<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 AUGUST 31, 1999
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 October 12, 1999 was 8,476,372.
<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 for interim
financial statements. 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, 1999.
2
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, AUGUST 31, AUGUST 31,
1999 1999 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,080,000 $ 898,000 $ 926,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,782,000, $3,638,000, and $3,197,000 45,655,000 43,919,000 38,597,000
Other 853,000 629,000 632,000
Merchandise inventories 40,798,000 46,181,000 40,876,000
Deferred income taxes 2,312,000 2,184,000 2,162,000
Other 523,000 588,000 631,000
---------- ---------- ----------
Total current assets 91,221,000 94,399,000 83,824,000
Land and building 83,000 83,000 82,000
Furniture and equipment 19,601,000 21,353,000 18,614,000
Leasehold improvements 10,972,000 11,309,000 10,791,000
---------- ---------- ----------
30,656,000 32,745,000 29,487,000
Less: accumulated depreciation and amortization 17,895,000 19,151,000 17,220,000
---------- ---------- ----------
Net property and equipment 12,761,000 13,594,000 12,267,000
Goodwill, net of accumulated amortization of
$2,101,000, $2,324,000, and $1,877,000 6,295,000 6,072,000 6,518,000
Deferred income taxes, net of valuation allowance of
$157,000, $150,000 and $145,000 127,000 22,000 238,000
Other 561,000 723,000 616,000
--------- --------- ---------
Total other assets 6,983,000 6,817,000 7,372,000
--------- --------- ---------
TOTAL ASSETS $110,965,000 $114,810,000 $103,463,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 15,638,000 $ 8,020,000 $ 10,331,000
Accrued compensation 3,780,000 1,817,000 1,764,000
Accrued expenses 2,510,000 2,002,000 1,888,000
Deferred revenue 908,000 607,000 1,230,000
Income taxes 1,879,000 113,000 144,000
Current portion of long-term debt 0 0 4,217,000
---------- ---------- ----------
Total current liabilities 24,715,000 12,559,000 19,574,000
Revolving credit note 43,348,000 59,342,000 45,000,000
Subordinated notes payable to shareholders 845,000 845,000 845,000
Deferred income taxes 1,440,000 1,207,000 1,185,000
Deferred revenue 314,000 81,000 688,000
Other long-term liabilities 135,000 135,000 141,000
---------- ---------- ----------
Total long-term liabilities 46,082,000 61,610,000 47,859,000
Common stock, par value $0.10 per share; 25,000,000 shares
authorized; 8,476,372 shares issued and outstanding at
February 28, 1999 and August 31, 1999; 8,464,272 shares
issued and Outstanding at August 31, 1998 847,000 847,000 846,000
Additional paid-in capital 10,560,000 10,560,000 10,541,000
Retained earnings 28,761,000 29,234,000 24,643,000
---------- ---------- ----------
Total shareholders' equity 40,168,000 40,641,000 36,030,000
---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $110,965,000 $114,810,000 $103,463,000
============ ============ ============
</TABLE>
3
<PAGE> 4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 22,731,000 $ 21,052,000 $ 46,150,000 $ 41,483,000
Cost of sales 11,055,000 10,560,000 22,565,000 20,613,000
---------- ---------- ---------- ----------
Gross profit 11,676,000 10,492,000 23,585,000 20,870,000
Selling, general, and administrative 9,559,000 8,630,000 19,325,000 17,274,000
Depreciation and amortization 897,000 881,000 1,749,000 1,697,000
----------- ---------- ---------- ----------
Operating earnings 1,220,000 981,000 2,511,000 1,899,000
Interest expense 1,008,000 918,000 1,805,000 1,769,000
----------- ----------- ----------- -----------
Income before income taxes 212,000 63,000 706,000 130,000
Income taxes 70,000 21,000 233,000 43,000
------ ------ ------- ------
Net earnings $ 142,000 $ 42,000 $ 473,000 $ 87,000
========= ======== ========= =========
Basic and diluted earnings
Per share $ 0.02 $ 0.01 $ 0.06 $ 0.01
====== ====== ====== ======
Diluted weighted average shares
Outstanding 8,476,372 8,459,116 8,476,372 8,454,434
========= ========= ========= =========
</TABLE>
4
<PAGE> 5
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 473,000 $ 87,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 1,497,000 1,457,000
Amortization 252,000 240,000
Loss (gain) on sale of property, furniture and equipment 0 4,000
Changes in operating assets and liabilities:
Accounts receivable 1,960,000 1,690,000
Merchandise inventories (5,383,000) (4,410,000)
Other current assets and other assets (257,000) (86,000)
Accounts payable (7,618,000) 962,000
Accrued compensation and expenses (2,471,000) (1,479,000)
Deferred revenue (534,000) (852,000)
Income taxes (1,766,000) (1,854,000)
Other long-term liabilities 0 (12,000)
----------- ------------
Net cash used in operating activities (13,847,000) (4,253,000)
INVESTING ACTIVITIES
Purchases of property, furniture and equipment (2,329,000) (2,053,000)
---------- ----------
Net cash used in investing activities (2,329,000) (2,053,000)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 0 6,000
Net proceeds from revolving credit note 15,994,000 6,261,000
Principal payments on debt 0 (31,000)
---------- --------
Net cash provided by financing activities 15,994,000 6,236,000
---------- ---------
Net (decrease) in cash and cash equivalents (182,000) (70,000)
Cash, beginning of period 1,080,000 996,000
--------- -------
Cash, end of period $ 898,000 $ 926,000
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,683,000 $ 1,769,000
=========== ===========
Income taxes $ 1,981,000 $ 1,898,000
=========== ===========
</TABLE>
5
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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 included in the
Company's Form 10-K for the fiscal year ended February 28, 1999.
