092,000 3,538,000 3,419,000
------------ ------------ -----------
110,143,000 103,633,000 94,004,000
------------ ------------ -----------
Income before income taxes and extraordinary item..... 4,141,000 6,007,000 5,128,000
Income taxes (Note 6)................................. 1,374,000 1,982,000 1,689,000
------------ ------------ -----------
Net income before extraordinary item.................. 2,767,000 4,025,000 3,439,000
Extraordinary item -- loss on early extinguishment of
debt, net of income tax benefit of $40,000 in 1998
and $151,000 in 1996................................ (59,000) -- (227,000)
------------ ------------ -----------
Net income.................................. $ 2,708,000 $ 4,025,000 $ 3,212,000
============ ============ ===========
Net income per common share:
Income before extraordinary item.................... $ .33 $ .48 $ 0.41
Extraordinary item -- loss on early extinguishment
of debt.......................................... (.01) -- (.03)
============ ============ ===========
Basic and diluted net income per common share......... $ .32 $ .48 $ .38
============ ============ ===========
Weighted average shares outstanding................... 8,449,752 8,442,160 8,415,406
============ ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 18
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
STOCK PAID-IN CAPITAL EARNINGS TOTAL
-------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
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
Exercise of stock options for common
stock.................................... -- 27,000 -- 27,000
Net income for 1997......................... -- -- 4,025,000 4,025,000
-------- ----------- ----------- -----------
Balance at February 28, 1997.................. 422,000 10,925,000 21,848,000 33,195,000
Two-for-one stock split effective in the
form of a 100% stock dividend (Note 7)... 422,000 (422,000) -- --
Net income for 1998......................... -- -- 2,708,000 2,708,000
-------- ----------- ----------- -----------
Balance at February 28, 1998.................. $844,000 $10,503,000 $24,556,000 $35,903,000
======== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 19
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
FEBRUARY 28
----------------------- FEBRUARY 29,
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $2,708,000 $4,025,000 $ 3,212,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation........................................ 2,741,000 2,363,000 2,064,000
Amortization........................................ 446,000 446,000 226,000
Provision for deferred income taxes................. (745,000) (520,000) (106,000)
(Gain) loss on sale of property, furniture and
equipment......................................... -- (92,000) 116,000
Changes in operating assets and liabilities:
Accounts receivable............................... (2,252,000) (1,264,000) 3,080,000
Merchandise inventories........................... (377,000) (5,678,000) (1,456,000)
Other current assets and miscellaneous assets..... (19,000) (283,000) 74,000
Accounts payable.................................. (2,121,000) 1,918,000 (1,526,000)
Accrued compensation and expenses................. 817,000 (55,000) (5,829,000)
Deferred revenue.................................. 234,000 199,000 357,000
Income taxes...................................... 252,000 747,000 (705,000)
Other long-term liabilities....................... (54,000) (71,000) 80,000
---------- ---------- ------------
Net cash provided by (used in) operating activities...... 1,630,000 1,735,000 (413,000)
INVESTING ACTIVITIES
Purchases of property, furniture and equipment........... (3,141,000) (3,222,000) (2,351,000)
Acquisition of The Melart Jewelers, Inc.................. -- -- (1,755,000)
---------- ---------- ------------
Net cash used in investing activities.................... (3,141,000) (3,222,000) (4,106,000)
FINANCING ACTIVITIES
Proceeds from exercise of stock options.................. -- 6,000 104,000
Net proceeds from revolving credit note.................. 4,803,000 4,420,000 14,691,000
Principal payments on debt............................... (2,992,000) (2,429,000) (10,224,000)
---------- ---------- ------------
Net cash provided by financing activities................ 1,811,000 1,997,000 4,571,000
---------- ---------- ------------
Net increase in cash and cash equivalents................ 300,000 510,000 52,000
Cash and cash equivalents at beginning of year........... 696,000 186,000 134,000
---------- ---------- ------------
Cash and cash equivalents at end of year................. $ 996,000 $ 696,000 $ 186,000
========== ========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest............................................... $3,275,000 $3,479,000 $ 3,407,000
========== ========== ============
Income taxes........................................... $1,082,000 $1,755,000 $ 2,291,000
========== ========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 20
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998
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 $59,000 and $227,000 for the years ending
February 28, 1998 and February 29, 1996, respectively, net of income tax benefit
of $40,000 and $151,000, represents the write-off of loan origination fees and
prepayment penalties paid on the early extinguishment of debt.
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. As of February 28, 1998, the Company
had no significant concentrations of credit risk with individual customers.
