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, 1999
COMMISSION FILE NUMBER 0-15247
REEDS JEWELERS, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1441702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2525 South Seventeenth Street
Wilmington, North Carolina 28401
(Address of principal executive offices)
(910) 350-3100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of outstanding shares of Common Stock, par value $0.10 per
share, as of January 13, 2000 was 8,476,372.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K for the fiscal year ended February 28, 1999.
2
3
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
FEBRUARY 28, NOVEMBER 30, NOVEMBER 30,
1999 1999 1998
------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 1,080,000 $ 1,088,000 $ 1,577,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,782,000, $3,735,000, and $3,369,000 45,655,000 45,088,000 40,675,000
Other 853,000 1,080,000 701,000
Merchandise inventories 40,798,000 52,497,000 49,559,000
Deferred income taxes 2,312,000 2,118,000 2,175,000
Other 523,000 580,000 1,659,000
------------ ------------ ------------
Total current assets 91,221,000 102,451,000 96,346,000
Land and building 83,000 83,000 83,000
Furniture and equipment 19,601,000 22,382,000 19,345,000
Leasehold improvements 10,972,000 11,292,000 10,588,000
------------ ------------ ------------
30,656,000 33,757,000 30,016,000
Less: accumulated depreciation and amortization 17,895,000 19,530,000 17,717,000
------------ ------------ ------------
Net property and equipment 12,761,000 14,227,000 12,299,000
Goodwill, net of accumulated amortization of
$2,101,000, $2,436,000, and $1,989,000 6,295,000 5,960,000 6,407,000
Deferred income taxes, net of valuation allowance of
$157,000, $153,000, and $149,000 127,000 0 172,000
Other 561,000 1,037,000 791,000
------------ ------------ ------------
Total other assets 6,983,000 6,997,000 7,370,000
------------ ------------ ------------
TOTAL ASSETS $110,965,000 $123,675,000 $116,015,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 15,638,000 $ 15,480,000 $ 23,485,000
Accrued compensation 3,780,000 2,483,000 1,846,000
Accrued expenses 2,510,000 3,513,000 2,841,000
Deferred revenue 908,000 462,000 1,068,000
Income taxes 1,879,000 72,000 192,000
Current portion of long-term debt 0 0 2,872,000
------------ ------------ ------------
Total current liabilities 24,715,000 22,010,000 32,304,000
Revolving credit note 43,348,000 58,862,000 45,000,000
Subordinated notes payable to shareholders 845,000 845,000 845,000
Deferred income taxes 1,440,000 1,118,000 1,133,000
Deferred revenue 314,000 11,000 473,000
Other long-term liabilities 135,000 140,000 139,000
------------ ------------ ------------
Total long-term liabilities 46,082,000 60,976,000 47,590,000
Common stock, par value $0.10 per share;
25,000,000 shares authorized; 8,476,372 shares
issued and outstanding at February 28, 1999 and
November 30, 1999; 8,464,272 shares issued and
outstanding at November 30, 1998 847,000 847,000 846,000
Additional paid-in capital 10,560,000 10,560,000 10,541,000
Retained earnings 28,761,000 29,282,000 24,734,000
------------ ------------ ------------
Total shareholders' equity 40,168,000 40,689,000 36,121,000
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $110,965,000 $123,675,000 $116,015,000
============ ============ ============
3
4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $26,027,000 $24,339,000 $72,177,000 $65,822,000
Cost of sales 13,045,000 12,302,000 35,610,000 32,915,000
----------- ----------- ----------- -----------
Gross profit 12,982,000 12,037,000 36,567,000 32,907,000
Selling, general, and administrative 10,877,000 10,071,000 30,202,000 27,345,000
Depreciation and amortization 954,000 926,000 2,704,000 2,623,000
----------- ----------- ----------- -----------
Operating earnings 1,151,000 1,040,000 3,661,000 2,939,000
Interest expense 1,079,000 904,000 2,884,000 2,673,000
----------- ----------- ----------- -----------
Income before income taxes 72,000 136,000 777,000 266,000
Income taxes 24,000 45,000 256,000 88,000
----------- ----------- ----------- -----------
Net earnings $ 48,000 $ 91,000 $ 521,000 $ 178,000
=========== =========== =========== ===========
Basic and diluted earnings per share $ 0.01 $ 0.01 $ 0.06 $ 0.02