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.
B. RECLASSIFICATIONS
Certain reclassifications were made to the 1998 financial statements to conform
to the classifications used in 1999. The reclassifications had no effect on net
income or shareholders' equity as previously reported.
C. DEFERRED REVENUE
For the fiscal years ended prior to February 28, 1999, 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 were directly related to the
acquisition of these contracts were 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, were charged to expense as incurred. Previously deferred
extended service contract revenue recognized for the quarters ended August 31,
1999 and 1998 of $228,000 and $377,000, respectively, has been reflected as a
reduction of selling, general, and administrative expenses.
During the first quarter of the fiscal year ended February 28, 1999, the Company
stopped selling its own extended service contracts and began selling such
contracts on behalf of unrelated third parties only. These contracts provided
for warranty periods of 24 to 36 months. As a result of this change, the Company
will continue to recognize existing deferred revenues from previously sold
contracts through January 31, 2001 and now recognizes commission revenue for the
unrelated third-party extended warranty plans at the time of sale.
6
<PAGE> 7
D. OPERATING SEGMENT INFORMATION
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company now reports two segments, retail operations and
credit operations. Separate financial information is produced internally and is
regularly reviewed by the chief operating decision-maker ("CODM").
The retail operations segment consists of all store locations and corporate
headquarters. The stores have all been combined into one segment because they
have similar basic characteristics, such as the nature of products, and the
class of customers for their products. Corporate headquarters is included in
this same segment due to the fact that its revenues earned are incidental to the
Company's activities and it serves as a support system to the stores.
The credit operations segment is primarily engaged in providing and maintaining
financing for our customers. This operation is aggregated since the CODM
evaluates it separately. It also meets one of the three quantitative thresholds,
the asset test, since it represents 10.0% or more of the combined assets of all
operating segments.
The following tables summarize the revenues, operating income, assets,
depreciation, and capital expenditures for each reportable segment for the
quarters and six-months ended August 31, 1999, and 1998. The credit operations
revenue primarily consists of finance charges, which are shown as an offset in
SG&A on the income statement.
