<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED NOVEMBER 30, 2000
COMMISSION FILE NUMBER 0-15247
REEDS JEWELERS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
NORTH CAROLINA 56-1441702
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
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2525 SOUTH SEVENTEENTH STREET
WILMINGTON, NORTH CAROLINA 28401
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(910) 350-3100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of outstanding shares of Common Stock, par value $0.10 per
share, as of January 11, 2001 was 8,476,372.
<PAGE> 2
PART I
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations; however, the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's latest annual report on Form 10-K for the fiscal year ended
February 29, 2000.
2
<PAGE> 3
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
FEBRUARY 29 NOVEMBER 30 NOVEMBER 30
2000 2000 1999
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<S> <C> <C> <C>
ASSETS (UNAUDITED) (UNAUDITED)
Current assets:
Cash and cash equivalents .......................... $ 895,000 $ 919,000 $ 1,088,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $4,060,000, $3,937,000 and $3,735,000 ...... 48,897,000 47,525,000 45,088,000
Other .......................................... 758,000 3,549,000 1,080,000
Merchandise inventories ............................ 46,253,000 59,977,000 52,497,000
Deferred income taxes, net of valuation allowance of
$151,000, 142,000 and $142,000 .................. 2,249,000 2,023,000 1,976,000
Other .............................................. 486,000 1,414,000 580,000
------------ ------------ ------------
Total current assets ........................ 99,538,000 115,407,000 102,309,000
Property, furniture and equipment:
Land and building .................................. 83,000 83,000 83,000
Furniture and equipment ............................ 22,691,000 26,679,000 22,382,000
Leasehold improvements ............................. 11,575,000 11,912,000 11,292,000
------------ ------------ ------------
34,349,000 38,674,000 33,757,000
Less accumulated depreciation and amortization ..... 19,305,000 19,615,000 19,530,000
------------ ------------ ------------
Net property, furniture and equipment ....... 15,044,000 19,059,000 14,227,000
Other assets:
Goodwill, net of accumulated amortization of
$2,547,000, $2,882,000 and $2,436,000 ............ 5,849,000 5,514,000 5,960,000
Deferred income taxes, net of valuation allowance of
$12,000, $11,000 and $11,000 ..................... 173,000 165,000 142,000
Restricted investments (Note C) .................... -- 2,628,000 --
Miscellaneous ...................................... 733,000 869,000 1,037,000
------------ ------------ ------------
6,755,000 9,176,000 7,139,000
------------ ------------ ------------
TOTAL ASSETS ........................................ $121,337,000 $143,642,000 $123,675,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 12,855,000 $ 30,442,000 $ 15,480,000
Accrued compensation ............................... 3,569,000 1,901,000 2,483,000
Accrued expenses ................................... 2,712,000 3,417,000 3,513,000
Deferred revenue (Note D) .......................... 314,000 11,000 462,000
Income taxes ....................................... 2,233,000 -- 72,000
------------ ------------ ------------
Total current liabilities .................... 21,683,000 35,771,000 22,010,000
Revolving credit note ............................... 52,359,000 62,689,000 58,862,000
Subordinated notes payable to shareholders .......... 845,000 845,000 845,000
Deferred income taxes ............................... 1,267,000 1,823,000 1,118,000
Deferred revenue (Note D) ........................... -- -- 11,000
Other long-term liabilities ......................... 213,000 213,000 140,000
------------ ------------ ------------
Total liabilities ............................ 76,367,000 101,341,000 82,986,000
Shareholders' equity:
Common stock, par value $0.10 per share;
25,000,000 shares authorized; 8,476,372 shares
issued and outstanding in 2000 and 1999 .......... 847,000 847,000 847,000
Additional paid-in capital .......................... 10,560,000 10,560,000 10,560,000
Retained earnings ................................... 33,563,000 30,894,000 29,282,000
------------ ------------ ------------
Total shareholders' equity ................... 44,970,000 42,301,000 40,689,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .......... $121,337,000 $143,642,000 $123,675,000
============ ============ ============
</TABLE>