=========== =========== =========== ===========
Diluted weighted average shares
outstanding 8,476,372 8,464,272 8,476,372 8,457,522
=========== =========== =========== ===========
4
5
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998
------------ ------------
OPERATING ACTIVITIES
Net income $ 521,000 $ 178,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 2,322,000 2,263,000
Amortization 382,000 360,000
Loss on sale of property, furniture and equipment 3,000 5,000
Changes in operating assets and liabilities:
Accounts receivable 340,000 (458,000)
Merchandise inventories (11,699,000) (13,093,000)
Other current assets and other assets (580,000) (1,298,000)
Accounts payable (158,000) 14,116,000
Accrued compensation and expenses (294,000) (434,000)
Deferred revenue (749,000) (1,229,000)
Income taxes (1,808,000) (1,805,000)
Other long-term liabilities 5,000 (14,000)
------------ ------------
Net cash used in operating activities (11,715,000) (1,409,000)
INVESTING ACTIVITIES
Proceeds from sale of property, furniture, and equipment 21,000 0
Purchases of property, furniture and equipment (3,812,000) (2,901,000)
------------ ------------
Net cash used in investing activities (3,791,000) (2,901,000)
FINANCING ACTIVITIES
Proceeds from exercise of stock options 0 6,000
Net proceeds from revolving credit note 15,514,000 4,885,000
------------ ------------
Net cash provided by financing activities 15,514,000 4,891,000
------------ ------------
Net increase in cash and cash equivalents 8,000 581,000
Cash, beginning of period 1,080,000 996,000
------------ ------------
Cash, end of period $ 1,088,000 $ 1,577,000
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,757,000 $ 2,632,000
============ ============
Income taxes $ 2,063,000 $ 1,895,000
============ ============
5
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 28, 1999.
Management of Reeds Jewelers, Inc. believes that the consolidated financial
statements contained herein contain all adjustments necessary to present
fairly the financial position, consolidated results of operations, and cash
flows for the interim period. Management also believes that all adjustments
so made are of a normal and recurring nature.
B. RECLASSIFICATIONS
Certain reclassifications were made to the 1998 financial statements to
conform to the classifications used in 1999. The reclassifications had no
effect on net earnings or shareholders' equity as previously reported.
C. DEFERRED REVENUE
For the fiscal years ended prior to February 28, 1999, in accordance with
FASB Technical Bulletin 90-1, "Accounting for Separately Priced Extended
Warranty and Product Maintenance Contracts," revenue from these contracts
was deferred and recognized in income on a straight-line basis over the
contract period. This deferred revenue has been separated into its current
and long-term portions on the balance sheet. Commission costs that were
directly related to the acquisition of these contracts were deferred and
charged to expense in proportion to the revenue recognized. All other
costs, such as costs of services performed under the contracts, general and
administrative expenses, and advertising expenses, were charged to expense
as incurred. Previously deferred extended service contract revenue
recognized for the quarters ended November 30, 1999 and 1998 of $198,000
and $347,000, respectively, has been reflected as a reduction of selling,
general, and administrative expenses.
During the first quarter of the fiscal year ended February 28, 1999, the
Company stopped selling its own extended service contracts and began
selling such contracts on behalf of unrelated third parties only. These
contracts provided for warranty periods of 24 to 36 months. As a result of
this change, the Company will continue to recognize existing deferred
revenues from previously sold contracts through January 31, 2001 and now
recognizes commission revenue for the unrelated third-party extended
warranty plans at the time of sale.
6
7
D. OPERATING SEGMENT INFORMATION
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company now reports two segments, retail operations and
credit operations. Separate financial information is produced internally and is
regularly reviewed by the chief operating decision-maker ("CODM").
