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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 or organization) (I.R.S. Employer Identification No.)
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 2, 2000 (computed by reference to the last reported
sales price of the registrant's common stock on the American Stock Exchange on
such date) was $3,292,929.
The number of shares outstanding as of May 2, 2000 of the registrant's
common stock, par value $.10 per share, was 8,476,372.
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 2000
Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
Reeds Jewelers, Inc. (the "Company" or the "Registrant") operates 111
specialty retail jewelry stores primarily in enclosed regional malls located
principally in the Sunbelt section of the United States. During the last five
years, the Company has increased its number of stores an average of 7.2% each
year and has increased transactions and net sales at compound annual rates of
6.0% and 9.3%, respectively. Of the 32 net new stores opened during the last
five years, 12 resulted from acquisitions that provided the Company with its
first stores in Maryland and Iowa.
The Company was incorporated in 1984 under the laws of North Carolina
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. Its principal executive offices are located at 2525 South Seventeenth
Street, Wilmington NC 28401, and its telephone number is (910) 350-3100.
PRINCIPAL PRODUCTS, MARKETS, AND METHODS OF DISTRIBUTION
The Company operates stores under the names of Reeds Jewelers, Mills
Jewelers, and Reeds Jewelers Outlet. The Mills name is used in two malls; this
name is used where the Company already has a store displaying the Reeds brand.
The Company currently operates one store with the Reeds Jewelers Outlet brand.
As of February 29, 2000, the Company operated 109 stores, located as follows:
<TABLE>
<S> <C> <C>
5 in Alabama 9 in Florida 11 in Georgia
4 in Iowa 3 in Kansas 2 in Kentucky
8 in Maryland 1 in Michigan 7 in Mississippi
22 in North Carolina 1 in Ohio 1 in Oklahoma
11 in South Carolina 5 in Tennessee 1 in Texas
15 in Virginia 3 in West Virginia
</TABLE>
The Company plans to open a total of ten or more stores in the current
fiscal year. As of May 2, 2000, two new stores have opened, one in Florida and
another in Virginia. The Company has signed leases for seven additional
locations for the current year including its first locations in the states of
Delaware and Pennsylvania. The Company also has signed leases for three
locations to open in fiscal 2002 in Maryland, Louisiana, and Michigan.
Management chooses locations for its stores based upon various demographic
factors, the aggregate amount of jewelry business being done in the mall being
considered, and 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 approximately 1,100 square feet of
selling space. The stores are designed to invite customers into a well-lighted
and attractive setting where typically more than 2,000 items will be offered
for sale. Promotional displays are changed periodically to provide variety and
to reflect special and seasonal events.
The Company opened an e-commerce site, Reeds.com, on December 22,
1999. The Internet site offers consumers the opportunity to buy diamond
jewelry, gold jewelry and giftware online. Customers can also apply for credit
online.
Each of the Company's stores is operated under a store manager who is
responsible for store-level operations. In addition, each store is assigned an
assistant manager who is being trained for future assignment as a store
manager. Depending upon the sales volume of each store, 4-16 additional sales
associates make up the balance of the staffing. In addition to a competitive
salary or hourly wage, each store associate has the opportunity to earn
incentive compensation based on achieving certain performance objectives, and
is eligible for various benefits.
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The Company has strong inventory control systems, extensive security
systems, and loss prevention procedures to maintain low inventory losses. The
Company screens employment applicants and provides training in loss prevention
to its store associates. Despite these precautions, from time to time the
Company experiences losses from theft and maintains insurance to cover such
losses. The Company's losses from inventory shrinkage have averaged 0.5% of net
sales during each of the last three years.
The Company believes it is important to provide knowledgeable and
responsive customer service. It maintains this capability through its various
training programs. New employees receive intensive training in sales techniques
at Reeds University I, a 3-day off-site training experience. Store management
associates and more experienced sales associates receive sales management
training at Reeds University II, another 3-day off-site session of classes and
role-playing. Store managers annually attend a national training meeting where,
for three days, they attend various classes of their choice in management,
sales, product knowledge, personnel issues, and also listen to motivational
speakers and are provided an overview of the Company's performance and plans.
In addition, associates receive individual and group training within their
respective stores on an on-going basis.
The Company's marketing efforts include the use of newspaper inserts,
direct mail, radio, and television offering selected items at a variety of
price points. The Company advertises throughout the year, but intensifies its
efforts for the major gift-giving holidays of Christmas, Mother's Day, and
Valentine's Day. The Company spent 4.5%, 4.5%, and 4.7% of its net sales for
advertising and marketing during the fiscal years ended February 29, 2000 and
February 28, 1999 and 1998, 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 in like new condition
within thirty days of its purchase. The Company backs its diamond jewelry with
a lifetime warranty and also offers a trade-in policy, pursuant to which a
customer may exchange a diamond in partial payment for one of higher value.
Approximately 75% of the merchandise sold in each store is available
in all the Company's stores, and the remainder is chosen to meet the demand for
particular merchandise at the individual locations. The Company offers 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 one carat or less in size, with a limited selection of
larger diamonds. Gold jewelry items sold in the Company's stores are primarily
14 or 18 karat, 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 major classes of
similar products offered by the Company during each of the last three fiscal
years were as follows:
<TABLE>
<CAPTION>
CLASS 2000 1999 1998
----- ---- ---- ----
<S> <C> <C> <C>
Diamonds & precious gems ..... 58.0% 57.0% 54.9%
Watches ...................... 15.7% 15.3% 14.1%
Gold jewelry ................. 10.2% 11.2% 12.9%
Semi-precious gems ........... 6.3% 6.1% 7.4%
</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. The average price of a
piece of merchandise sold from the Company's basic merchandise mix in fiscal
2000 was $242, compared to $233 in fiscal 1999 and $209 in fiscal 1998.
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.
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The Company does not engage in hedging activities with respect to
merchandise held in inventory, since it has been able to adjust retail prices
to reflect price fluctuations in the commodities that are used in the
merchandise it sells. The Company is not subject to substantial currency
fluctuations because its purchases are dollar denominated.
In the fiscal year ended February 29, 2000, the Company's four largest
suppliers accounted for 11.4%, 7.4%, 7.0%, and 6.3%, respectively, of the
Company's total merchandise purchases, with no other supplier accounting for
more than 4.0%. Alternate sources exist for all merchandise provided by the
Company's suppliers, with the exception of any particular name brand.
Diamond products represent more than half of the sales made by the
Company and DeBeers Consolidated Mines Ltd. ("DeBeers") substantially controls
the supply and price of this major product. 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>
NET SALES 2000 1999 1998
--------- ---- ---- ----
<S> <C> <C> <C>
First Quarter ................ 19.4% 18.7% 19.7%
Second Quarter ............... 18.8% 19.3% 19.3%
Third Quarter ................ 21.5% 22.3% 22.4%
Fourth Quarter ............... 40.3% 39.7% 38.6%
NET EARNINGS
First Quarter ................ 6.9% 1.1% (18.0)%
Second Quarter ............... 3.0% 1.0% 2.6%
Third Quarter ................ 1.0% 2.2% 3.0%
Fourth Quarter ............... 89.1% 95.7% 112.4%
</TABLE>
PROPRIETARY CREDIT AND OTHER WORKING CAPITAL ITEMS
The Company considers its credit operations to be a separate segment
of its business because it is evaluated separately from the retail operations
of the Company, and also because the credit portfolio and other credit assets
represent more than 10% of the combined assets of all operating segments.
Additional details required under SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," are provided in Note 11 of the Notes to
Consolidated Financial Statements contained herein.