INTEREST RATE RISK 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, FURNITURE AND EQUIPMENT
Property, furniture and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
related assets. Amortization of leasehold improvements is provided using the
straight-line method over the useful life of the improvement or the remaining
lease term, whichever is shorter. The estimated useful lives are as follows:
<TABLE>
<S> <C>
Building.................................................... 40 years
Furniture and equipment..................................... 5 - 10 years
Leasehold improvements...................................... 5 - 10 years
</TABLE>
F-7
<PAGE> 21
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL
Goodwill represents the excess cost over the fair value of net assets
acquired and is being amortized on a straight-line basis over 15-40 years.
EARNINGS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128
Earnings per Share ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
In accordance with SFAS 128, basic earnings per share presented is computed
using the weighted average number of shares of common stock outstanding. Diluted
earnings per share presented is computed using the weighted average number of
shares of common stock and the dilutive effect of options and warrants
outstanding, using the "treasury stock" method. All periods presented have been
restated to conform with SFAS 128. Certain stock options are considered
anti-dilutive and therefore have not been included in the computation. In
accordance with SFAS 128, 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 two-for-one stock split
in the form of a one hundred percent stock dividend described in Note 7.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
DEFERRED REVENUE
For the fiscal years ended February 28, 1998, February 28, 1997 and
February 29, 1996, 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
The Company expenses advertising costs as incurred. Total advertising
expense was approximately $4,845,000, $4,903,000, and $4,621,000 for 1998, 1997
and 1996, respectively.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value amounts of financial instruments
as required by Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," using market information available
to management as of February 28, 1998 and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the
F-8
<PAGE> 22
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company would realize in a current market exchange. The carrying amount of
assets and liabilities are reasonable estimates of their fair values.
LONG-LIVED ASSETS
In fiscal year 1997, the Company adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". Under the provisions of the Statement, impairment losses are
recognized when expected future cash flows are less than the assets' carrying
value. Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property and equipment and intangibles,
including goodwill, in relation to the operating performance and expected future
undiscounted cash flows of the underlying business. The Company adjusts the net
book value of the underlying assets if the sum of expected future cash flows is
less than book value. Since adoption, no impairment losses have been recognized.
STOCK BASED COMPENSATION
Prior to March 1,1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Pursuant to APB 25, compensation expense was recorded only to
the extent that the current market price of the underlying stock exceeded the
exercise price on the date of grant. On March 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires companies to (i) recognize as expense
the fair value of all stock-based awards on the date of grant when issued at
market value, or (ii) continue to apply the provisions of APB 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS 123 had been applied. The Company has elected to continue to
apply the provisions of APB 25 and provide the pro forma disclosure provisions
of SFAS 123 (see Note 8).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income" ("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Company does not believe that the adoption of these new standards will have a
material impact on its financial statements.
2. LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt at February 28, 1998 and February 28, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------- ----------
<S> <C> <C>
Senior subordinated note, unsecured, payable in quarterly
principal installments of $588,000; interest payable
quarterly at 12.31%....................................... $ -- $2,939,000
Other....................................................... 73,000 126,000
------- ----------
73,000 3,065,000
Less current portion........................................ 62,000 2,404,000
------- ----------
$11,000 $ 661,000
======= ==========
</TABLE>
F-9
<PAGE> 23
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING FEBRUARY 28,
- ------------------------
<S> <C>
1999........................................................ $62,000
2000........................................................ 11,000
-------
$73,000
=======
</TABLE>
The Company also has subordinated notes payable to shareholders totaling
$879,000 at February 28, 1998 and 1997 with interest at prime (8.5% at February
28, 1998). These notes are unsecured and subordinate to the revolving credit
note and the senior subordinated note 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.
In June 1997, the Company increased its revolving credit facility ("credit
facility") to $45,000,000 and extended its expiration to July 31, 2000;
covenants and other terms remained unchanged. This agreement also provides for
an additional seasonal increase to $50,000,000 from July 1 through December 31,
1997. Interest under the credit facility payable monthly, at an interest rate
ranging from at the 30-day LIBOR rate (5.69% at February 28, 1998) plus 1.6% to
2.0% or prime plus .38% to .63% based on the Company's debt-to-worth ratio. The
Company had $42,914,000 outstanding on this revolver at February 28, 1998, which
is classified as a long-term liability based on its expiration date.
To limit increases in interest expense due to changes in 30-day LIBOR, 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. The interest rate protection agreement
expired on February 2, 1998. No payments had been received from the counterparty
as of February 28, 1998.
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 various
times through 2006. Aggregate monthly payments for these leases total
approximately $21,000. Annual rent of approximately $255,000 was paid to
shareholders during each of the years ended February 28, 1998, February 28, 1997
and February 29, 1996.