3
<PAGE> 4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales .................................. $ 27,296,000 $ 26,027,000 $ 75,744,000 $ 72,177,000
Cost of sales .............................. 14,168,000 13,045,000 38,119,000 35,610,000
------------ ------------ ------------ ------------
Gross profit ..................... 13,128,000 12,982,000 37,625,000 36,567,000
Selling, general and administrative expenses 11,904,000 10,877,000 34,777,000 30,202,000
Depreciation and amortization .............. 1,010,000 954,000 2,985,000 2,704,000
------------ ------------ ------------ ------------
Operating earnings (loss) ........ 214,000 1,151,000 (137,000) 3,661,000
Interest expense ........................... 1,359,000 1,079,000 3,847,000 2,884,000
------------ ------------ ------------ ------------
(Loss) income before income taxes .......... (1,145,000) 72,000 (3,984,000) 777,000
Income tax (benefit) expense ............... (378,000) 24,000 (1,315,000) 256,000
------------ ------------ ------------ ------------
Net (loss) income .......................... $ (767,000) $ 48,000 $ (2,669,000) $ 521,000
============ ============ ============ ============
Basic and diluted net (loss) income per
common share .............................. $ (0.09) $ 0.01 $ (0.31) $ 0.06
============ ============ ============ ============
Weighted average shares outstanding -
diluted .................................. 8,476,372 8,476,372 8,476,372 8,476,372
============ ============ ============ ============
</TABLE>
4
<PAGE> 5
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2000 1999
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OPERATING ACTIVITIES
Net (loss) income ......................................... $ (2,669,000) $ 521,000
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Depreciation ..................................... 2,591,000 2,322,000
Amortization ..................................... 394,000 382,000
Loss on sale of property, furniture and equipment 278,000 24,000
Changes in operating assets and liabilities:
Accounts receivable .............................. (1,419,000) 340,000
Merchandise inventories .......................... (13,724,000) (11,699,000)
Other current assets and other assets ............ (1,123,000) (580,000)
Accounts payable ................................. 17,587,000 (158,000)
Accrued compensation and expenses ................ (963,000) (294,000)
Deferred revenue ................................. (303,000) (749,000)
Income taxes ..................................... (1,443,000) (1,808,000)
Other long-term liabilities ...................... -- 5,000
------------ ------------
Net cash used in operating activities ..................... (794,000) (11,694,000)
INVESTING ACTIVITIES
Purchases of property, furniture and equipment ............ (6,884,000) (3,812,000)
Purchase of restricted investments ........................ (2,628,000) --
------------ ------------
Net cash used in investing activities ..................... (9,512,000) (3,812,000)
FINANCING ACTIVITIES
Net proceeds from revolving credit note ................... 10,330,000 15,514,000
------------ ------------
Net cash provided by financing activities ................. 10,330,000 15,514,000
------------ ------------
Net increase in cash and cash equivalents ................. 24,000 8,000
Cash and cash equivalents at beginning of period .......... 895,000 1,080,000
------------ ------------
Cash and cash equivalents at end of period ................ $ 919,000 $ 1,088,000
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .............................................. $ 3,718,000 $ 2,757,000
============ ============
Income taxes .......................................... $ 2,328,000 $ 2,063,000
============ ============
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5
<PAGE> 6
REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. MANAGEMENT'S OPINION
These consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended February 29, 2000.
Management of Reeds Jewelers, Inc. believes that the consolidated financial
statements contained herein contain all adjustments necessary to present fairly
the financial position, consolidated results of operations, and cash flows for
the interim period. Management also believes that all adjustments so made are of
a normal and recurring nature.
B. RECLASSIFICATIONS
Certain reclassifications were made to the 1999 financial statements to conform
to the classifications used in 2000. The reclassifications had no effect on net
income or shareholders' equity as previously reported.