The Company's proprietary credit card programs help facilitate the
sale of merchandise to customers who wish to finance their purchases rather
than use cash or available credit limits on their bank cards. Proprietary
credit sales represented approximately 45% of net sales in 2000 and
approximately 46% of net sales during 1999 and 1998. During the second quarter
of fiscal 2001, the Company intends to charter and begin operating a CEBA bank,
First Retail Bank, N.A. ("Bank"), as a wholly owned subsidiary. The Bank will
be located in Georgia. The Bank's activities will be limited to those of a
credit card bank as specified in Section 2(c)(2)(F) of the Bank Holding Company
Act of 1956 as amended by the Competitive Equality Banking Act of 1987 (CEBA).
The Bank will extend credit to customers and then assign the receivables to
Reeds Financial Services, Inc, ("RFSI"), another wholly
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owned subsidiary of the Company. RFSI will perform centralized credit functions
including processing, collection, and other related activities.
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 3% of the individual
customer's highest balance, with minimum payments of $25 per month. Once the
CEBA Bank is operational, the Company will be able to export the rate and fee
regulations of the state of Georgia to all locations in which the Company has
customers. The Company offers optional insurance coverage for all credit
purchases. 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 finance
charges.
The following table presents certain data concerning sales, credit
sales, and accounts receivable for the past three fiscal years:
<TABLE>
<CAPTION>
Year Ended
February 29 February 28 February 28
2000 1999 1998
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<S> <C> <C> <C>
Net sales ....................................................... $120,861,000 $109,284,000 $102,845,000
Net credit sales ................................................ $ 54,869,000 $ 50,701,000 $ 47,647,000
Credit sales as a percentage of net sales ....................... 45.4% 46.4% 46.3%
Average number of active customer accounts ...................... 66,000 60,000 59,000
Average balance per customer account ............................ $ 743 $ 747 $ 704
Customer receivables, before allowance for doubtful accounts .... $ 52,957,000 $ 49,437,000 $ 43,629,000
Average monthly collection percentage ........................... 9.5% 9.4% 10.1%
Bad debt expense as a percentage of total sales ................. 4.1% 3.9% 4.0%
Accounts receivable greater than 90 days past due ............... 10.0% 8.1% 8.1%
</TABLE>
Accounts are automatically charged off when no full scheduled payment
is received for a period of seven consecutive billing cycles. Additionally,
accounts are charged off if a total of 12 scheduled payments are missed.
Accounts receivable (prior to allowance for doubtful accounts)
increased 7.1% to $52,957,000 at February 29, 2000 from $49,437,000 at February
28, 1999, and had increased 13.3% from $43,629,000 at February 28, 1998. The
allowance for doubtful accounts was approximately 7.65% of accounts receivable
(prior to allowance for doubtful accounts) at February 29, 2000 and February
28, 1999 and 1998.
Bad debt expense as a percentage of net sales was 4.1% in the fiscal
year ended February 29, 2000, compared to 3.9% and 4.0% in the years ended
February 28, 1999 and 1998, 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. Delinquency in the Company's
accounts receivable averaged 9.6% for the fiscal year ended February 29, 2000
and 8.8% in the fiscal year ended February 28, 1999. In the fourth quarter of
fiscal 1999, the Company slightly increased the risk of its credit portfolio by
testing a program for young applicants. As a result, there was a slight increase
in bad debt and delinquency, but the Company experienced an increase in finance
charge income that exceeded the increase in bad debt expense. During the third
quarter of fiscal 2000, management returned to its previous risk profile.
Primarily as a result of the higher accounts receivable, finance
charges grew to $8,716,000 in the fiscal year ended February 29, 2000 from
$7,751,000 and $7,078,000 in the fiscal years ended February 28, 1999 and 1998,
respectively. Credit insurance fees were $1,683,000 in fiscal 2000, up from
$1,406,000 in 1999 and $1,240,000 in 1998. Late fees in fiscal 2000 were
$1,364,000 as compared to $1,165,000 in 1999 and $892,000 in 1998. The finance
charge yield has averaged 17.7%, 17.6%, and 17.6% for years ended February 29,
2000 and February 28, 1999 and 1998, respectively. The Company anticipates the
transition of receivables from RFSI to First Retail Bank, N.A. will result in
an annualized average increase of at least 200 basis points in the finance
charge yield, as well as increases in other fees.
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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 not
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 tenth largest retail jewelry chain in
the United States, based on the number of locations. However, other publicly
held jewelry chains are substantially larger than the Company and compete
directly with the Company in a number of markets. In 72% of its locations, the
Company competes with Zale Corporation (ZLC), with Freidman's, Inc. (FRDM) in
41%, with Sterling, Inc. (a subsidiary of SIGYY) in 39%, and with Whitehall
Jewelers, Inc. (WHJI) in 20% of its locations. The malls in which the Company
has stores have an average of 5.1 specialty retail jewelers, with as few as two
and as many as ten in any single mall. Management estimates that its market
share among specialty jewelers in the malls in which it operates is 18 1/2%.
Although the Company considers its primary competition to be other specialty
jewelers in the malls in which it operates, it also competes for customers in
various markets with department stores, discount stores, catalog showrooms,
direct mail suppliers, television shopping networks, and merchants on the
Internet.
The Company believes the retail jewelry industry competes primarily on
the basis of reputation, value, service, location, and fashion. Success is
substantially dependent on the experience, training, and enthusiasm of sales
personnel and the ability to respond quickly to the level of consumer demand
for particular items of merchandise. The Company seeks to maintain and increase
its market position by aggressively promoting competitive prices and value, by
offering quality products and services, and by employing superior inventory
replenishment and management information systems.
EMPLOYEES
As of February 29, 2000, the Company had a total of 873 full-time
equivalent (FTE) employees. Of these, 176 FTEs were employed in the corporate
headquarters and the remaining 697 FTEs were employed in the stores. Throughout
the year, the Company hires a number of part-time employees, primarily during
the holiday shopping seasons. Approximately 68% of all employees during the
year are full-time and 32% are part-time. The Company considers its relations
with its employees to be good.
MISCELLANEOUS
- 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.
- 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 the downtown Wilmington location that it owns,
the Company occupies its various store premises generally under five to ten
year lease arrangements with monthly payments of four to six percent of net
sales, subject to minimum payments. 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.
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The table below sets forth information with respect to the expiration of leases
on 108 locations in operation and 12 locations committed to by the Company as
of February 29, 2000:
<TABLE>
<CAPTION>
NUMBER OF LEASES
YEAR OF EXPIRATION WHICH EXPIRE
------------------ ------------
<S> <C>
2001 ..................................... 14
2002 ..................................... 10
2003 ..................................... 3
2004 ..................................... 5
2005 ..................................... 11
2006 ..................................... 11
2007 ..................................... 12
2008 ..................................... 15
2009 ..................................... 9
2010 ..................................... 18
2011 ..................................... 9
2012 ..................................... 3
</TABLE>
Leases for 20,731 square feet for the Corporate Headquarters in
Wilmington, North Carolina are with related parties and expire December 31,
2006. Additional information regarding these leases is incorporated herein by
reference to the information contained under the heading Certain Relationships
and Related Transactions in Item 13 of Part III of this document.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
currently pending litigation to which it is a party will have a material
adverse effect on its consolidated financial condition or results of
operations.
