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, 1995
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 8, 1996 was 4,216,406.
2
Part I
Item 1. FINANCIAL STATEMENTS
The consolidated financial statements included herein have been
prepared by Reeds Jewelers, Inc. (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations; however, the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's latest annual report on Form 10-K for the
fiscal year ended February 28, 1995.
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, November 30, November 30,
1995 1995 1994
---- ---- ----
ASSETS
Cash and cash equivalents $ 134,000 $ 154,000 $ 165,000
Accounts receivable:
Customers, less allowance for doubtful
accounts of $2,869,000, $2,739,000,
and $2,565,000 35,379,000 34,109,000 31,630,000
Other 838,000 1,257,000 1,238,000
Merchandise inventories 26,438,000 39,719,000 36,714,000
Deferred income taxes 1,840,000 1,831,000 1,670,000
Other 365,000 1,161,000 766,000
------------ ------------ ------------
Total current assets 64,994,000 78,231,000 72,183,000
Property and equipment 20,893,000 25,379,000 20,790,000
Less: accumulated depreciation and amortization 11.270,000 15,247,000 11,034,000
------------ ------------ ------------
Net property and equipment 9,623,000 10,132,000 9,756,000
Goodwill, net of accumulated amortization of
$536,000, $552,000, and $520,000 2,189,000 7,527,000 2,206,000
Other 595,000 713,000 561,000
------------ ------------ ------------
Total other assets 2,784,000 8,240,000 2,767,000
------------ ------------ ------------
TOTAL ASSETS $ 77,401,000 $ 96,603,000 $ 84,706,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 8,567,000 $ 19,914,000 $ 18,407,000
Accrued expenses 4,523,000 5,471,000 4,004,000
Deferred revenue 1,074,000 1,213,000 962,000
Income taxes 1,702,000 -95,000 375,000
Current portion of long-term debt 3,313,000 6,354,000 5,297,000
------------ ------------ ------------
Total current liabilities 19,179,000 32,857,000 29,045,000
Revolving credit note 19,000,000 24,655,000 19,000,000
Long-term debt and subordinated notes payable 9,378,000 8,049,000 9,835,000
Subordinated notes payable to shareholders 900,000 900,000 900,000
Deferred income taxes 2,211,000 2,231,000 2,018,000
Deferred revenue 906,000 921,000 777,000
------------ ------------ ------------
Total liabilities 51,574,000 69,613,000 61,575,000
Common stock, par value $0.10 per share;
Authorized: 10,000,000 shares; issued and
outstanding: 4,201,281, 4,216,406, and
4,201,259 (Note B) 420,000 422,000 420,000
Additional paid-in capital (Note B) 7,368,000 10,898,000 7,368,000
Retained earnings (Note B) 18,039,000 15,670,000 15,343,000
------------ ------------ ------------
Total shareholders' equity 25,827,000 26,990,000 23,131,000
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 77,401,000 $ 96,603,000 $ 84,706,000
============ ============ ============
4
REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended November 30, Nine months ended November 30,
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Net sales $ 21,214,000 $ 18,273,000 $ 54,544,000 $ 48,129,000
Other (principally finance
charges) 2,268,000 2,107,000 6,995,000 6,375,000
------------ ------------ ------------ ------------
Total revenues 23,482,000 20,380,000 61,539,000 54,504,000
Costs and expenses:
Cost of sales (including
occupancy costs) 12,996,000 10,597,000 32,939,000 28,187,000
Selling, general, and
administrative 8,445,000 7,087,000 22,421,000 19,843,000
Bad debt 892,000 860,000 2,155,000 1,979,000
Interest 867,000 773,000 2,509,000 2,280,000
------------ ------------ ------------ ------------
Total costs and expenses 23,200,000 19,317,000 60,024,000 52,289,000
------------ ------------ ------------ ------------
Earnings before income taxes 282,000 1,063,000 1,515,000 2,215,000
Income taxes 63,000 382,000 470,000 797,000
------------ ------------ ------------ ------------
Net earnings $ 219,000 $ 681,000 $ 1,045,000 $ 1,418,000
============ ============ ============ ============
Earnings per share (Note B) $ 0.05 $ 0.16 $ 0.25 $ 0.34
============ ============ ============ ============
Weighted average shares
outstanding (Note B) 4,204,768 4,201,055 4,211,819 4,197,764
============ ============ ============ ============
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended November 30,
1995 1994
---- ----
Cash flows from operating activities:
Net earnings $ 1,045,000 $ 1,418,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,552,000 1,327,000
Provision for loss on accounts receivable 2,155,000 1,979,000
Gain on sale of property and equipment 38,000 1,000
Changes in assets and liabilities:
Accounts receivable -226,000 -3,220,000
Merchandise inventories -9,188,000 -14,484,000
Other assets -665,000 -421,000
Trade payables 8,423,000 10,036,000
Accrued expenses -31,000 851,000
Deferred revenue 148,000 16,000
Income taxes -862,000 -1,182,000
------------- --------------
Net cash provided by (used in) operating activities 2,389,000 -3,679,000
Cash flows from investing activities:
Net effect of acquisition of The Melart Jewelers, Inc.,
net of cash acquired -3,690,000 0
Proceeds from sale of property and equipment 14,000 7,000
Capital expenditures -1,594,000 -2,382,000
------------- --------------
Net cash used in investing activities -5,270,000 -2,375,000
Cash flows from financing activities:
Proceeds from exercise of options on common stock 102,000 49,000
Proceeds from revolving credit note 5,655,000 8,771,000
Principal payments on debt -2,856,000 -2,855,000
------------- --------------
Net cash provided by financing activities 2,901,000 5,965,000
------------- --------------
Net change in cash 20,000 -89,000
Cash, beginning of period 134,000 254,000
------------- --------------
Cash, end of period $ 154,000 $ 165,000
============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,560,000 $ 2,260,000
Income taxes 2,223,000 2,099,000
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REEDS JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. MANAGEMENT'S OPINION
These consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto for the
fiscal year ended February 28, 1995.