- --------------------------------------------------------------------------------
RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
- --------------------------------------------------------------------------------
FOR THE QUARTER ENDED AUGUST 31, 1999
- --------------------------------------------------------------------------------
REVENUES $22,731,000 $ 2,594,000 $ 25,325,000
OPERATING INCOME (155,000) 1,375,000 1,220,000
IDENTIFIABLE ASSETS 70,358,000 44,452,000 114,810,000
DEPRECIATION AND AMORTIZATION 843,000 54,000 897,000
CAPITAL EXPENDITURES 1,330,000 33,000 1,363,000
- --------------------------------------------------------------------------------
For the quarter ended August 31, 1998
- --------------------------------------------------------------------------------
Revenues $21,052,000 $ 2,254,000 $ 23,306,000
Operating income 498,000 483,000 981,000
Identifiable assets 64,394,000 39,069,000 103,463,000
Depreciation and Amortization 844,000 37,000 881,000
Capital expenditures 1,006,000 33,000 1,039,000
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED AUGUST 31, 1999
- --------------------------------------------------------------------------------
REVENUES $46,150,000 $ 5,197,000 $ 51,347,000
OPERATING INCOME (654,000) 3,165,000 2,511,000
IDENTIFIABLE ASSETS 70,358,000 44,452,000 114,810,000
DEPRECIATION AND AMORTIZATION 1,650,000 99,000 1,749,000
CAPITAL EXPENDITURES 2,167,000 162,000 2,329,000
- --------------------------------------------------------------------------------
For the six months ended August 31, 1998
- --------------------------------------------------------------------------------
Revenues $41,483,000 $ 4,436,000 $ 45,919,000
Operating income 885,000 1,014,000 1,899,000
Identifiable assets 64,394,000 39,069,000 103,463,000
Depreciation and Amortization 1,630,000 67,000 1,697,000
Capital expenditures 1,956,000 97,000 2,053,000
7
<PAGE> 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITI0N AND
RESULTS OF OPERATIONS
Results of Operations
Sales
Net sales for the three months ended August 31, 1999 were $22,731,000, up 8.0%
over the same period a year earlier. The Company operated five more stores in
the second quarter of 1999 ending the period with 107 stores. Comparable store
sales of 6.0% in June, 7.0% in July, and 3.1% in August resulted in a 5.2%
same-store increase for the quarter. Year to date, net sales rose 11.3% to
$46,150,000 from $41,483,000 a year ago. Comparable stores sales for the current
six-month period were up 8.2%.
The Company averaged 97.4% in-stock on its key and core items during the second
quarter of both the current and prior year. On the entire basic merchandise mix,
the Company averaged 85.0% in-stock compared to 81.4% during the same quarter
last year. During the quarter ended August 31, 1999, key and core merchandise
accounted for 51.9% of net sales, 54.7% of the items in the Company's basic
merchandise mix, and 37.7% of its inventory investment. For the quarter ended
August 31, 1998, key and core merchandise represented 47.3% of net sales, 53.8%
of the items offered, and 34.2% of inventory. Year to date, the Company averaged
96.8% in-stock on its key and core items, up 221 basis points from a year ago,
and averaged 84.3%, on its entire basic merchandise mix, up 110 basis points
over the six month period ending August 31, 1998. For the six month period ended
August 31, 1999, key and core merchandise accounted for 50.9% of net sales,
53.5% of the items in the Company's basic merchandise mix, and 37.5% of its
inventory investment.
Sales on the Company's proprietary credit card were up 11.9% and cash sales rose
4.1% during the second quarter of the current year. Credit sales accounted for
51.5% of total net sales, compared to 49.7% during the second quarter of last
year. The average credit transaction during the second quarter was 1.2% higher
than the same quarter in 1998. The average credit sale was also 4.7 times the
size of the average cash sale, compared to 4.9 times in 1998. The Company's
credit marketing efforts resulted in 11.8% more applications and 37.2% more new
accounts during the second quarter of the current year than during the same
period a year ago. Year to date the Company's credit card sales were up 14.2%
and cash sales rose 8.4%. Credit card sales accounted for 50.5% of net sales for
the six-month period ended August 31, 1999, compared to 49.2% a year ago. The
average credit sale for the current year was 1.8% higher than a year ago, and
was 4.5 times the size of the average cash sale. For the current six-month
period 10.5% more credit applications were processed.
Gross Profit
Gross profit increased 11.3% to $11,676,000 from $10,492,000, with a resulting
gross margin of 51.4% up from 49.8% for the second quarter of the current year.
Year to date, gross profit increased 13.0%, and gross margins were 79 basis
points higher than the same time frame a year ago. The improvement in gross
margins was a result of the majority of the increase in sales coming from the
Company's categories that yield the highest margin. Sales of karat gold rose
8.6%, sales of semi-precious gems increased 8.5%, and sales of diamonds
increased 12.4%.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses, as a percentage of net sales,
were 42.1%, and 41.0% for the three-month periods ended August 31, 1999 and
1998, respectively. Year to date SG&A expenses were 41.9% of net sales, compared
to 41.6% during the first six months of last year. The following table shows the
significant expenses as a percentage of net sales for the second quarters and
the six-month periods ended August 31, 1999 and 1998:
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- --------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
------------- ----------------
08/31/99 08/31/98 08/31/99 08/31/98
- --------------------------------------------------------------------------------
Total compensation, including benefits 29.8 % 28.2 % 28.8 % 28.2 %
Rents for space 10.8 % 11.1 % 10.7 % 11.1 %
Advertising 1.8 % 2.4 % 3.9 % 4.2 %
Bad Debt 4.7 % 4.3 % 4.1 % 4.1 %
Finance Charges (9.5)% (8.9)% (9.3)% (9.1)%
- --------------------------------------------------------------------------------
Compensation expense increased 14.2%, and accounted for 29.8% of net sales
during the second quarter of the current year compared to 28.2% during the same
time frame a year ago. The increase was due to an annual wage increase of four
percent, an enhanced sales incentive structure during the current year, and the
addition of five stores during the current year. Advertising expenditures
decreased 22.2% and accounted for 1.8% and 2.4% of net sales for the three-month
periods ended August 31, 1999 and 1998, respectively. The decrease resulted from
more advertising rebates being earned during the second quarter of the current
year.