However, in the past, a subsidiary of the Company purchased non-file
UCC insurance from an unaffiliated insurance carrier for accounts originated in
certain states and 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 reimbursed the subsidiary for losses on accounts that
resulted from its decision not to file a UCC financing statement for the
collateral securing the account. Several plaintiffs challenged certain aspects
of the Company's non-file insurance practices. This civil action suit was
discussed in more detail in previous filings, including the Company's February
28, 1998 10-K and Annual Report. In July 1998, the final order for a settlement
provided for, among other things, the payment of $486,000 to a settlement fund
and the payment of administrative fees that were approximately $127,000. No
expense was incurred during the fiscal years ended February 29, 2000 and
February 28, 1999 due to the fact that the Company recorded a charge of
$700,000, or $ .08 per share, during the fourth quarter of the 1998 fiscal year
in anticipation of this settlement.
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 February 29, 2000 there were 8,476,372 shares outstanding held
by 229 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
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dividends in the foreseeable future (See Footnote 2 to the Consolidated
Financial Statements). 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 29, 2000 and February 28, 1999
were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 29, 2000 HIGH LOW
---- ---
<S> <C> <C>
Fourth Quarter ......................... $ 3.3750 $ 2.6250
Third Quarter .......................... 4.1250 3.0000
Second Quarter ......................... 4.3750 2.8750
First Quarter .......................... 4.3750 2.6250
FISCAL YEAR ENDED FEBRUARY 28, 1999
Fourth Quarter ......................... $ 4.6250 $ 3.2500
Third Quarter .......................... 5.6875 3.0000
Second Quarter ......................... 4.1250 3.5625
First Quarter .......................... 4.3750 3.7500
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA
AND NUMBER OF STORES)
<S> <C> <C> <C> <C> <C>
FIVE-YEAR SUMMARY
Net Sales ................................... $120,861 $109,284 $102,845 $ 98,952 $ 89,801
Bad Debt Expense ............................ 4,950 4,234 4,092 3,538 3,419
Interest Expense ............................ 3,896 3,470 3,457 3,428 3,263
Net Earnings ................................ 4,802 4,205 2,708 4,025 3,212
Earnings Per Share (basic & diluted) ........ .57 .50 .32 .48 .38
Working Capital ............................. 77,855 66,366 63,305 56,545 52,050
Total Assets ................................ 121,337 110,965 100,986 97,519 88,886
Long-Term Debt, Less Current ................ 53,204 44,193 43,793 39,651 38,019
Shareholders' Equity ........................ 44,970 40,168 35,903 33,195 29,143
Number of Stores ............................ 109 104 98 100 96
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
At February 29, 2000 the Company operated 109 store in 17 states
compared to 104 stores in fifteen states and 98 stores in 13 states at February
28, 1999 and 1998, respectively. Total net sales for fiscal 2000 were up 10.6%
to $120,861,000 from $109,284,000 in fiscal year 1999, which were 6.3% higher
than net sales of $102,845,000 in fiscal 1998. Same store sales, or stores open
in comparable periods, were up 6.5% in 2000, were up 5.0% in 1999, and were
positive 1.0% in 1998. During the coming fiscal year ending February 28, 2001,
the Company already has commitments to open nine stores, two of which were
opened in April 2000. Management expects to open ten or more new stores during
the year.
The sales of a retail jeweler depend upon having the right mixture of
merchandise available in its stores. The Company has identified those inventory
items that have the most favorable turnover and are the most profitable as core
inventory items. The Company averaged 94.8% in-stock on its core items during
fiscal 2000, up from 94.4% last year; it averaged 84.1% in-stock on its entire
basic merchandise mix in fiscal 2000, compared to 83.7% during
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the previous year. During the fiscal year ended February 29, 2000, core
merchandise accounted for 56.0% of net sales, 56.6% of the items in the
Company's basic merchandise mix, and 36.2% of its inventory investment. During
the prior year, core merchandise accounted for 52.4% of net sales, 48.7% of the
items in the Company's basic merchandise mix, and 35.3% of its inventory
investment. The average price of each piece of merchandise sold in fiscal 2000
was $242, up from $233 a year earlier and $209 in fiscal 1998, and management
plans to increase this average by approximately 7% in the current year as it
continues to increase its offerings of higher price points.
Sales on the Company's proprietary credit card were up 8.2% and cash
sales rose 12.7%. Credit sales accounted for 45.4% of total net sales, down
from 46.4% a year earlier. The average credit transaction during the year was
3.5% higher than that of last year. The average credit transaction was also 4.0
times the size of the average cash transaction, compared to 4.2 times a year
ago. The primary reason for the difference in the average credit and cash
transaction is the large number of cash repair sales that yield a lower price
per transaction. The Company's credit-marketing efforts resulted in 10.6% more
applications being obtained and 15.1% more new accounts being opened throughout
the year compared to last year. Management believes that its proprietary
financing program is a strategic competitive strength and seeks to optimize its
risk-reward ratio by financing up to 55% of net sales.
Gross Profit
Gross margins were 50.8% of net sales in 2000, 50.1% in 1999, and
50.3% in 1998. The increase in gross margins resulted primarily from more sales
in the higher margin diamond and precious gem and colored stone categories.
Management has developed plans to continue to increase gross margins during the
current fiscal year. These plans include changes in sources for certain items
and less discounting as the result of training emphasis and continuing to
reward sales associates for achieving goals for both sales and gross margin.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses as a percentage of net
sales were 38.8%, 37.9%, and 39.8% in 2000, 1999, and 1998, respectively.
Significant expense categories are reflected on a normalized basis for the
three years in the following table:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Compensation - salaries & hourly wages .......................... 16.6% 16.5% 16.4%
Compensation - bonuses & commissions ............................ 5.1% 4.7% 3.7%
Compensation - benefits & other personnel costs ................. 3.6% 3.6% 3.2%
Rents for space ................................................. 8.7% 8.9% 9.0%
Advertising ..................................................... 4.5% 4.5% 4.7%
Bad debt ........................................................ 4.1% 3.9% 4.0%
Finance charges ................................................. (7.2)% (7.1)% (6.9)%
</TABLE>
The increase in compensation from bonuses and commissions in fiscal
2000 and 1999 resulted from costs associated with changes in the Company's
incentive plans designed to reward associates for increases in personal sales
and gross margins, and for improved profitability. Outlays for advertising were
essentially flat throughout the three years as the Company leveraged its
marketing investment while making minor changes in its approach.
Extended service agreements equaled 2.3%, 2.9%, and 1.9% of net sales
in 2000, 1999, and 1998, respectively. During the first quarter of fiscal 1999,
the Company stopped selling its own extended service contracts and began
selling such contracts on behalf of unrelated third parties only. 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 from the unrelated third-party extended warranty
plans at the time of sale.
Bad debt expense increased 16.9% to $4,950,000 in the year ended
February 29, 2000 from $4,234,000 in 1999; bad debt expense in 1998 was
$4,092,000. Actual write-offs as a percentage of net sales during each of the
years were 3.9% in 2000, 3.5% in 1999, and 3.7% in 1998. At the end of 2000,
1999, and 1998 the allowance for doubtful accounts was approximately 7.65%, 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
8
<PAGE> 10
significantly during the three-year period. Delinquent accounts (accounts more
than 90 days past due) represented 10.0%, 8.1%, and 8.1% of the Company's
accounts receivable portfolio on the last day of February 2000, 1999, and 1998,
respectively.
Interest Expense
Interest expense was flat at 3.2% of net sales in 2000 as compared to
3.2% in 1999 and 3.4% in 1998. In 2000, the average borrowings were 16.7%
higher than a year earlier, but the Company's effective interest rate for the
year was 7.15% compared to 7.34% the previous year.
