<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 NOVEMBER 30, 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 January 12, 1998 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.
<PAGE> 3
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
February 28, November 30, November 30,
1997 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 696,000 $ 45,000 $ 81,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,079,000, $3,040,000, and $2,885,000 37,970,000 36,695,000 35,580,000
Other 696,000 1,069,000 1,396,000
Merchandise inventories 36,089,000 45,323,000 43,036,000
Deferred income taxes 2,118,000 2,102,000 2,034,000
Other 490,000 911,000 1,099,000
----------- ------------- -------------
Total current assets 78,059,000 86,145,000 83,226,000
Property and equipment 27,606,000 28,755,000 26,820,000
Less: accumulated depreciation and amortization 16,302,000 16,541,000 16,326,000
----------- ------------- -------------
Net property and equipment 11,304,000 12,214,000 10,494,000
Goodwill, net of accumulated amortization of
$1,208,000, $1,543,000, and $584,000 7,187,000 6,853,000 7,299,000
Other 969,000 1,248,000 913,000
----------- ------------- -------------
Total other assets 8,156,000 8,101,000 8,212,000
----------- ------------- -------------
TOTAL ASSETS $97,519,000 $ 106,460,000 $ 101,932,000
=========== ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $11,490,000 $ 15,590,000 $ 15,590,000
Accrued expenses 4,549,000 5,075,000 4,627,000
Deferred revenue 1,434,000 1,441,000 1,357,000
Income taxes 1,746,000 (277,000) (324,000)
Current portion of long-term debt 2,404,000 2,674,000 5,085,000
----------- ------------- -------------
Total current liabilities 21,623,000 24,503,000 26,335,000
Revolving credit note 38,111,000 45,000,000 40,000,000
Long-term debt and subordinated notes payable 661,000 190,000 1,491,000
Subordinated notes payable to shareholders 879,000 879,000 879,000
Deferred income taxes 1,948,000 1,991,000 2,378,000
Deferred revenue 1,102,000 1,039,000 1,005,000
----------- ------------- -------------
Total long-term liabilities 42,701,000 49,099,000 45,753,000
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 November 30, 1997;
4,222,456 shares issued and
outstanding at November 30, 1996 422,000 422,000 422,000
Additional paid-in capital 10,925,000 10,925,000 10,918,000
Retained earnings 21,848,000 21,511,000 18,504,000
----------- ------------- -------------
Total shareholders' equity 33,195,000 32,858,000 29,844,000
----------- ------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $97,519,000 $ 106,460,000 $ 101,932,000
=========== ============= =============
</TABLE>
<PAGE> 4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Three months ended November 30, Nine months ended November 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 23,087,000 $ 21,870,000 $ 63,165,000 $ 62,739,000
Other (principally finance charges) 2,760,000 2,649,000 8,538,000 7,782,000
--------- --------- --------- ---------
Total revenues 25,847,000 24,519,000 71,703,000 70,521,000
Costs and expenses:
Cost of sales (including
occupancy costs) 15,011,000 13,783,000 40,678,000 38,846,000
Selling, general, and administrative 8,733,000 8,506,000 26,039,000 25,574,000
Bad debt 1,053,000 974,000 2,743,000 2,450,000
Interest 929,000 899,000 2,647,000 2,636,000
------- ------- --------- ---------
Total costs and expenses 25,726,000 24,162,000 72,107,000 69,506,000
---------- ---------- ---------- ----------
Earnings before income taxes and
extraordinary item 121,000 357,000 (404,000) 1,015,000
Income taxes 40,000 118,000 (126,000) 335,000
------ ------- --------- -------
Net earnings before
extraordinary item 81,000 239,000 (278,000) 680,000
Extraordinary item- loss on early
extinguishment of debt, net of
income tax benefit of $ 40,000 (59,000)
------ ------- --------- -------
Net earnings $ 81,000 $ 239,000 $ (337,000) $ 680,000
======== ========= =========== =========
Earnings per share
Earnings before extraordinary item $ 0.02 $ 0.06 $ (0.07) $ 0.16
Extraordinary item - loss on early
extinguishment of debt (0.01)
------ ------- --------- -------
Net earnings per share $ 0.02 $ 0.06 $ (0.08) $ 0.16
====== ====== ======== ======
Weighted average shares outstanding 4,224,876 4,222,456 4,224,876 4,220,314