C. RESTRICTED INVESTMENTS
-------------------------------------------------------------------
11/30/00 11/30/99
-------------------------------------------------------------------
Cash ........................... $ 45,000 $ --
Held-to-maturity investments ... 2,523,000 --
Equity investment .............. 60,000 --
---------- --------
Total Restricted Investments $2,628,000 $ --
========== ========
-------------------------------------------------------------------
Restricted Investments in the accompanying balance sheet represent cash, bonds
and stock being held by the Company's subsidiary, First Retail Bank N.A., to
comply with the Federal Banking Regulations.
The Held-to-maturity investments consist of Federal Home Loan Bank bonds that
mature in June 2001 and Atlanta Georgia Urban Housing bonds that mature in April
2019. These bonds are stated at amortized cost, as it is the intent of the
Company to hold these securities until maturity.
The Company's equity investment, carried at cost, consists of 1,200 shares of
Federal Reserve Bank stock with a $50 par value at November 30, 2000.
D. DEFERRED REVENUE
For the fiscal years ended prior to February 28, 1999, in accordance with FASB
Technical Bulletin 90-1, "Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts," revenue from these contracts was deferred and
recognized in income on a straight-line basis over the contract period. This
deferred revenue has been separated into its current and long-term portions on
the balance sheet. Commission costs that were directly related to the
acquisition of these contracts were deferred and charged to expense in
proportion to the revenue recognized. All other costs, such as costs of services
performed under the contracts, general and administrative expenses, and
advertising expenses, were charged to expense as incurred. Previously deferred
extended service contract revenue recognized for the quarters ended November 30,
2000 and 1999 of $64,000 and $198,000, respectively, has been reflected as a
reduction of selling, general, and administrative expenses.
6
<PAGE> 7
During the first quarter of the fiscal year ended February 28, 1999, the Company
stopped selling its own extended service contracts and began selling such
contracts on behalf of unrelated third parties only. These contracts provided
for warranty periods of 24 to 36 months. As a result of this change, the Company
will continue to recognize existing deferred revenues from previously sold
contracts through January 31, 2001 and now recognizes commission revenue for the
unrelated third-party extended warranty plans at the time of sale.
E. DEBT
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 this agreement, the Company pays interest monthly at an
interest rate ranging from the 30-day LIBOR rate (6.83% at November 30, 2000)
plus 125 basis points to 185 basis points or prime (9.50% at November 30, 2000)
plus 25 basis points, depending upon the Company's debt-to-worth ratio. As of
December 1, 2000, the Company's rate was 30-day LIBOR plus 165 basis points. The
Company had $62,689,000 outstanding on this revolver at November 30, 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 is in
compliance with these covenants, as amended or waived.
F. 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 the Company's customers. This operation is segregated 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.
7
<PAGE> 8
The following table summarizes the net sales, revenues, operating earnings,
interest expense, assets, depreciation, and capital expenditures for each
reportable segment for the quarters and nine-months ended November 30, 2000 and
1999. In the financial statements, other revenues are reflected as a reduction
of selling, general, and administrative expenses and inter-segment revenue
eliminates in consolidation.