The retail operations segment consists of all store locations and corporate
headquarters. The stores have all been combined into one segment because they
have similar basic characteristics, such as the nature of products, and the
class of customers for their products. Corporate headquarters is included in
this same segment due to the fact that its revenues earned are incidental to the
Company's activities and it serves as a support system to the stores.
The credit operations segment is primarily engaged in providing and maintaining
financing for our customers. This operation is aggregated since the CODM
evaluates it separately. It also meets one of the three quantitative thresholds,
the asset test, since it represents 10.0% or more of the combined assets of all
operating segments.
The following tables summarize the revenues, operating income(loss), assets,
depreciation, and capital expenditures for each reportable segment for the
quarters and nine-months ended November 30, 1999, and 1998. The credit
operations revenue primarily consists of finance charges, which are shown as an
offset in selling, general, and administrative expenses on the consolidated
statements of earnings.
- --------------------------------------------------- ----------------- --------------- -----------------------
RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
- --------------------------------------------------- ----------------- --------------- -----------------------
FOR THE QUARTER ENDED NOVEMBER 30, 1999
- --------------------------------------------------- ----------------- --------------- -----------------------
REVENUES $ 26,027,000 $ 2,583,000 $ 28,610,000
OPERATING INCOME(LOSS) (15,000) 1,166,000 1,151,000
IDENTIFIABLE ASSETS 78,108,000 45,567,000 123,675,000
DEPRECIATION AND AMORTIZATION 898,000 56,000 954,000
CAPITAL EXPENDITURES 1,470,000 13,000 1,483,000
- --------------------------------------------------- ----------------- --------------- -----------------------
For the quarter ended November 30, 1998
- --------------------------------------------------- ----------------- --------------- -----------------------
Revenues $ 24,339,000 $ 2,267,000 $ 26,606,000
Operating income 81,000 959,000 1,040,000
Identifiable assets 74,815,000 41,200,000 116,015,000
Depreciation and Amortization 888,000 38,000 926,000
Capital expenditures 782,000 66,000 848,000
- --------------------------------------------------- ----------------- --------------- -----------------------
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1999
- --------------------------------------------------- ----------------- --------------- -----------------------
REVENUES $ 72,177,000 $ 7,780,000 $ 79,957,000
OPERATING INCOME(LOSS) (671,000) 4,332,000 3,661,000
IDENTIFIABLE ASSETS 78,108,000 45,567,000 123,675,000
DEPRECIATION AND AMORTIZATION 2,548,000 156,000 2,704,000
CAPITAL EXPENDITURES 3,637,000 175,000 3,812,000
- --------------------------------------------------- ----------------- --------------- -----------------------
For the nine months ended November 30, 1998
- --------------------------------------------------- ----------------- --------------- -----------------------
Revenues $ 65,822,000 $ 6,704,000 $ 72,526,000
Operating income 966,000 1,973,000 2,939,000
Identifiable assets 74,815,000 41,200,000 116,015,000
Depreciation and Amortization 2,518,000 106,000 2,624,000
Capital expenditures 2,738,000 163,000 2,901,000
7
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Sales
Net sales for the three months ended November 30, 1999 were $26,027,000 up 6.9%
over the same period a year earlier. The Company operated five more stores in
the third quarter of 1999 ending the period with 112 stores. Comparable store
sales increases of 1.6% in September, 5.7% in October, and 2.9% in November
resulted in a 2.6% same-store increase for the quarter. Year to date, net sales
rose 9.7% to $72,177,000 from $65,822,000 a year ago. Comparable stores sales
for the current nine-month period were up 6.2%.
The sales of a retailer 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 97.2% in-stock on its core items during
the third quarter of both the current and prior year. On the entire basic
merchandise mix, the Company averaged 87.3% in-stock compared to 86.6% during
the same quarter last year. During the quarter ended November 30, 1999, core
merchandise accounted for 49.5% of net sales, 61.1% of the items in the
Company's basic merchandise mix, and 34.6% of its inventory investment. For the
quarter ended November 30, 1998, core merchandise represented 45.7% of net
sales, 46.6% of the items offered, and 32.1% of inventory. Year to date, the
Company averaged 97.0% in-stock on its core items, up 150 basis points from a
year ago, and averaged 85.3% on its entire basic merchandise mix, up 90 basis
points over the nine month period ending November 30, 1998. For the nine month
period ended November 30, 1999, core merchandise accounted for 50.4% of net
sales, 56.0% of the items in the Company's basic merchandise mix, and 36.5% of
its inventory investment, as compared to 47.5% of net sales, 48.0% of the items
in its basic merchandise mix, and 35.3% of its inventory investment for the same
period of the prior year.