Income Taxes
The provision for income taxes was $2,248,000 in 2000, $2,071,000 in
1999, and $1,374,000 in 1998. The net effective tax rate in each of the three
years was approximately 33.0%. The Company earned a record $4,802,000 in the
year ended February 29, 2000, 14.2% higher than the previous year and 77.3%
higher than two years earlier. On a basic and diluted basis, the Company earned
$ .57 per share compared to $ .50 per share and $ .32 per share during the two
prior years.
Non-File UCC Insurance Litigation
In the past, a subsidiary of the Company purchased non-file UCC
insurance from an unaffiliated insurance carrier for accounts originated in
certain states and 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 reimbursed the subsidiary for losses on accounts that
resulted from its decision not to file a UCC financing statement for the
collateral securing the account. Several plaintiffs challenged certain aspects
of the Company's non-file insurance practices. This civil action suit was
discussed in more detail in previous filings, including the Company's February
28, 1998 10-K and Annual Report. In July 1998, the final order for a settlement
provided for, among other things, the payment of $486,000 to a settlement fund
and the payment of administrative fees that were approximately $127,000. No
expense was incurred during the fiscal years ended February 29, 2000 and
February 28, 1999 due to the fact that the Company recorded a charge of
$700,000, or $ .08 per share, during the fourth quarter of the 1998 fiscal year
in anticipation of this settlement.
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.
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. Because the Company had 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. As of the date of this
filing, Reeds has experienced no disruptions of operations due to any Y2K issues
and no future disruptions are anticipated.
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 requirements will be financed by funds generated from operations and
bank lines described below. Cash used in operations in 2000 was $3,799,000
compared to $3,813,000 and $1,743,000 provided by operations in 1999 and 1998,
respectively.
9
<PAGE> 11
Working Capital
Working capital increased 17.3% to $77,855,000 from $66,366,000 in
1999. The resulting ratio of current assets to current liabilities as of
February 29, 2000 was 4.6 to 1, compared to 3.7 to 1 at February 28, 1999.
Capital expenditures totaled $5,397,000 in 2000, $4,189,000 in 1999, and
$3,141,000 in 1998. The Company opened new stores in Louisville KY, Norfolk VA,
Chattanooga TN, Dulles VA, Bufurd GA, Birmingham AL, Atlanta GA, Grandville MI,
Concord NC, and Corpus Christi TX. The Company also closed stores in Memphis
TN, Tulsa OK, Goldsboro NC, and Jackson MS. The Company, with capital
expenditures of $837,000, opened an e-commerce site, Reeds.com, on December 22,
1999. The Internet site offers consumers the opportunity to buy diamond
jewelry, gold jewelry and giftware online. Customers can also apply for credit
online.
Since year-end, the Company has opened two new stores, one in Orlando
FL and the other in Danville VA, and plans to open a total of ten or more new
stores in the current fiscal year. The Company has a budget of approximately
$6,600,000 for capital expenditures in the fiscal year ending February 28, 2001
for new store openings, major and minor remodels, and other equipment. The
Company also intends to have additional capital expenditures related to the
Internet site of approximately $400,000. These capital expenditures will be
financed by funds generated from operations and bank lines described below.
Debt
Borrowings under the Company's revolving credit facility averaged
$54.1 million in 2000 and $46.4 million in 1999. The maximum borrowings
outstanding under the facility at any time during each year were $61.2 million
in 2000 and $50.0 million in 1999. At February 29, 2000, $52.4 million was
outstanding under the facility compared to $43.3 million at February 28, 1999.
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 new agreement, the Company pays interest monthly
at an interest rate ranging from the 30-day LIBOR rate (5.92% at February 29,
2000) plus 125 basis points to 185 basis points or prime (8.75% at February 29,
2000) plus 25 basis points, depending upon the Company's debt-to-worth ratio.
The Company had $52,359,000 outstanding on this revolver at February
29, 2000, which is classified as a long-term liability based on its expiration
date. 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.
The Company also has subordinated notes totaling $845,000 with three
related parties, with interest payable monthly at the prime rate (8.75% at
February 29, 2000) 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
10
<PAGE> 12
projected in the statement. Various forward-looking statements have been made
throughout this discussion, including comments about:
(i) planned store openings;
(ii) expected increases in finance charge yields;
(iii) expected increases in gross margins;
(iv) expected increases in the average price of merchandise sales;
and
(v) goals for the mix of credit and cash sales.
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) lack of available locations on terms acceptable to the
Company;
(ii) unexpected changes in the marketing and pricing strategies of
competitors;
(iii) adverse changes in the political environments of countries
providing raw materials for the jewelry industry;
(iv) adverse changes in consumer spending or consumer
credit-worthiness;
(v) significant changes in interest rates; or
(vi) the loss of key executives.
Impact of Inflation
In management's opinion, changes in net sales and net earnings that
have resulted from inflation and changing prices have not been material during
the periods presented. There is no assurance, however, that inflation will not
materially affect the Company in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
that may adversely affect its financial position, results of operations, and
cash flows. In seeking to minimize the risks from interest rate fluctuations,
the Company manages exposures through its regular operating and financing
activities. From time to time, the Company will purchase interest rate caps,
collars, or swaps for the purpose of managing its interest rate exposure.
However, the Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowing activities that are described in Note 2 to the Consolidated Financial
Statements. All of the Company's borrowings are under floating rate
arrangements. See Note 2 to the Consolidated Financial Statements regarding
Long-Term Debt and Notes Payable.
Based on the Company's market risk sensitive instruments (its variable
rate debt) outstanding at February 29, 2000, the Company has determined that
there was no material market risk exposure to the Company's financial position,
results of operations, or cash flows as of such date.
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.
11
<PAGE> 13
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 2000 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 2000 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 2000 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 20,731
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 $26,484, and rising
to $26,927 on January 1, 2003. The Company also pays the related insurance,
property taxes, maintenance fees, and utilities for this location. The leases
for this facility expire December 31, 2006. Based on rentals charged for
comparable properties in Wilmington, the Company believes the terms of the
lease are no less favorable to the Company than those that could be obtained
from unaffiliated parties.
Herbert J. Zimmer and Jeffrey L. Zimmer are partners in the law firm
of Zimmer and Zimmer, which serves as general counsel to the Company. During
the fiscal year ended February 29, 2000, the Company paid Zimmer and Zimmer
legal fees and reimbursement of costs advanced in the amount of $201,000; the
Company paid $184,000 and $175,000 to Zimmer and Zimmer in 1999 and 1998,
respectively.
Between June 30, 1989 and February 6, 1990, the Company borrowed a
total of $1,370,000 from three of its principal shareholders. 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
$560,000 to Alan M. Zimmer, $185,000 to Arlene Z. Schreiber, and $100,000 to
Ronna T. Zimmer (the wife of Herbert J. Zimmer). These amounts are evidenced by
various subordinated notes and are due upon full payment of all senior
obligations or with approval of all senior lenders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A)(1) AND (2) Financial Statements and Financial Statement Schedule: The
financial statements, financial statement schedule and report
of independent auditors listed in the accompanying index are
filed as part of this annual report.
12
<PAGE> 14
(A)(3) EXHIBITS:
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) Third Amendment dated February 16, 1999 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, 1999, file number 0-15247)
***** 21 List of Subsidiaries of the Registrant
***** 23 Consent of Ernst & Young LLP
***** 27 Financial data schedule (for SEC use only)
(B) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF THE PERIOD COVERED BY
THIS REPORT.
None.
13
<PAGE> 15
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 4th day of
May 2000.