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RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
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<S> <C> <C> <C>
FOR THE QUARTER ENDED NOVEMBER 30, 2000
NET SALES ............................. $ 27,296,000 $ -- $ 27,296,000
OTHER REVENUES ........................ 630,000 3,405,000 4,035,000
INTER-SEGMENT REVENUE ................. -- 261,000 261,000
OPERATING (LOSS) EARNINGS ............. (1,279,000) 1,493,000 214,000
INTEREST EXPENSE ...................... 551,000 808,000 1,359,000
IDENTIFIABLE ASSETS ................... 93,163,000 50,479,000 143,642,000
DEPRECIATION AND AMORTIZATION ......... 960,000 50,000 1,010,000
CAPITAL EXPENDITURES .................. 2,335,000 3,000 2,338,000
----------------------------------------------------------------------------------------------------------
For the quarter ended November 30, 1999
----------------------------------------------------------------------------------------------------------
Net Sales ............................. $ 26,027,000 $ -- $ 26,027,000
Other revenues ........................ 778,000 2,834,000 3,612,000
Inter-segment revenue ................. -- 256,000 256,000
Operating earnings .................... 125,000 1,026,000 1,151,000
Interest expense ...................... 381,000 698,000 1,079,000
Identifiable assets ................... 78,093,000 45,582,000 123,675,000
Depreciation and amortization ......... 898,000 56,000 954,000
Capital expenditures .................. 1,471,000 12,000 1,483,000
----------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED NOVEMBER 30, 2000
----------------------------------------------------------------------------------------------------------
NET SALES ............................. $ 75,744,000 $ -- $ 75,744,000
OTHER REVENUES ........................ 1,905,000 9,556,000 11,461,000
INTER-SEGMENT REVENUE ................. -- 714,000 714,000
OPERATING (LOSS) EARNINGS ............. (4,258,000) 4,121,000 (137,000)
INTEREST EXPENSE ...................... 1,415,000 2,432,000 3,847,000
IDENTIFIABLE ASSETS ................... 93,163,000 50,479,000 143,642,000
DEPRECIATION AND AMORTIZATION ......... 2,874,000 111,000 2,985,000
CAPITAL EXPENDITURES .................. 6,816,000 68,000 6,884,000
----------------------------------------------------------------------------------------------------------
For the nine months ended November 30, 1999
----------------------------------------------------------------------------------------------------------
Net Sales ............................. $ 72,177,000 $ -- $ 72,177,000
Other revenues ........................ 2,283,000 8,628,000 10,911,000
Inter-segment revenue ................. -- 706,000 706,000
Operating (loss) earnings ............. (480,000) 4,141,000 3,661,000
Interest expense ...................... 826,000 2,058,000 2,884,000
Identifiable assets ................... 78,093,000 45,582,000 123,675,000
Depreciation and amortization ......... 2,549,000 155,000 2,704,000
Capital expenditures .................. 3,638,000 174,000 3,812,000
</TABLE>
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales
Net sales for the third quarter ended November 30, 2000 were up 4.9% to
$27,296,000 from $26,027,000 at the end of the third quarter last year. Same
store sales, or stores open in comparable periods, rose 1.1% in the third
quarter this year. For the nine months ended November 30, 2000, net sales
increased 4.9% to $75,744,000 from $72,177,000 for the same period a year
earlier. Comparable store sales rose 1.1% during the nine-month period. During
the third quarter of fiscal 2001, the Company opened five stores in the Oxford
AL, Fort Myers FL, Baltimore MD, Austin TX and Laredo TX markets. At November
30, 2000, the Company operated 120 stores in 19 states compared to 112 stores in
17 states at November 30, 1999.
The sales of a retail jeweler depend upon having the right mixture of
merchandise available in its stores. Management has identified those inventory
items that have the most favorable turnover and are the most profitable as core
inventory items. The Company averaged 96.0% in-stock on its core items during
third quarter fiscal 2001, compared to 97.2% last year; it averaged 94.1%
in-stock on its entire basic merchandise mix compared to 87.3% during the same
quarter a year ago. During the quarter ended November 30, 2000, core merchandise
accounted for 54.8% of net sales, 82.4% of the items offered in the Company's
basic merchandise mix, and 39.7% of its inventory investment. In the same
quarter last year, core merchandise accounted for 49.5% of net sales, 61.1% of
the items offered in the Company's basic merchandise mix, and 38.3% of its
inventory investment. In the third quarter of fiscal 2001 and 2000, the average
price of each piece of merchandise sold was $249 and $240, respectively.
Credit sales for the third quarter of fiscal 2001 accounted for 49.3% of net
sales compared to 50.7% a year earlier. Although the total transactions during
the quarter were down 1.0% compared to last year same quarter, the average
transaction size increased 10.2% for credit sales and 7.4% for cash sales.