Bad debt increased 17.8% to $1,074,000 from $912,000 and rose to 4.7% of net
sales for the quarter compared to 4.3% a year earlier. Gross write-off for bad
debts increased 13.6% and net write-off, after recovery of amounts previously
written off, increased 18.2%. Year to date, bad debt expense was 11.0% higher
than a year earlier, representing 4.1% of net sales for both six-month periods
ended August 31, 1999 and 1998. Accounts receivable were 13.8% higher at August
31, 1999 than a year earlier. The allowance for doubtful accounts was 7.65% of
customer receivables (prior to the allowance for doubtful accounts) at the end
of the second quarter of the last two years. Delinquent accounts (accounts over
90 days past due) represented 9.8% and 8.9% of the Company's accounts receivable
portfolio on the last day of August 1999 and 1998, respectively. The Company's
policies and procedures regarding credit authorization, collection, and
write-offs have not changed during either of the two periods.
During the first quarter of last year, the Company stopped selling its own
extended service contracts and began selling such contracts on behalf of
unrelated third parties only. These contracts provided for warranty periods of
24 to 36 months. As a result of this change, the Company will continue to
recognize existing deferred revenues from previously sold contracts through
January 31, 2001 and now recognizes commission revenue for the unrelated
third-party extended warranty plans at the time of sale. The deferred revenue
recognized, which has been shown as a reduction of selling, general, and
administrative expenses, was $228,000 during the second quarter of this year,
compared to $377,000 during the second quarter a year ago. Year to date, the
deferred revenue recognized was $492,000. Total extended service agreements,
Company owned and third party, equaled 2.6% and 3.1% of net sales at the end of
the second quarter of fiscal 2000 and 1999, respectively.
Interest Expense
Interest expense increased $90,000 over the prior year to $1,008,000 for the
quarter. Average borrowings were 12.5% higher than during the second quarter of
last year. However, the Company's effective interest rate during the quarter was
6.8%, down from 7.4% a year ago. Year to date, the expense was $36,000 higher
than the same period a year ago, and decreased to 3.9% of net sales compared to
4.3% a year earlier.
Income Taxes and Net Earnings
The provision for income taxes was $70,000 during the second quarter ended
August 31, 1999, compared to $21,000 for the same period a year earlier. The
Company's anticipated tax rate was 33.0% in the second quarter of both years.
The Company earned $142,000 in the quarter ended August 31, 1999, compared to
9
<PAGE> 10
$42,000 in the previous year. On a basic and diluted basis, the Company earned
$0.02 per share in the second quarter of 1999 compared to $0.01 per share in the
same quarter of 1998. During the first half of the fiscal year, the Company
earned $473,000, or $0.06 per share, compared to $87,000, or $ 0.01 per share,
during the same time a year ago.
Year 2000 ("Y2K")
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define a specific year. Any programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in systems failures or miscalculations causing
disruptions to various activities and operations. This problem has the potential
to disrupt, and even to disable, companies that are not prepared to handle the
rollover to the new millennium, or who are dependent upon others that are not
prepared.
Reeds Jewelers had Year 2000 in mind in 1985 when it began the first stages of
developing its inventory and credit systems that would allow the Company to grow
and move into the next century, and programmed its systems accordingly. In
addition, all purchased software that the Company uses has been certified as Y2K
compliant by the vendors. The Company has thoroughly tested all proprietary and
purchased software that it uses and believes that all such operating systems and
application programs are Y2K compliant.
The Company has been assured by its banks, its processors of financial data and
transactions, its electronic security vendors that their systems are Y2K
compliant. The Company has also received assurances from its merchandise
suppliers and other providers of services that their systems are Y2K compliant,
or will be before year-end.