========= ========= ========= =========
</TABLE>
<PAGE> 5
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended November 30,
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ (337,000) $ 680,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,385,000 2,072,000
Provision for loss on accounts receivable 2,743,000 2,450,000
(Gain) loss on sale of property and equipment (108,000) 15,000
Changes in assets and liabilities:
Accounts receivable (1,841,000) (2,205,000)
Merchandise inventories (9,234,000) (12,625,000)
Other assets (731,000) (879,000)
Trade payables 4,156,000 6,053,000
Accrued expenses 818,000 (177,000)
Deferred revenue 23,000 (62,000)
Income taxes (1,962,000) (905,000)
----------- ------------
Net cash used in operating activities (4,088,000) (5,583,000)
Cash flows from investing activities:
Proceeds from sale of property and equipment 20,000 19,000
Capital expenditures (3,077,000) (1,928,000)
----------- ------------
Net cash used in investing activities (3,057,000) (1,909,000)
Cash flows from financing activities:
Proceeds from revolving credit note 9,501,000 8,987,000
Principal payments on debt (3,007,000) (1,600,000)
----------- ------------
Net cash provided by financing activities 6,494,000 7,387,000
----------- ------------
Net change in cash (651,000) (105,000)
Cash, beginning of period 696,000 186,000
----------- ------------
Cash, end of period $ 45,000 $ 81,000
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,707,000 $ 2,671,000
=========== ============
Income taxes $ 1,858,000 $ 1,757,000
=========== ============
</TABLE>
<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.
<PAGE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended November 30, 1997 were up 6% over the same
quarter in 1996 to a third quarter record of $23,087,000. Comparable store sales
rose 4% for the quarter, down 3% in September and up 3% and 6% in October and
November respectively. The number of sales transactions during the quarter
increased 3%, and the average sale, including repairs and other non-inventories
items, also increased 3% to $158 from $154; the average price point sold during
the quarter, excluding repairs and other non-inventoried items, was $240 . The
Company operated 103 stores at November 30, 1997, compared to 100 at the same
time in the previous year. Net sales for the nine month period increased 1% to
$66,165,000; same store sales were flat during the nine-month period. The
increased sales year-to-date resulted from less than a 1% increase in customer
transactions and a 1% increase in the average transaction size, including
repairs and other non-inventories items, to $145 from $144; the average price
point sold during the first nine months, excluding repairs and other
non-inventories items, was $226.
Other revenues in the third quarter increased 4% over last year to $2,760,000.
Finance charges and credit insurance income from customer receivables accounted
for 70% of other revenues, down from 71% a year earlier. Year-to-date, other
revenues increased 10% over the same period a year earlier, and finance charges
and credit insurance income represented 69% of the total, down from 74%.
Gross margins were 35% of net sales during the third quarter ended November 30,
1997, down from 37% in the same quarter last year; approximately 9% of the
decrease was caused by higher occupancy costs and the balance resulted from
lower merchandise margins in most major categories during the period. For the
first nine months of the year, gross margins were 36% of net sales, down from
38% of net sales for the same period last year because of lower margins on
merchandise sales in all categories.
Selling, general, and administrative expenses decreased in the third quarter to
38% of net sales from 39% a year ago. Advertising expenses for the quarter were
12% lower, decreasing to 3% of net sales from 4% of net sales. Salaries and
wages increased 6% in the third quarter of 1997 over the third quarter of 1996,
but were higher by 14 basis points as a percentage of net sales. Year-to-date,
SG&A expenses were 41% for both years. Advertising decreased 6% for the nine
months, and dropped 31 basis points as a percentage of net sales. Salaries and
wages for the first three quarters increased 3% and rose 60 basis points as a
percentage of net sales.