Management believes that its proprietary financing program is a strategic
competitive strength and seeks to optimize its risk-reward ratio by financing up
to 55.0% of net sales.
Gross Profit
Gross margins were 48.1% of net sales for the third quarter of fiscal 2001, down
from 49.9% for the same period a year earlier. Year-to-date, gross margins were
49.7%, down from 50.7% in the first nine months of the prior year. The decline
is attributable to increased promotional activity. The Company has also been
impacted by a decrease in the margins on special order transactions. Management
plans to incorporate this merchandise into its basic inventory mix in order to
mitigate the effect on margins. Management continued its aggressive advertising
and promotion throughout the holiday season.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses as a percentage of net sales were
43.6% and 41.8% for the quarters ended November 30, 2000 and 1999, respectively.
Significant expense categories are reflected on a normalized basis for the third
quarters of the last two fiscal years in the following table:
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Quarter Ended Nine Months Ended
11/30/00 11/30/99 11/30/00 11/30/99
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<S> <C> <C> <C> <C>
Compensation - salaries & hourly wages ........ 20.1 % 18.9 % 20.6 % 19.8 %
Compensation - bonuses & commissions .......... 3.6 % 4.0 % 3.7 % 4.2 %
Compensation - benefits & other personnel costs 4.3 % 4.1 % 5.3 % 4.2 %
Rents for space ............................... 10.6 % 10.2 % 11.2 % 10.5 %
Advertising ................................... 4.7 % 3.4 % 4.2 % 3.7 %
Bad debt ...................................... 5.6 % 5.2 % 5.3 % 4.6 %
Finance charges ............................... (8.4)% (8.1)% (8.9)% (8.9)%
Late charge income ............................ (2.8)% (1.3)% (2.2)% (1.4)%
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<PAGE> 10
The increase in selling, general, and administrative expenses is the result of
higher compensation, occupancy, advertising, and bad debt expenses. Compensation
from salaries and hourly wages increased at a faster rate than net sales. The
increase was primarily a result of hiring additional staff for the twelve new
stores and the internet site that opened since the third quarter of last year.
An annual raise of approximately 5% also contributed to the increase. The
increase in compensation from benefits and other personnel costs results from
increased expenses from the Company's self-insured health insurance plan. The
Company is also experiencing an increase in the negotiated base rents for new
and remodeled stores. These increases are partially offset by the increased
contribution from the Company's credit operations. The finance charges and late
charge income increased as a direct result of the Company's nationally chartered
credit card bank that opened during the second quarter.
Bad debt increased to $1,522,000 from $1,350,000 and rose to 5.6% of net sales
for the quarter compared to 5.2% a year earlier. Gross write-offs for bad debts
were $1,879,000 versus $1,681,000 in the same quarter last year. Net write-offs,
after recovery of amounts previously written off, were $1,658,000 and $1,446,000
for the third quarter of the current and prior fiscal year, respectively. At the
end of the third quarter of fiscal 2001 and 2000 the allowance for doubtful
accounts was 7.65% of gross customer receivables. The average delinquent account
(accounts more than 90 days past due) represented 11.1% and 10.6% of the
Company's accounts receivable portfolio for the third quarter of fiscal 2001 and
2000, respectively. The Company's policies and procedures regarding credit
authorization, collection, and write-offs have not changed significantly during
each of the two periods. The approval rate on applications was 44.0% for the
third quarter of the current year and 51.2% for the third quarter last year.
During the first quarter ended May 31, 1999, the Company changed its portfolio
mix to include young adults in a test program. Management made the decision in
the third quarter of last year to end the test program. Although bad debt has
increased quarter to quarter, management believes that over the next year the
portfolio will return to historical levels of mix and approval rate.
In the first quarter of fiscal 1999 the Company began selling extended service
agreements on behalf of an unrelated third party versus selling them in-house.