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 4th day of May 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/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
- ------------------------------------- (Principal Accounting Officer)
(James R. Rouse)
/s/ ALLAN E. METZNER Vice President and Corporate Controller
- -------------------------------------
(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>
14
<PAGE> 16
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 29, 2000 AND FEBRUARY 28, 1999 AND 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
Report of Independent Auditors ............................................................................ F-2
Consolidated Balance Sheets as of February 29, 2000 and February 28, 1999 ................................. F-3
Consolidated Statements of Income for the years ended February 29, 2000 and February 28, 1999 and 1998..... F-4
Consolidated Statements of Shareholders' Equity for the years ended February 29, 2000 and February 28,
1999 and 1998 ............................................................................................. F-5
Consolidated Statements of Cash Flows for the years ended February 29, 2000 and February 28, 1999 and
1998 ...................................................................................................... F-6
Notes to Consolidated Financial Statements ................................................................ F-7
Schedule II --- Valuation and Qualifying Accounts ......................................................... F-20
</TABLE>
F-1
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Reeds Jewelers, Inc. and Subsidiaries
Wilmington, North Carolina
We have audited the accompanying consolidated balance sheets of Reeds
Jewelers, Inc. and subsidiaries as of February 29, 2000 and February 28, 1999
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended February 29, 2000.
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 auditing standards generally
accepted in the United States. 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 29, 2000 and February 28, 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended February 29, 2000, in conformity with
accounting principles generally accepted in the United States. 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 28, 2000
F-2
<PAGE> 18
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 29 FEBRUARY 28
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................................................... $ 895,000 $ 1,080,000
Accounts receivable:
Customers, less allowance of $4,060,000 in 2000 and $3,782,000 in 1999 ...................... 48,897,000 45,655,000
Other ....................................................................................... 758,000 853,000
Merchandise inventories ....................................................................... 46,253,000 40,798,000
Deferred income taxes, net of valuation allowance of $151,000 in 2000 and $140,000 in 1999 ... 2,249,000 2,172,000
Other.......................................................................................... 486,000 523,000
------------ ------------
Total current assets .................................................................. 99,538,000 91,081,000
Property, furniture and equipment:
Land and building ............................................................................. 83,000 83,000
Furniture and equipment ....................................................................... 22,691,000 19,601,000
Leasehold improvements ........................................................................ 11,575,000 10,972,000
------------ ------------
34,349,000 30,656,000
Less accumulated depreciation and amortization ................................................ 19,305,000 17,895,000
------------ ------------
Net property, furniture and equipment ................................................. 15,044,000 12,761,000
Other assets:
Goodwill, net of accumulated amortization of $2,547,000 in 2000 and $2,101,000 in 1999 ....... 5,849,000 6,295,000
Deferred income taxes, net of valuation allowance of $12,000 in 2000 and $17,000 in 1999 ..... 173,000 267,000
Miscellaneous ................................................................................. 733,000 561,000
------------ ------------
6,755,000 7,123,000
------------ ------------
TOTAL ASSETS .................................................................................... $121,337,000 $110,965,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................................. $ 12,855,000 $ 15,638,000
Accrued compensation .......................................................................... 3,569,000 3,780,000
Accrued expenses .............................................................................. 2,712,000 2,510,000
Deferred revenue .............................................................................. 314,000 908,000
Income taxes (Note 6) ......................................................................... 2,233,000 1,879,000
------------ ------------
Total current liabilities ............................................................. 21,683,000 24,715,000
Revolving credit note (Note 2) .................................................................. 52,359,000 43,348,000
Subordinated notes payable to shareholders (Note 2) ............................................. 845,000 845,000
Deferred income taxes ........................................................................... 1,267,000 1,440,000
Deferred revenue ................................................................................ -- 314,000
Other long-term liabilities ..................................................................... 213,000 135,000
------------ ------------
76,367,000 70,797,000
Commitments and contingencies (Notes 3 and 10)
Shareholders' equity (Notes 7 and 8):
Common stock, par value $.10 per share, 25,000,000 shares authorized, 8,476,372 shares
issued and outstanding in 2000 and 1999 .................................................... 847,000 847,000
Additional paid-in capital .................................................................... 10,560,000 10,560,000
Retained earnings ............................................................................. 33,563,000 28,761,000
------------ ------------
Total shareholders' equity ............................................................ 44,970,000 40,168,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................................... $121,337,000 $110,965,000
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 19
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2000 1999 1998
------------------------------------------------------
<S> <C> <C> <C>
Net sales ........................................................ $120,861,000 $ 109,284,000 $ 102,845,000
Cost of sales .................................................... 59,408,000 54,559,000 51,136,000
------------------------------------------------------
Gross profit .............................................. 61,453,000 54,725,000 51,709,000
Selling, general, and administrative expenses .................... 46,896,000 41,410,000 40,924,000
Depreciation and amortization .................................... 3,611,000 3,569,000 3,187,000
------------------------------------------------------
Operating earnings ........................................ 10,946,000 9,746,000 7,598,000
Interest expense ................................................. 3,896,000 3,470,000 3,457,000
------------------------------------------------------
Income before income taxes and extraordinary item ................ 7,050,000 6,276,000 4,141,000
Income taxes (Note 6) ............................................ 2,248,000 2,071,000 1,374,000
------------------------------------------------------
Net income before extraordinary item ............................. 4,802,000 4,205,000 2,767,000
Extraordinary item - loss on early extinguishments of debt, net
of income tax benefit of $40,000 in 1998 ..................... -- -- (59,000)
------------------------------------------------------
Net income ....................................................... $ 4,802,000 $ 4,205,000 $ 2,708,000
======================================================
Net income per common share:
Income before extraordinary item .............................. $ .57 $ .50 $ .33
Extraordinary item - loss on early extinguishments of debt .... -- -- (.01)
------------------------------------------------------
Basic and diluted net income per common share .................... $ .57 $ .50 $ .32
Weighted average shares outstanding - diluted .................... 8,480,195 8,476,417 8,465,752
======================================================
</TABLE>
See accompanying notes.
F-4
<PAGE> 20
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, 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
Exercise of stock options for common stock ......... 3,000 57,000 -- 60,000
Net income for 1999 ................................ -- -- 4,205,000 4,205,000
---------------------------------------------------------------------
Balance at February 28, 1999 .......................... 847,000 10,560,000 28,761,000 40,168,000
Net income for 2000 ................................ -- -- 4,802,000 4,802,000
---------------------------------------------------------------------
Balance at February 29, 2000 .......................... $ 847,000 $ 10,560,000 $33,563,000 $44,970,000
=====================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 21
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................. $ 4,802,000 $ 4,205,000 $ 2,708,000
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation .......................................... 3,102,000 3,123,000 2,741,000
Amortization .......................................... 509,000 446,000 446,000
Provision for deferred income taxes ................... (156,000) 216,000 (745,000)
Loss on sale of property, furniture and equipment ..... 12,000 44,000 --
Changes in operating assets and liabilities:
Accounts receivable ................................. (3,147,000) (5,590,000) (2,252,000)
Merchandise inventories ............................. (5,455,000) (4,332,000) (377,000)
Other current assets and other assets ............... (198,000) 59,000 (19,000)
Accounts payable .................................... (2,783,000) 6,269,000 (2,121,000)
Accrued compensation and expenses ................... (9,000) 1,089,000 919,000
Deferred revenue .................................... (908,000) (1,548,000) 234,000
Income taxes ........................................ 354,000 (119,000) 252,000
Other long-term liabilities ......................... 78,000 (49,000) (43,000)
---------------------------------------------
Net cash (used in) provided by operating activities ........ (3,799,000) 3,813,000 1,743,000
INVESTING ACTIVITIES
Purchases of property, furniture and equipment ............. (5,397,000) (4,189,000) (3,141,000)
---------------------------------------------
Net cash used in investing activities ...................... (5,397,000) (4,189,000) (3,141,000)
FINANCING ACTIVITIES
Proceeds from exercise of stock options .................... -- 26,000 --
Net proceeds from revolving credit note .................... 9,011,000 434,000 4,803,000
Principal payments on debt ................................. -- -- (3,105,000)
---------------------------------------------
Net cash provided by financing activities .................. 9,011,000 460,000 1,698,000
---------------------------------------------
Net (decrease) increase in cash and cash equivalents ....... (185,000) 84,000 300,000
Cash and cash equivalents at beginning of year ............. 1,080,000 996,000 696,000
---------------------------------------------
Cash and cash equivalents at end of year ................... $ 895,000 $ 1,080,000 $ 996,000
=============================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during year for:
Interest ................................................ $ 3,770,000 $ 3,487,000 $ 3,275,000
=============================================
Income taxes ............................................ $ 2,049,000 $ 2,191,000 $ 1,082,000
=============================================
</TABLE>
See accompanying notes.