F-10
<PAGE> 24
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total rent expense was $10,521,000, $9,858,000, and $8,038,000 including
percentage rent of $695,000, $769,000, and $830,000 for the years ended February
28, 1998, February 28, 1997, and February 29, 1996, respectively. Future minimum
lease payments are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 7,500,000
2000........................................................ 6,709,000
2001........................................................ 6,012,000
2002........................................................ 4,508,000
2003........................................................ 4,066,000
Thereafter.................................................. 12,546,000
-----------
$41,341,000
===========
</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 $355,000, $236,000, and $176,000 for the years ended
February 28, 1998, February 28, 1997 and February 29, 1996, 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 for each of the years ended February 28, 1998, February
28, 1997, and February 29, 1996.
6. INCOME TAXES
The provision for income taxes for the years ended February 28, 1998,
February 28, 1997 and February 29, 1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal.......................................... $1,736,000 $2,120,000 $1,278,000
State............................................ 343,000 382,000 366,000
---------- ---------- ----------
2,079,000 2,502,000 1,644,000
Deferred:
Federal.......................................... (604,000) (453,000) (85,000)
State............................................ (141,000) (67,000) (21,000)
---------- ---------- ----------
(745,000) (520,000) (106,000)
---------- ---------- ----------
$1,334,000 $1,982,000 $1,538,000
========== ========== ==========
</TABLE>
F-11
<PAGE> 25
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 28, 1998, February 28, 1997 and February 29, 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income tax expense at statutory federal rate....... $1,375,000 $2,043,000 $1,627,000
Increase (decrease) resulting from:
Tax attributable to captive insurance company
income not taxed for federal purposes......... (217,000) (222,000) (170,000)
State income taxes, net of federal income tax
benefit.......................................... 226,000 252,000 237,000
Other.............................................. (50,000) (91,000) (156,000)
---------- ---------- ----------
$1,334,000 $1,982,000 $1,538,000
========== ========== ==========
</TABLE>
The tax effects of temporary differences at February 28, 1998 and February
28, 1997 that give rise to significant portions of deferred tax assets and
deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation................................ $ 1,768,000 $1,948,000
----------- ----------
Total deferred tax liabilities.............................. 1,768,000 1,948,000
Deferred tax assets:
Deferred revenue.......................................... 995,000 912,000
Net operating loss carryforwards.......................... 49,000 51,000
Accrued expenses.......................................... 476,000 410,000
Reserves.................................................. 1,641,000 1,265,000
----------- ----------
Total deferred tax assets................................... 3,161,000 2,638,000
Valuation allowance for deferred tax assets (178,000) (220,000)
----------- ----------
Net deferred tax assets..................................... 2,983,000 2,418,000
----------- ----------
Net deferred taxes.......................................... $(1,215,000) $ (470,000)
=========== ==========
</TABLE>
The Company's deferred income tax benefit results from the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Excess of tax over financial reporting:
Depreciation............................................ $(179,000) $(302,000) $ 44,000
Deferred revenue........................................ (83,000) (68,000) (125,000)
Vacation accrual........................................ (13,000) (24,000) (15,000)
Reserves................................................ (376,000) (71,000) (16,000)
Other items, net........................................ (94,000) (55,000) 6,000
--------- --------- ------------
$(745,000) $(520,000) $ (106,000)
========= ========= ============
</TABLE>
At February 28, 1998, certain companies of the consolidated group have
state net operating loss carryovers, expiring through 2006, of $1,479,000 for
tax return purposes.
A valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The Company has
established valuation allowances for certain state net operating losses and
deferred state tax assets which management believes it is more likely than not
that the Company will not realize any benefit.
F-12
<PAGE> 26
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK SPLIT
On February 10, 1998, the Company declared a two-for-one stock split
effective in the form of a one hundred percent stock dividend to shareholders of
record as of February 11, 1998. On February 20, 1998, the Company issued
4,224,900 shares of common stock in connection with this stock split.
Accordingly, approximately $422,000 was transferred from additional paid-in
capital to common stock, representing the par value of additional shares issued.
Additionally, 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 connection 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 stock dividends.
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 fully vested and
exercisable under the original terms of the agreement, expiring at various times
from July 1998 through July 2000.
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 fully vested and
exercisable under the original terms of the agreement, expiring in July 1998.
On July 13, 1994, the Company adopted the 1994 Stock Option Plan (the "1994
Plan"). Under the 1994 Plan, options to purchase 484,000 shares of common stock
(as adjusted for the 1998 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 1998, the Company
granted options for 24,000 shares of common stock with vesting terms of 20% per
year and options for 14,000 shares of common stock, which vested immediately.