Sales on the Company's proprietary credit card were up 6.4% and cash sales rose
7.5% during the third quarter of the current year. Credit sales accounted for
50.7% of total net sales, compared to 50.9% during the third quarter of last
year. The average credit transaction during the third quarter was 3.2% higher
than the same quarter in 1998. The average credit sale was also 4.5 times the
size of the average cash sale, compared to 4.7 times in 1998. The Company's
credit marketing efforts resulted in 14.1% more applications and 13.0% more new
accounts during the third quarter of the current year than during the same
period a year ago. Year to date the Company's proprietary credit sales were up
11.3% and cash sales rose 8.0%. Credit sales accounted for 50.6% of net sales
for the nine-month period ended November 30, 1999, compared to 49.8% a year ago.
The average credit sale for the current year was 2.6% higher than a year ago,
and was 4.5 times the size of the average cash sale. For the current nine-month
period, 11.8% more credit applications were processed and 24.6% more new
accounts were opened than the same period the year before. Year to date, the
number of total transactions (credit and cash) are up 1.1% over prior year and
the average total transaction has increased 5.8% over prior year.
Gross Profit
Gross profit for the third quarter of the current year increased 7.9% to
$12,982,000 from $12,037,000, with a resulting gross margin of 49.9% up from
49.5%. Year to date, gross profit increased 11.1%, and gross margins were 67
basis points higher than the same time frame a year ago. The improvement in
gross margins resulted from increased sales in the categories that yield the
highest margin --- sales of karat gold rose 4.8%, sales of semi-precious gems
increased 11.9%, and sales of diamonds increased 10.5%.
8
9
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative expenses, as a percentage of net sales,
were 41.8% and 41.4% for the three-month periods ended November 30, 1999 and
1998, respectively. Year to date SG&A expenses were 41.8% of net sales, compared
to 41.5% during the first nine months of last year. The following table shows
the significant expenses as a percentage of net sales for the third quarters and
the nine-month periods ended November 30, 1999 and 1998:
- --------------------------------------------------------------------------------------------------------
Quarter Ended Nine Months Ended
11/30/99 11/30/98 11/30/99 11/30/98
- --------------------------------------------- ---------------- ----------- --------------- -------------
Total compensation, including benefits 27.0 % 26.5 % 28.2 % 27.6 %
Rents for space 10.2 % 10.0 % 10.5 % 10.7 %
Advertising 3.4 % 4.6 % 3.7 % 4.3 %
Bad Debt 3.9 % 3.6 % 3.1 % 3.1 %
Finance Charges (8.1)% (7.7)% (8.9)% (8.6)%
- ---------------------------------------------- --------------- ----------- -------------- -------------
Compensation expense increased 9.0%, and accounted for 27.0% of net sales during
the third quarter of the current year compared to 26.5% during the same time
frame a year ago. The increase was due to an annual wage increase of four
percent, an enhanced sales incentive structure during the current year, and the
net addition of five stores during the current year. Advertising expenditures
decreased 20.5% and accounted for 3.4% and 4.6% of net sales for the three-month
periods ended November 30, 1999 and 1998, respectively. The decrease resulted
from a decision to postpone expenditures to the fourth quarter.
Bad debt increased 13.6% to $1,003,000 from $883,000 and rose to 3.9% of net
sales for the quarter compared to 3.6% a year earlier. For the quarter, gross
write-off for bad debts increased 23.4% and net write-off, after recovery of
amounts previously written off, increased 10.4%. Year to date, bad debt expense
was 10.3% higher than a year earlier, representing 3.1% of net sales for both
nine-month periods ended November 30, 1999 and 1998. Accounts receivable were
10.9% higher at November 30, 1999 than a year earlier. The allowance for
doubtful accounts was 7.65% of customer receivables (prior to the allowance for
doubtful accounts) at the end of the third quarter of the last two years.