F-6
<PAGE> 22
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2000
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Reeds Jewelers, Inc. and subsidiaries (the "Company") are specialty
retailers of fine jewelry, selling to the general public primarily through
retail outlets in seventeen states in the United States. Substantially all of
the Company's accounts receivable are due from individual customers in these
states. The Company has recently made its merchandise available for purchase on
the Internet.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. Significant
inter-company accounts and transactions have been eliminated in consolidation.
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.
RECLASSIFICATIONS
The classifications in use at February 29, 2000 have been applied to
the financial statements for February 28, 1999 and 1998. These reclassifications
had no effect on net income or shareholders' equity as previously reported.
STORE PRE-OPENING COSTS
Store pre-opening costs are charged to results of operations in the
period in which the store is opened. Store closing costs are estimated and
recognized in the period in which the Company makes the decision that the store
will close. Such costs include the present value of estimated future rentals,
loss on retirement of property and equipment, and other related occupancy costs.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), requires all non-owner changes in equity
that are excluded from net income under existing Financial Accounting Standards
Board ("FASB") standards be included as comprehensive income. The Company
presently does not have any transactions that directly affect equity other than
those transactions with owners. Therefore, the provisions of SFAS 130 did not
affect the Company's net income or financial position.
F-7
<PAGE> 23
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports. The
adoption of SFAS 131 did not affect the Company's net income or financial
position.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which, as amended by SFAS 137, is required to be
adopted in fiscal years beginning after June 15, 2000. SFAS 133 requires the
recognition of all derivatives at fair value on the balance sheet. Management
does not anticipate that the adoption of SFAS 133 will have a significant effect
on earnings or the financial position of the Company.
IMPAIRMENT
Under the provisions of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," 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, furniture 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.
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 29, 2000 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 Company would realize in a current market exchange. The carrying amount
of assets and liabilities are reasonable estimates of their fair values.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturity of
three months or less when purchased to be cash equivalents.
F-8
<PAGE> 24
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
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 allowance for doubtful accounts was
$4,060,000 and $3,782,000 at February 29, 2000 and February 28, 1999,
respectively. Finance charge income and revenues from credit insurance
subsidiaries of $10,399,000, $9,157,000, and $8,318,000, as well as late fees of
$1,364,000, $1,165,000, and $892,000, for the years ended February 29, 2000 and
February 28, 1999 and 1998, respectively, have been reflected as a reduction of
selling, general, and administrative expenses. 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 29, 2000,
the Company had no significant concentrations of credit risk with individual
customers.
MERCHANDISE INVENTORIES
Merchandise inventories are carried at the lower of cost or market
using the first-in, first-out (FIFO) method. Merchandise inventories were
$46,253,000 and $40,798,000 at February 29, 2000 and February 28, 1999,
respectively. The Company also maintained consigned inventory at its retail
locations of $12,763,000 and $12,630,000 at February 29, 2000 and February 28,
1999, respectively. This consigned inventory and related contingent obligation
are not reflected in the Company's financial statements. At the time consigned
inventory is sold, the Company records the purchase liability in accounts
payable and the related cost of merchandise in cost of sales.
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>
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.
F-9
<PAGE> 25
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
For the fiscal year ended February 28, 1998, 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 are 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.
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. As a result of this
change, the Company will continue to recognize existing deferred revenues from
previously sold contracts through January 31, 2001 and will now recognize
commission revenue for the unrelated third-party extended warranty plans at the
time of sale. Previously deferred extended service contract revenue recognized
for the fiscal years ended February 29, 2000 and February 28, 1999 of $836,000
and $1,427,000, respectively, as well as commission revenues of $2,694,000 and
$2,300,000 for the 2000 and 1999 fiscal years, respectively, have been reflected
as a reduction of selling, general, and administrative expenses.
LAYAWAYS
The Company offers its customers a layaway plan that allows them to set
items aside and pay for them over a period of up to six months with no finance
charges. Receipts of payments for layaway deposits are treated as a liability on
the Company's balance sheet and are included in accrued expenses. Layaway
transactions are not recognized as sales until fully paid for by customers.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Cooperative
advertising funds are received from certain vendors. Advertising expense, net of
amounts contributed by vendors to the Company, was $5,419,000, $4,861,000, and
$4,845,000 for 2000, 1999 and 1998, respectively. The amounts of accrued
advertising at February 29, 2000 and February 28, 1999 were $199,000 and
$232,000, respectively.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires companies to either (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
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("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).
F-10
<PAGE> 26
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE RISK MANAGEMENT
At times, the Company enters into various interest rate swaps, collars,
and caps in managing its interest rate risk. Payments to or from counter parties
are recorded as adjustments to interest expense. The Company has no interest
rate swaps, collars, or caps as of February 29, 2000.
EXTRAORDINARY LOSS
The extraordinary loss of $59,000 for the year ending February 28,
1998, net of income tax benefit of $40,000, represents the write-off of loan
origination fees and prepayment penalties paid on the early extinguishments of
debt.
2. LONG-TERM DEBT AND NOTES PAYABLE
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 to
$45,000,000 and extended its expiration to July 31, 2000; covenants and other
terms remained unchanged. This agreement also provided for an additional
seasonal increase to $50,000,000 from July 1 through December 31, 1997. In May
1998, the Company and its banks agreed to another seasonal increase to
$50,000,000 from May 10 through December 31, 1998.
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 new agreement, the Company pays interest monthly
at an interest rate ranging from the 30-day LIBOR rate (5.92% at February 29,
2000) plus 125 basis points to 185 basis points or prime (8.75% as of February
29, 2000) plus 25 basis points, depending upon the Company's debt-to-worth
ratio.
The Company had $52,359,000 outstanding on this revolver at February
29, 2000, which is classified as a long-term liability based on its expiration
date. 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.
The Company also has subordinated notes payable to shareholders
totaling $845,000 at February 29, 2000 and February 28, 1999, with interest at
the prime rate (8.75% at February 29, 2000). These notes are unsecured and
subordinate to the revolving credit note 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.
F-11
<PAGE> 27
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 executor costs including taxes
and maintenance. Certain of the leases contain fixed renewal options. The
Company also leases certain equipment throughout the year on a short-term basis.
The corporate offices and related facilities are leased from certain
shareholders under operating lease agreements expiring on December 31, 2006.