Options outstanding under the 1994 plan expire at various times from July 1999
through July 2007.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company accounted for its employee stock options
granted subsequent to February 28, 1995 under the fair value method. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions as of February 28, 1998 and 1997 and February 29, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- -------
<S> <C> <C> <C>
Risk-free interest rate.......................... 5.80% 6.93% 6.20%
Dividend yield................................... 0% 0% 0%
Volatility factor................................ .454 .472 .524
Expected life.................................... 8.7 years 6.5 years 9 years
</TABLE>
F-13
<PAGE> 27
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Option valuation models require the input of highly subjective assumptions.
Changes in the subjective input assumptions can materially affect the fair value
estimate, and therefore, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options. Had the
compensation cost for the Company's stock option plans been determined based on
the fair value at the date of grant for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS 123, the Company's net income and net income per
share would have decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
FEBRUARY 28,
---------------- FEBRUARY 29,
1998 1997 1996
------ ------- ------------
<S> <C> <C> <C>
Net income -- as reported................................. $2,708 $ 4,025 $3,212
Net income -- pro forma................................... 2,663 3,991 3,163
Net income per share -- as reported....................... .32 .48 .38
Net income per share -- pro forma......................... .31 .47 .37
</TABLE>
Stock option activity, as restated for the two-for-one stock split in the
form of a one hundred percent stock dividend described in Note 7, under each of
these plans for the years ended February 28, 1998, February 28, 1997 and
February 29, 1996 were as follows:
<TABLE>
<CAPTION>
1986 AND 1992 PLANS 1994 PLAN
-------------------------- --------------------------
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES PRICE
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Options outstanding at February 28,
1995............................... 96,316 $1.34 to $3.00 329,362 $5.01 to $5.51
Granted............................ -- -- 45,660 $ 4.75
Exercised.......................... (18,150) $1.34 to $3.00 (12,100) $5.01 to $5.51
Canceled........................... (484) $1.34 to $3.00 (49,568) $5.01 to $5.51
------- -------------- ------- --------------
Options outstanding at February 29,
1996............................... 77,682 $1.34 to $3.00 313,354 $4.50 to $5.51
Granted............................ -- -- 20,000 $4.00 to $4.40
Exercised.......................... (16,940) $1.34 to $1.70 -- --
Canceled........................... -- -- (14,944) $4.75 to $5.01
------- -------------- ------- --------------
Options outstanding at February 28,
1997............................... 60,742 $1.55 to $3.00 318,410 $4.00 to $5.51
Granted............................ -- -- 38,000 $3.88 to $4.26
Exercised.......................... -- -- -- --
Canceled........................... (484) $ 2.58 (1,968) $4.75 to $5.51
------- -------------- ------- --------------
Options outstanding at February 28,
1998............................... 60,258 $1.55 to $3.00 354,442 $3.88 to $5.51
======= ============== ======= ==============
Options exercisable at February 28,
1998............................... 60,258 $1.55 to $3.00 213,602 $3.88 to $5.51
======= ============== ======= ==============
Options available for grant at
February 28, 1998 -- 117,458
======= =======
</TABLE>
Approximately 273,860, 100,346 and 119,089 outstanding awards were
exercisable at February 28, 1998, February 28, 1997 and February 29, 1996.
The weighted-average remaining contractual life of options outstanding as
of February 28, 1998 is 4.8 years. The weighted-average exercise price of
options outstanding as of February 28, 1998 is $4.58.
F-14
<PAGE> 28
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options granted during the year ended February 28, 1998, February 28, 1997
and February 29, 1996 had the following weighted-average information:
<TABLE>
<CAPTION>
GRANT DATE STOCK GRANT DATE STOCK
PRICE EQUAL TO PRICE LESS THAN
EXERCISE PRICE EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
February 29, 1996
Weighted-average fair value.......................... $3.22 $ --
Weighted-average exercise price...................... $4.75 $ --
February 28, 1997
Weighted-average fair value.......................... $2.29 $1.71
Weighted-average exercise price...................... $4.40 $4.00
February 28, 1998
Weighted-average fair value.......................... $2.54 $1.73
Weighted-average exercise price...................... $3.88 $4.26
</TABLE>
At February 28, 1998 and 1997, the Company has reserved 532,158 and 532,642
shares, respectively, of common stock for future issuance related to the stock
option plans.