Delinquent accounts (accounts over 90 days past due) represented 10.7% and 9.1%
of the Company's accounts receivable portfolio on the last day of November 1999
and 1998, respectively. 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, bad debt for the quarter is a higher percentage
of sales, but year to date bad debt is consistent with prior year. Also, the
Company experienced an increase in finance charge income that exceeded the
increase in bad debt expense. During the current quarter, management returned to
its previous risk profile.
During the first quarter of last year, the Company stopped selling its own
extended service contracts and began selling such contracts on behalf of
unrelated third parties only. These contracts provided for warranty periods of
24 to 36 months. As a result of this change, the Company will continue to
recognize existing deferred revenues from previously sold contracts through
January 31, 2001 and now recognizes commission revenue for the unrelated
third-party extended warranty plans at the time of sale. The deferred revenue
recognized, which has been shown as a reduction of selling, general, and
administrative expenses, was $198,000 during the third quarter of this year,
compared to $347,000 during the third quarter a year ago. Year to date, the
deferred revenue recognized was $690,000. Total extended service agreements,
Company owned and third party, equaled 2.4% and 2.9% of net sales at the end of
the third quarter of fiscal 2000 and 1999, respectively.
9
10
Interest Expense
Interest expense increased $175,000 over the prior year to $1,079,000 for the
quarter. Average borrowings were 15.5% higher than during the third quarter of
last year. However, the Company's effective interest rate during the quarter was
7.06%, down from 7.25% a year ago. Year to date, the expense was $211,000 higher
than the same period a year ago, and decreased to 4.0% of net sales compared to
4.1% a year earlier.
Income Taxes and Net Earnings
The provision for income taxes was $24,000 during the third quarter ended
November 30, 1999, compared to $45,000 for the same period a year earlier. The
Company's anticipated tax rate was 33.0% in the third quarter of both years. The
Company earned $48,000 in the quarter ended November 30, 1999, compared to
$91,000 in the previous year. On a basic and diluted basis, the Company earned
$0.01 per share in the third quarter of 1999 and 1998. During the first nine
months of the fiscal year, the Company earned $521,000, or $0.06 per share,
compared to $178,000, or $ 0.02 per share, during the same time a year ago.
Year 2000 ("Y2K")
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define a specific year. Any programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than 2000. This could result in systems failures or miscalculations causing
disruptions to various activities and operations. This problem has the potential
to disrupt, and even to disable, companies that are not prepared to handle the
rollover to the new millennium, or who are dependent upon others that are not
prepared.
Reeds Jewelers had Year 2000 in mind in 1985 when it began the first stages of
developing its inventory and credit systems that would allow the Company to grow
and move into the next century, and programmed its systems accordingly. In
addition, all purchased software that the Company uses has been certified as Y2K
compliant by the vendors. The Company thoroughly tested all proprietary and
purchased software. The Company has been assured by its banks, its processors of
financial data and transactions, and its electronic security vendors that their
systems are Y2K compliant. The Company has also received assurances from its
merchandise suppliers and other providers of services that their systems are Y2K
compliant.
Because the Company had anticipated the Y2K issue and built or bought its
systems with the issue in mind, no material costs have been incurred, nor are
any expected to be incurred, by the Company related to the Y2K issue. 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
Working Capital
Working capital increased 25.6% to $80,441,000 at November 30, 1999 from
$64,042,000 at November 30, 1998. The ratio of current assets to current
liabilities as of November 30, 1999 was 4.7 to 1, compared to 3.0 to 1 a year
earlier. The increase in cash used in operations resulted primarily from a
reduction in accounts payable.
10
11
Merchandise inventories at the end of the third quarter of the current year
were 5.9% higher than a year earlier --- $52,497,000 compared to $49,559,000.