The Company will continue to recognize deferred revenue from extended service
agreements previously sold by the Company through January 31, 2001. The Company
now recognizes commission revenue for the unrelated third-party extended service
agreements at the time of sale. Previously deferred extended service agreements
revenue recognized for the quarters ended November 30, 2000 and 1999 of $64,000
and $198,000, respectively, as well as commission revenues of $566,000 and
$580,000, respectively, have been reflected as a reduction of selling, general,
and administrative expenses. Extended service agreements equaled 2.3% and 3.0%
of net sales during the quarters ended November 30, 2000 and 1999, respectively.
Interest Expense
Interest expense increased $280,000 over the prior year to $1,359,000 for the
quarter. Two-thirds of the additional interest is attributed to the higher
interest rate and one-third is a result of increased average borrowings during
the quarter. The effective pre-tax interest rate was 8.4%, up from 7.1% a year
ago. Average total borrowings were 6.3% higher than during the third quarter of
last year. Year to date, the expense was $963,000 higher than the same period a
year ago, and increased to 5.0% of net sales compared to 4.0% a year earlier.
Income Taxes
The benefit for income taxes was $378,000 during the third quarter ended
November 30, 2000, compared to an expense of $24,000 for the same period a year
earlier. The Company's anticipated tax rate was 33.0% in the third quarter of
both years.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
The Company requires cash for purchasing inventory, opening new stores, making
leasehold improvements, enhancing technology, 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 for the nine months ending
November 30, 2000 was $794,000 compared to $11,694,000 for the nine months
ending November 30, 1999.
Working Capital
Working capital decreased 0.8% at November 30, 2000 to $79,636,000 from
$80,299,000 at November 30, 1999. The resulting ratio of current assets to
current liabilities as of November 30, 2000 was 3.2 to 1, compared to 4.6 to 1
at November 30, 1999. Capital expenditures totaled $6,884,000 and $3,812,000 for
the nine months ended November 30, 2000 and 1999, respectively. The Company
opened three stores during the quarter ended May 31, 2000, four stores in the
quarter ended August 31, 2000, and five stores in the quarter ended November 30,
2000. Management does not intend to open any additional stores this fiscal year.
Debt
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 this agreement, the Company pays interest monthly at an
interest rate ranging from the 30-day LIBOR rate (6.83% at November 30, 2000)
plus 125 basis points to 185 basis points or prime (9.50% at November 30, 2000)
plus 25 basis points, depending upon the Company's debt-to-worth ratio. As of
December 1, 2000, the Company's rate was 30-day LIBOR plus 165 basis points.
Borrowings under the Company's revolving credit facility averaged $64.2 million
during the third quarter of fiscal 2001 and $60.3 million during the same
quarter a year ago. The maximum borrowings outstanding under the facility at any
time during each of the quarters were $65.0 million and $61.2 million,
respectively. The Company had $62,689,000 outstanding on this revolver at
November 30, 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 is currently in compliance with these covenants, as amended or waived.
The Company also has subordinated notes totaling $845,000 with three related
parties, with interest payable monthly at the prime rate (9.50% at November 30,
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 projected in the statement. Various
forward-looking statements have been made throughout this discussion, including
comments about:
(i) planned store openings;
(ii) goals for the mix of credit and cash sales;
(iii) expected increases in gross margins; and
(iv) expected increase in approval rates on credit applications.
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Accordingly, Reeds Jewelers, Inc. hereby identifies the following important
factors that could cause its actual financial results to differ materially from
those projected by the Company in forward-looking statements:
(i) availability of favorable 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 Reeds Jewelers, Inc. in the future.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
currently pending litigation to which it is a party will have a
material adverse effect on its consolidated financial condition or
results of operations.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
Not applicable.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REEDS JEWELERS, INC.
January 12, 2001 /s/ James R. Rouse
-------------------------------- --------------------
James R. Rouse
Treasurer and
Chief Financial Officer
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