Annual rent was paid to shareholders of $298,000 for the year ended February 29,
2000 and $255,000 for the years ended February 28, 1999 and 1998.
Total rent expense for space and equipment was $11,873,000,
$10,886,000, and $10,521,000, including percentage rent of $734,000, $682,000,
and $695,000 for the years ended February 29, 2000 and February 28, 1999 and
1998, respectively. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
2001........................... $ 9,738,000
2002........................... 9,073,000
2003........................... 8,153,000
2004........................... 7,419,000
2005........................... 6,837,000
Thereafter..................... 22,579,000
-----------
$63,799,000
===========
</TABLE>
The Company also purchased certain equipment, with a net book value at
February 29, 2000 of $86,000, through capital leases. The capital leases have an
outstanding principal balance of $86,000 as of February 29, 2000. Lease terms
are 55 and 60 months, expiring in October and November 2003, with an interest
rate of 9.0%. Future minimum lease payments are as follows:
<TABLE>
<S> <C>
2001................................ $ 24,000
2002................................ 24,000
2003................................ 24,000
2004................................ 31,000
--------
Total minimum lease payments........ 103,000
Amounts representing interest....... (17,000)
--------
86,000
Current maturities.................. (17,000)
--------
$ 69,000
========
</TABLE>
F-12
<PAGE> 28
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $369,000, $366,000, and $355,000 for the years ended
February 29, 2000 and February 28, 1999 and 1998, 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 $201,000, $184,000 and $175,000 for the years ended February 29,
2000, February 28, 1999, and February 28, 1998, respectively.
6. INCOME TAXES
The provision for income taxes for the years ended February 29, 2000
and February 28, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal ................................................. $ 2,163,000 $ 1,590,000 $ 1,736,000
State ................................................... 241,000 265,000 343,000
---------------------------------------------
2,404,000 1,855,000 2,079,000
Deferred:
Federal ................................................. (141,000) 202,000 (604,000)
State ................................................... (15,000) 14,000 (141,000)
---------------------------------------------
(156,000) 216,000 (745,000)
---------------------------------------------
$ 2,248,000 $ 2,071,000 $ 1,334,000
=============================================
</TABLE>
A reconciliation of the provision for income taxes to income tax
expense, computed by applying the statutory federal income tax rate to pre-tax
earnings at February 29, 2000 and February 28, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
Income tax expense at statutory federal rate ............... $ 2,397,000 $ 2,134,000 $ 1,375,000
Increase (decrease) resulting from:
Tax attributable to captive insurance company income
not taxed for federal purposes........................... (226,000) (243,000) (217,000)
State income taxes, net of federal income tax benefit..... 149,000 184,000 226,000
Other .................................................. (72,000) (4,000) (50,000)
---------------------------------------------
$ 2,248,000 $ 2,071,000 $ 1,334,000
=============================================
</TABLE>
F-13
<PAGE> 29
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences at February 29, 2000 and
February 28, 1999 that give rise to significant portions of deferred tax assets
and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ............................ $ 1,267,000 $ 1,440,000
-----------------------------
Total deferred tax liabilities ........................... 1,267,000 1,440,000
Deferred tax assets:
Deferred revenue ...................................... 113,000 439,000
Net operating loss carry forwards ..................... 42,000 45,000
Accrued expenses ...................................... 765,000 536,000
Reserves .............................................. 1,665,000 1,576,000
-----------------------------
Total deferred tax assets ................................ 2,585,000 2,596,000
Valuation allowance for deferred tax assets .............. (163,000) (157,000)
-----------------------------
Net deferred tax assets .................................. 2,422,000 2,439,000
-----------------------------
Net deferred taxes ....................................... $(1,155,000) $ (999,000)
=============================
</TABLE>
The Company's deferred income tax (benefit) expense results from the
following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2000 1999 1998
-----------------------------------------------
<S> <C> <C> <C>
Excess of tax over financial reporting:
Depreciation ........................... $(173,000) $(328,000) $(179,000)
Deferred revenue ....................... 326,000 556,000 (83,000)
Accrued expenses ....................... (229,000) (60,000) (67,000)
Reserves ............................... (89,000) 65,000 (376,000)
Other items, net ....................... 9,000 (17,000) (40,000)
---------------------------------------------
$(156,000) $ 216,000 $(745,000)
=============================================
</TABLE>
At February 29, 2000, certain companies of the consolidated group have
state net operating loss carryovers, expiring through 2006, of $1,274,000 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-14
<PAGE> 30
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.
Earnings per common share, weighted average shares outstanding, and all
stock option activity have been restated to reflect the stock dividends.
8. STOCK OPTION PLANS
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
through July 2000.
Under the 1992 Director Stock Option Plan (the "1992 Plan"), options
were authorized to be granted to non-employee 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. All options granted under the 1992 Plan expired during
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 subsequent stock dividends) may be granted to key
employees and non-employee 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. Options outstanding under the 1994
plan expire at various times from July 1999 through July 2009.
Since the stock options granted during 2000, 1999 and 1998 had exercise
prices that were greater than or equal to the fair market value of the common
stock on the date of grant, no compensation expense was recognized during the
respective periods.
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 29, 2000 and February 28, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate............. 6.24% 5.63% 5.80%
Dividend yield...................... 0% 0% 0%
Volatility factor................... .412 .415 .454
Expected life....................... 10.0 years 9.4 years 8.7 years
</TABLE>
F-15
<PAGE> 31
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (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 2000, 1999, and 1998
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>
FISCAL YEAR ENDED
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Net income - as reported ................... $ 4,802 $ 4,205 $ 2,708
Net income - pro forma ..................... 4,714 4,137 2,663
Net income per share - as reported ......... .57 .50 .32
Net income per share - pro forma ........... .56 .49 .31
</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 29, 2000 and February 28, 1999
and 1998 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, 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
Granted ........................................ -- 18,000 $3.75 to $4.54
Exercised ...................................... (26,620) $1.55 to $2.84 -- --
Canceled ....................................... (15,972) $2.58 to $3.00 (3,252) $4.75 to $5.01
------------------------------- ---------------------------------
Options outstanding at February 28, 1999 ............ 17,666 $ 2.58 369,190 $3.75 to $5.51
Granted ........................................ -- -- 27,900 $3.25 to $3.75
Exercised ...................................... -- -- -- --
Canceled ....................................... -- -- (91,600) $3.25 to $5.01
Options outstanding at February 29, 2000 ............ 17,666 $ 2.58 305,490 $3.25 to $5.01
=============================== =================================
Options exercisable at February 29, 2000 ............ 17,666 $ 2.58 288,490 $3.25 to $5.01
=============================== =================================
Options available for grant at February 29, 2000 ... -- -- 166,410 --
=============================== =================================
</TABLE>
Approximately 306,156, 337,881, and 273,860 outstanding awards were
exercisable at February 29, 2000 and February 28, 1999 and 1998, respectively.
F-16
<PAGE> 32
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
The weighted-average remaining contractual life of options outstanding
as of February 29, 2000 is 6.6 years. The weighted-average exercise price of
options outstanding as of February 29, 2000 is $4.54. Options granted during
the years ended February 29, 2000 and February 28, 1999 and 1998 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 28, 1998
Weighted-average fair value ............. $ 2.54 $ 1.73
Weighted-average exercise price ......... $ 3.88 $ 4.26
February 28, 1999
Weighted-average fair value ............. $ 2.34 $ 2.04
Weighted-average exercise price ......... $ 3.75 $ 4.28
February 29, 2000
Weighted-average fair value ............. $ 2.15 $ 2.14
Weighted-average exercise price ......... $ 7.00 $ 3.55
</TABLE>
The Company has reserved 489,566 shares of common stock for future
issuance related to the stock option plans at February 29, 2000 and February
28, 1999.