Bad debt expense was 4.5% of net sales for both quarters ended November 30, 1997
and 1996, respectively, and was also 4% for both nine-month periods. As a
percentage of average customer receivables, bad debt was 2.7% in the current
third quarter and 2.6% in the same quarter last year; for the first nine months
of this year, bad debt was 7.0% of customer receivables, compared to 6.4% last
year. Balances on delinquent accounts were about 1% higher at November 30, 1997
than they were at the same date in 1996, but represented only 15% of total
accounts receivable at November 30, 1997 compared to 16% a year earlier; gross
customer receivables were 1.5% higher at November 30, 1997 than a year ago. The
allowance for bad debts at November 30, 1997 was 7.65% and was 7.5% at the same
date in 1996. The Company's credit extension and collection policies and
criteria continue to be consistent with those used during the same periods last
year.
Interest expense was $30,000 higher in the third quarter and $11,000 higher in
the first nine months than for the same periods last year. The increase resulted
from increased average borrowings of approximately 10% during the third quarter
and 6% during the nine-month period. The Company's effective interest rate
during the quarter was 7.6%, 400 basis points lower than the same quarter a year
earlier, and for the nine-month period was 7.7%, also 40 basis points lower than
the same period in the previous year.
<PAGE> 8
The Company's anticipated tax rate was 33% for both periods ending November 30,
1997; the actual rates were 33% for the third quarters of both years and 31% and
33% for the nine months ended November 30, 1997 and 1996, respectively. Net
income after taxes was $81,000 ($0.02 per share and 0.4% of net sales) for the
quarter ended November 30, 1997, compared to $239,000 ($0.06 per share and 1.1%
of net sales) for the same quarter last year. For the first nine months, the
Company lost $337,000 (-$ 0.08 per share and -0.5% of net sales) compared to
$680,000 ($0.16 per share and 1.1% of net sales) for the same period last year.
Management expects comparable store sales to be higher during the final quarter
of the current fiscal year that will end February 28, 1997, based on positive
comparable store sales in December 1997 of 5%. Gross margin pressure is expected
to continue, but anticipates that gross margins will not be significantly worse
than at the end of the third fiscal quarter of this year. Management further
expects no change in SG&A expenses, as a percentage of net sales, during the
final fiscal quarter compared to the same period last year. Bad debt expense, as
a percentage of accounts receivable, is expected to remain in line with levels
experienced during the past three years.
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 or deflationary forces during the periods
reported herein.
Liquidity and Capital Resources
Working capital increased 8% to $61,642,000 at November 30, 1997 from
$56,891,000 at November 30, 1996. The resulting ratio of current assets to
current liabilities as of November 30, 1997 was 3.5 to 1, compared to 3.2 to 1
at the same date in the prior year.
Customer receivables, net of allowance for doubtful accounts, were $36,695,000
and $35,580,000 at November 30, 1997 and 1996, respectively. The 3% increase
resulted from 51% of total net sales being done on the Company's proprietary
credit card and related finance charges and credit insurance fees. Credit
extension and collection policies and criteria remained consistent during both
years.
Merchandise inventories were 5% higher at the end of the third quarter of 1997
than at the same time in the previous year. The increase resulted from the
Company's commitment to maintaining a high in-stock ratio for key, core, and
advertised items. At November 30, 1997, the Company was 99.1% in-stock on key
items and 95.3% in-stock on core items.
Capital expenditures for the Company were $3,057,000 during the nine months
ended November 30, 1997, compared to $1,909,000 for the same period in 1996.
Expenditures during both periods were primarily for tenant improvements in new
and remodeled stores and for additional office, security, and computer
equipment. The Company opened five new stores during the first nine months of
this year, and has closed one under-performing store in the fourth quarter.
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. This agreement also provides
for an additional seasonal increase to $50,000,000 from July 1 through December
31, 1997. 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
November 30, 1997 and also as of the date of this report, the Company's rate was
30-day LIBOR plus 170 basis points.