Because the Company had anticipated the Y2K issue and built or bought its
systems with the issue in mind, no material costs have been incurred, nor are
any expected to be incurred, by the Company related to the Y2K issue.
In summary, five major concerns seem to dominate the Y2K issue. First, will
existing systems need to be replaced? For Reeds, the answer is "No" because of
our planning and organized transition during the last 15 years. Second, will the
Company stockpile inventories in anticipation of problems? For Reeds, the answer
is "No" because the timing of potential problems follows our critical selling
season and comes at the lowest point of our selling cycle. Third, will
supply-chain problems exist because of failures from key suppliers? Reeds
believes that if such problems occur they will be minimal and can be resolved by
the use of manual processing by the vendors or a change of vendors. If this
should occur, delays would cause minimal impact, in our opinion, because we
would be in the low point of our selling cycle. Fourth, will embedded systems be
a problem? Reeds believes that embedded chips in the various electronic devices
that it uses will, at most, cause minor inconveniences. Finally, could the
Company be significantly and negatively impacted by the domino effect of
failures that might occur with its providers of energy or telecommunications
services.
There can be no guarantee that actual events will not differ materially from
those expected. However, since we expect no significant problems, our
contingency plan is limited to the handling of shipments and invoices from any
vendor or vendors that may have erroneously assessed their readiness regarding
Y2K.
Liquidity and Capital Resources
Working Capital
Working capital increased 27.4% to $81,840,000 at August 31, 1999 from
$64,250,000 at August 31, 1998. The ratio of current assets to current
liabilities as of August 31, 1999 was 7.5 to 1, compared to 4.4
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<PAGE> 11
to 1 a year earlier. The increase in cash used in operations resulted primarily
from increased inventories and a reduction of outstanding accounts payable.
Merchandise inventories at the end of the second quarter of the current year
were 13.0% higher than a year earlier --- $46,181,000 compared to $40,876,000.
The investment in owned inventories on a per store basis was up 8.4% from a year
earlier. In addition to owned inventories, the Company's offerings included an
additional 29.5% in consigned inventories at August 31, 1999 and an additional
25.4% at August 31, 1998.
Capital Expenditures
Capital expenditures totaled $2,329,000 at the end of the first six months of
fiscal 2000 compared to $2,053,000 during the same period a year ago. During the
second quarter of the fiscal 2000 the Company opened a new store in Buford, GA.
The Company also decided not to renew the lease of an under-performing store in
Memphis, TN.
Debt
Borrowings under the Company's revolving credit facility averaged $52.1 million
during the quarter ended August 31, 1999 and $48.5 million during the same
quarter of 1998. The maximum borrowings outstanding under the facility at any
time during the two quarters were $60.6 and $49.5, respectively. At August 31,
1999, $59.3 was outstanding under the facility compared to $49.0 at August 31,
1998. Substantially all of the Company's assets serve as collateral for the
revolving bank facility.
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.
In April 1999, the Company, its existing banks, and two additional banks entered
into an amended revolving credit agreement whereby the Company may borrow up to
$65,000,000 through June 30, 2002 on terms similar to those of the previous
agreement. Under the amended agreement, the Company pays interest at an interest
rate ranging from the 30-day LIBOR plus 125 basis points to 185 basis points or
at the banks' prime rate plus 25 basis points, depending upon the Company's
debt-to-worth ratio. As of August 31, 1999, the Company's rate was 30-day LIBOR
plus 155 basis points.
The Company also has subordinated notes totaling $845,000, 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. The interest rates paid on the subordinated note were 8 1/4% at
August 31, 1999 and 8 1/2% at August 31, 1998.
Strategic Expenditure
The Company intends to spend up to $1,000,000 during the remainder of the fiscal
year to develop a strategic channel of distribution on the internet.
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<PAGE> 12
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. For the
second quarter of the current fiscal year the Company believes that certain
statements made herein regarding Year 2000 are forward-looking. If unexpected
events occur, there could be a material impact on the Company's operating and
financial results. In addition, the statement regarding anticipated investments
in its internet initiative is forward-looking, and if the Company were to
significantly exceed the anticipated expenditures, operating and financial
results could be materially affected.
Impact of Inflation
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 factors during the periods reported herein.
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.
12
<PAGE> 13
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.
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.
Results stated in the first quarter 10-Q.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
Not applicable.
13
<PAGE> 14
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.
October 13, 1999 /s/ James R. Rouse
- ------------------------------- -------------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REEDS JEWELERS, INC. FOR THE QUARTER ENDED AUGUST 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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<COMMON> 847
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