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted income
per common share in accordance with Statement No. 128, "Earnings per Share":
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted income per
share -- net income available to common
shareholders.................................. $2,708,000 $4,025,000 $3,212,000
Denominator:
Denominator for basic income per
share -- weighted-average shares.............. 8,449,752 8,442,160 8,415,406
Effect of dilutive securities:
Employee stock options........................ 16,000 23,000 50,000
---------- ---------- ----------
Denominator for diluted income per
share -- adjusted weighted-average shares..... 8,465,752 8,465,160 8,465,406
========== ========== ==========
Basic and diluted income per common share
$ .32 $ .48 $ .38
========== ========== ==========
</TABLE>
F-15
<PAGE> 29
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 taken place at
March 1, 1996. The results of operations of the acquisition for the years ended
February 28, 1998 and 1997 are included in the Company's accompanying income
statement for the full year.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 28, 1996
-----------------
<S> <C>
Net revenues................................................ $107,628,000
Net income before extraordinary item........................ 2,423,000
Extraordinary item.......................................... 227,000
Net income.................................................. 2,196,000
</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, 1996 or of results that may occur in the future.
11. COMMITMENTS AND 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. Several
plaintiffs have brought a civil action 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.
The Company is actively working toward a negotiated settlement of the action.
The Company has reached a tentative preliminary agreement to settle the action;
however, the terms of such settlement have not been finalized. However, in
anticipation of settling the action on the basis of the tentative preliminary
agreement, the Company has recorded a $700,000 charge, approximately $.08 per
share, during the fourth quarter of the fiscal year ended February 28, 1998.
There can be no assurance that the tentative preliminary agreement will be
finalized. In such event, the Company will continue to contest the civil action
vigorously.
F-16
<PAGE> 30
SCHEDULE II
REEDS JEWELERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED FEBRUARY 28, 1998, FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
-------- ------------ ------------------------ ---------- ----------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended February 28, 1998:
Allowance for doubtful
accounts................. $3,079,000 $4,092,000 $ -- $3,833,000(1) $3,338,000
Valuation allowance for
deferred tax assets...... 220,000 -- -- 42,000(4) 178,000
---------- ---------- ------- ---------- ----------
$3,299,000 $4,092,000 $ -- $3,875,000 $3,516,000
========== ========== ======= ========== ==========
Year ended February 28, 1997:
Allowance for doubtful
accounts................. $2,934,000 $3,538,000 $ -- $3,393,000(1) $3,079,000
Valuation allowance for
deferred tax assets...... 202,000 -- 18,000(3) -- 220,000
---------- ---------- ------- ---------- ----------
$3,136,000 $3,538,000 $18,000 $3,393,000 $3,299,000
========== ========== ======= ========== ==========
Year ended February 29, 1996:
Allowance for doubtful
accounts................. $2,869,000 $3,419,000 $ -- $3,354,000(1) $2,934,000
Valuation allowance for
deferred tax assets...... 200,000 -- 2,000(2) -- 202,000
---------- ---------- ------- ---------- ----------
$3,069,000 $3,419,000 $ 2,000 $3,354,000 $3,136,000
========== ========== ======= ========== ==========
</TABLE>
- ---------------
(1) Uncollectible accounts written off.
(2) State net operating losses.
(3) State deferred tax assets unlikely to be realized.
(4) State deferred tax assets likely to be realized.
F-17
<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.
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-82100) pertaining to the 1994 Stock Option Plan of Reeds
Jewelers, Inc., of our report dated March 30, 1998, with respect to the
consolidated financial statements and schedule of Reeds Jewelers, Inc. and
Subsidiaries included in its Annual Report (Form 10-K) for the year ended
February 28, 1998.
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 27, 1998
<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 28,
1998 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-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> FEB-28-1998
<CASH> 996
<SECURITIES> 0
<RECEIVABLES> 43,629
<ALLOWANCES> 3,338
<INVENTORY> 36,466
<CURRENT-ASSETS> 81,539
<PP&E> 28,055
<DEPRECIATION> 16,351
<TOTAL-ASSETS> 100,986
<CURRENT-LIABILITIES> 18,234
<BONDS> 42,925
0
0
<COMMON> 844
<OTHER-SE> 35,059
<TOTAL-LIABILITY-AND-EQUITY> 100,986
<SALES> 102,845
<TOTAL-REVENUES> 114,284
<CGS> 64,206
<TOTAL-COSTS> 64,206
<OTHER-EXPENSES> 38,388
<LOSS-PROVISION> 4,092
<INTEREST-EXPENSE> 3,457
<INCOME-PRETAX> 4,141
<INCOME-TAX> 1,374
<INCOME-CONTINUING> 2,767
<DISCONTINUED> 0
<EXTRAORDINARY> 59
<CHANGES> 0
<NET-INCOME> 2,708
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
</TABLE>