<PAGE> 9
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
credit facility notes, which are 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, approximately 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. Through November 30, 1997, the
Company had received no payments under the agreement.
At this time, management believes its credit lines are adequate to support its
plans 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.
Our statements about comparable store sales, gross margins, and various expenses
during the fourth quarter of the fiscal year ending February 28, 1998 may be
considered forward-looking statements that involve a number of risks and
uncertainties. While others may exist, we have identified the risks of
unexpected changes in the marketing and pricing strategies of competitors,
adverse changes in the political environments of countries providing raw
materials for the jewelry industry, and significant changes in the buying and/or
debt payment practices of consumers.
Trading of the Company's Common Stock:
Since the Company's initial public offering in December 1986, its common stock
has traded on the Nasdaq National Market. From the first date of listing and
until the date of this report, Reeds Jewelers, Inc. has been in complete
compliance with all requirements for listing on the Nasdaq National Market.
On August 22, 1997, the Nasdaq National Market received approval from the
Securities and Exchange Commission to change its quantitative maintenance
requirements for continued listing effective February 23, 1998. Although Reeds
Jewelers, Inc., in its opinion, will remain in substantial compliance, the
Company does not expect to meet the specific requirements for number of shares
in the public float or for the market value of the shares not closely-held.
The Board of Directors of Reeds Jewelers, Inc. is currently evaluating
alternatives available, including the possibility of requesting an exemption for
continued listing on the basis of substantial compliance or the possibility of
listing its shares on a different exchange. The Company does intend and expect
to determine the appropriate course of action before the February 23, 1998
deadline.
<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 has purchased non-file UCC
insurance from an unaffiliated insurance carrier for accounts
originated in certain states and has charged its customers in those
states a non-file UCC insurance fee equal to the subsidiary's premium
cost for that insurance. Non-file insurance reimburses the subsidiary
for losses on accounts that result from its decision not to file a UCC
financing statement for the collateral securing the account. A civil
action has been brought by several plaintiffs against numerous finance
companies, jewelry retailers, furniture and appliance retailers, and
insurance companies specifically including the Company whereby the
plaintiffs have challenged certain aspects of the Company's non-file
insurance practices. If the non-file insurance practices of the
Company were determined to be invalid under applicable federal law or
the laws of certain states, the Company could be required to refund
non-file insurance fees, pay other damages to its former and current
customers in those states and pay fines, penalties, and attorneys'
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.
On or about June 20, 1997, U.W. Clemon, United States District Judge
in the United States District Court for the Middle District of
Alabama, Northern Division, signed a Conditional Class Certification
Order for this matter. On or about October 6, 1997, the same judge
signed a Decertification Order in this matter.
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.
Not applicable
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.
<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.
January 12, 1998 /s/ James R. Rouse
- ------------------------------ ---------------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REEDS JEWELERS, INC. FOR THE NINE MONTHS ENDED NOVEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> NOV-3-1997
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 39,375
<ALLOWANCES> 3,040
<INVENTORY> 45,323
<CURRENT-ASSETS> 86,145
<PP&E> 28,755
<DEPRECIATION> 16,541
<TOTAL-ASSETS> 106,460
<CURRENT-LIABILITIES> 24,503
<BONDS> 45,190
0
0
<COMMON> 422
<OTHER-SE> 32,436
<TOTAL-LIABILITY-AND-EQUITY> 106,460
<SALES> 63,165
<TOTAL-REVENUES> 71,703
<CGS> 40,678
<TOTAL-COSTS> 40,678
<OTHER-EXPENSES> 26,039
<LOSS-PROVISION> 2,743
<INTEREST-EXPENSE> 2,647
<INCOME-PRETAX> (404)
<INCOME-TAX> (126)
<INCOME-CONTINUING> (278)
<DISCONTINUED> 0
<EXTRAORDINARY> (59)
<CHANGES> 0
<NET-INCOME> (337)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