9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
net income per common share in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share":
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
FEBRUARY 29 FEBRUARY 28 FEBRUARY 28
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income per share -
net income available to common shareholders .............. $4,802,000 $4,205,000 $2,708,000
===================================================
Denominator:
Denominator for basic net income per share-weighted-
average shares ........................................... 8,476,372 8,461,417 8,449,752
Effect of dilutive securities:
Employee stock options ..................................... 3,823 15,000 16,000
---------------------------------------------------
Denominator for diluted net income per share-adjusted
weighted-average shares .................................. 8,480,195 8,476,417 8,465,752
===================================================
Basic and diluted net income per common share .............. $ .57 $ .50 $ .32
===================================================
</TABLE>
F-17
<PAGE> 33
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
In the past, a subsidiary of the Company purchased non-file UCC
insurance from an unaffiliated insurance carrier for accounts originated in
certain states and 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 reimbursed the subsidiary for losses on accounts that
resulted from its decision not to file a UCC financing statement for the
collateral securing the account. Several plaintiffs challenged certain aspects
of the Company's non-file insurance practices. This civil action suit was
discussed in more detail in previous filings, including the Company's February
28, 1998 10-K and Annual Report. In July 1998, the final order for a settlement
provided for, among other things, the payment of $486,000 to a settlement fund
and the payment of administrative fees that were approximately $127,000. No
expense was incurred during the fiscal years ended February 29, 2000 and
February 28, 1999 due to the fact that the Company recorded a charge of
$700,000, or $ .08 per share, during the fourth quarter of the 1998 fiscal year
in anticipation of this settlement.
During the second quarter of this fiscal year, the Company intends to
charter and begin operating a CEBA bank, First Retail Bank, N.A. ("Bank"). The
Bank's activities will be limited to those of a credit card bank as specified
in Section 2(c)(2)(F) of the Bank Holding Company Act of 1956 as amended by the
Competitive Equality Banking Act of 1987 (CEBA). Currently, the Company has to
comply with the state-mandated interest rate and fee limitations under the laws
and regulations of 17 separate states. The Bank, whose office will be located
in the state of Georgia, will be able to export the interest rate and terms
from the state of Georgia to all states in which the Company has customers. If
the Bank is opened, it will be a wholly owned subsidiary of the Company. The
Company would purchase 10,000 shares for $2,000,000. Also, upon opening, the
Bank will be required to maintain a deposit of $500,000 to qualify for Federal
Deposit Insurance.
11. 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 basis of accounting for segment reporting
is the same as stated in Note 1.
F-18
<PAGE> 34
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OPERATING SEGMENT INFORMATION (CONTINUED)
The following table summarizes the revenues, operating income, assets,
depreciation, and capital expenditures for each reportable segment for the
years ended February 29, 2000 and February 28, 1999 and 1998. In the financial
statements, other revenues are reflected as a reduction of selling, general,
and administrative expenses as discussed in Note 1 and inter-segment revenue
eliminates in consolidation.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED FEBRUARY 29, 2000
Net Sales .............................. $ 120,861,000 $ -- $ 120,861,000
Other revenues ......................... 3,530,000 11,763,000 15,293,000
Inter-segment revenue .................. -- 1,062,000 1,062,000
Operating income ....................... 5,570,000 5,376,000 10,946,000
Interest expense ....................... 966,000 2,930,000 3,896,000
Identifiable assets .................... 71,917,000 49,420,000 121,337,000
Depreciation and amortization .......... 3,391,000 220,000 3,611,000
Capital expenditures ................... 5,147,000 250,000 5,397,000
FOR THE YEAR ENDED FEBRUARY 28, 1999
Net Sales .............................. $ 109,284,000 $ -- $ 109,284,000
Other revenues ......................... 3,727,000 10,322,000 14,049,000
Inter-segment revenue .................. -- 983,000 983,000
Operating income ....................... 5,097,000 4,649,000 9,746,000
Interest expense ....................... 465,000 3,005,000 3,470,000
Identifiable assets .................... 64,846,000 46,119,000 110,965,000
Depreciation and amortization .......... 3,422,000 147,000 3,569,000
Capital expenditures ................... 4,020,000 169,000 4,189,000
FOR THE YEAR ENDED FEBRUARY 28, 1998
Net Sales .............................. $ 102,845,000 $ -- $ 102,845,000
Other revenues ......................... 1,942,000 9,210,000 11,152,000
Inter-segment revenue .................. -- 926,000 926,000
Operating income ....................... 4,689,000 2,909,000 7,598,000
Interest expense ....................... 682,000 2,775,000 3,457,000
Identifiable assets .................... 59,959,000 41,027,000 100,986,000
Depreciation and amortization .......... 3,117,000 70,000 3,187,000
Capital expenditures ................... 2,858,000 283,000 3,141,000
</TABLE>
F-19
<PAGE> 35
SCHEDULE II
REEDS JEWELERS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended February 29, 2000 and February 28, 1999 and 1998
<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 29, 2000:
Allowance for doubtful accounts ..... $3,782,000 $4,950,000 $ -- $4,672,000(1) $4,060,000
Valuation allowance for deferred
tax assets ....................... 157,000 -- 6,000(2) -- 163,000
-------------------------------------------------------------------------------
$3,939,000 $4,950,000 $ 6,000 $4,672,000 $4,223,000
===============================================================================
YEAR ENDED FEBRUARY 28, 1999:
Allowance for doubtful accounts ..... $3,338,000 $4,234,000 $ -- $3,790,000(1) $3,782,000
Valuation allowance for deferred
tax assets ....................... 178,000 -- -- 21,000(3) 157,000
-------------------------------------------------------------------------------
$3,516,000 $4,234,000 $ -- $3,811,000 $3,939,000
===============================================================================
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(3) 178,000
-------------------------------------------------------------------------------
$3,299,000 $4,092,000 $ -- $3,875,000 $3,516,000
===============================================================================
</TABLE>
(1) uncollectible accounts written off.
(2) state deferred tax assets unlikely to be realized.
(3) state deferred tax assets likely to be realized.
F-20
<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.
First Retail Bank, National Association
<PAGE> 1
EXHIBIT 23
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 28, 2000, 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 29, 2000.
Ernst & Young LLP
Raleigh, North Carolina
May 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF REEDS JEWELERS, INC. FOR THE YEAR ENDED FEBRUARY 29,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> FEB-29-2000
<CASH> 895
<SECURITIES> 0
<RECEIVABLES> 52,957
<ALLOWANCES> 4,060
<INVENTORY> 46,253
<CURRENT-ASSETS> 99,538
<PP&E> 34,349
<DEPRECIATION> 19,305
<TOTAL-ASSETS> 121,337
<CURRENT-LIABILITIES> 21,683
<BONDS> 53,290
0
0
<COMMON> 847
<OTHER-SE> 44,123
<TOTAL-LIABILITY-AND-EQUITY> 121,337
<SALES> 120,861
<TOTAL-REVENUES> 0
<CGS> 59,408
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 50,507
<LOSS-PROVISION> 4,950
<INTEREST-EXPENSE> 3,896
<INCOME-PRETAX> 7,050
<INCOME-TAX> 2,248
<INCOME-CONTINUING> 4,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,802
<EPS-BASIC> 0.57
<EPS-DILUTED> 0.57
</TABLE>