The investment in owned inventories on a per store basis was up 3.4% from a year
earlier. In addition to owned inventories, the Company's offerings included an
additional 35.9% in consigned inventories at November 30, 1999 and an additional
29.7% at November 30, 1998.
Capital Expenditures
Capital expenditures, including $175,000 for the Company's internet initiative,
totaled $3,812,000 at the end of the first nine months of fiscal 2000 compared
to $2,901,000 during the same period a year ago. During the third quarter of the
fiscal 2000, the Company opened new stores in Birmingham, AL, Atlanta, GA,
Grandville, MI, Concord, NC, and Corpus Christi, TX. The Company opened an
e-commerce site, Reeds.com, on December 22, 1999. The internet site offers
consumers the opportunity to buy diamond and gold jewelry and giftware online.
Customers can also apply for credit online. The Company does not intend to open
any additional stores this fiscal year, but does plan to make additional capital
investments to enhance Reeds.com.
Debt
Borrowings under the Company's revolving credit facility averaged $54.6 million
during the quarter ended November 30, 1999 and $47.2 million during the same
quarter of 1998. The maximum borrowings outstanding under the facility at any
time during the three quarters were $61.2 million and $50.0 million,
respectively. At November 30, 1999, $58.9 million was outstanding under the
facility compared to $48.9 at November 30, 1998. Substantially all of the
Company's assets serve as collateral for the revolving credit facility.
On December 21, 1995, the Company entered into a revolving credit agreement with
two commercial banks whereby the Company could borrow up to $40,000,000 based on
specified percentages of eligible inventory and accounts receivable. In June
1997, the Company increased its revolving credit facility to $45,000,000 and
extended its expiration to July 31, 2000; covenants and other terms remained
unchanged. In May 1998, the Company and the banks agreed to an additional
seasonal increase to $50,000,000 from May 10 through December 31, 1998. The
Company pays interest under the revolving credit facility at 30-day LIBOR plus
160-200 basis points or at the banks' prime rate plus 37 1/2 to 62 1/2 basis
points, depending upon the Company's debt-to-worth ratio.
In April 1999, the Company, its existing banks, and two additional banks entered
into an amended revolving credit agreement whereby the Company may borrow up to
$65,000,000 through June 30, 2002 on terms similar to those of the previous
agreement. Under the amended agreement, the Company pays interest at an interest
rate ranging from the 30-day LIBOR plus 125 basis points to 185 basis points or
at the banks' prime rate plus 25 basis points, depending upon the Company's
debt-to-worth ratio. As of November 30, 1999, the Company's rate was 30-day
LIBOR plus 155 basis points and was reduced to 145 basis points on December 1,
1999.
The Company also has subordinated notes totaling $845,000, with three related
parties, with interest payable monthly at the prime rate quoted in The Wall
Street Journal. The notes are unsecured and are subordinate to the revolving
bank note. The interest rates paid on the subordinated note were 8.50% at
November 30, 1999 and 7.75% at November 30, 1998.
11
12
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement. For the
third quarter of the current fiscal year, the Company believes that certain
statements made herein regarding Year 2000 and Reeds.com are forward-looking. If
unexpected events occur, there could be a material impact on the Company's
operating and financial results. Such forward-looking statements include the
statements regarding the Y2K computer issue and anticipated related
expenditures. If the Company were to experience significant unexpected Y2K
disruptions or were to significantly exceed the anticipated related
expenditures, operating and financial results could be materially affected.
Impact of Inflation
The Company generally follows the practice of passing on price changes to its
customers. As a result, management believes its operations have not been
materially affected by inflationary factors during the periods reported herein.
Increases in labor and other costs must be recovered through operating
efficiencies and improved gross profits.
At this time, management knows of no other material events or uncertainties that
would cause the financial information contained herein not to be indicative of
the operating results or future financial condition of Reeds Jewelers, Inc.
12
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no
currently pending litigation to which it is a party will have a material
adverse effect on its consolidated financial condition or results of
operations.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Results stated in the first quarter 10-Q.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
Not applicable.
13
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REEDS JEWELERS, INC.
January 14, 2000 /s/ James R. Rouse
- ------------------------------- ---------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
14