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. STOCK DIVIDEND
Adjusted for 10% stock dividend on June 1, 1995.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended November 30, 1995 were up 16% over the same
quarter in 1994 to a third quarter record of $21,214,000. Comparable store
sales, however, rose only 1% for the quarter. The number of sales transactions
during the quarter increased 17%, but the average sale decreased slightly to
$158 from $159. The Company operated 100 stores at November 30, 1994, compared
to 79 at the same time in the previous year. Net sales for the nine month
period increased 13% to $54,544,000 and same store sales increased 4% during
the period. The increased sales year-to-date resulted from an 11% increase in
customer transactions and an increase in the average transaction size to $147
from $144. On a trailing twelve-month basis, net sales through November 30,
1995 increased 13% over the same period through November 30, 1994, resulting
from an 8% increase in transactions and a 5% increase in the average
transaction to $147.
Other revenues in the third quarter increased 8% to $2,268,000 over last year.
Finance charges and credit insurance income from customer receivables accounted
for 78% of other revenues. Year-to-date, other revenues increased 10% over the
same period a year earlier, and finance charges and credit insurance income
represented 79% of the total.
Gross margins were 39% of net sales during the third quarter ended November 30,
1995, down from 42% in the same quarter last year. The newly-acquired Melart
stores accounted for 10% of total net sales, but gross margins in those stores
averaged 16% lower than the gross margins for all other stores because
aggressive price promotions were used to begin stabilizing and rebuilding
market share for the Melart stores. For the first nine months of the year,
gross margins were 40% of net sales, down from 41% of net sales for the same
period last year as a result of gross margins in the diamond category being 240
basis points (or 4%) lower than the same nine months last year. Gross margins
were sacrificed to increase diamond sales to nearly 57% of net sales from
nearly 53% of net sales for the first nine months of fiscal 1995 and fiscal
1994, respectively; as a result, diamond sales increased 22%, yielding a 17%
increase in diamond gross profits.
Selling, general, and administrative expenses increased in the third quarter to
40% of net sales from 39% a year ago. Advertising expenses for the quarter
were 35% higher, increasing to nearly 5% of net sales from 4% of net sales.
Salaries and wages increased 21% in the third quarter of 1995 over the third
quarter of 1994, rising 80 basis points as a percentage of net sales.
Year-to-date, SG&A expenses were 41% for both years. Advertising increased 13%
for the nine months, but remained flat as a percentage of net sales. Salaries
and wages for the first three quarters increased 16% and rose 42 basis points
as a percentage of net sales.
Bad debt expense was 4% and 5% of net sales for the quarters ended November 30,
1995 and 1994, respectively, and was 4% for both nine month periods. As a
percentage of average customer receivables, bad debt was 2.5% in the current
third quarter and 2.6% in the same quarter last year; for the first nine months
of this year, bad debt was 5.9% of customer receivables, compared to 6.1% last
year. Balances on delinquent accounts were about 33% higher at November 30,
1995 than they were at the same date in 1994, representing nearly 15% of total
accounts receivable at November 30, 1995 compared to 12 % a year earlier; gross
customer receivables were 7% higher at November 30, 1995 than a year earlier.
The allowance for bad debts at November 30, 1995 and 1994 was 7.5%. The
Company's credit extension and collection policies and criteria continue to be
consistent with those used during the same periods last year.
Interest expense was $94,000 higher in the third quarter and $229,000 higher in
the first nine months than for the same periods last year. The increase
resulted from increased average borrowings of approximately 10%.
The Company's anticipated tax rate was 33% for both periods ending November 30,
1995 and 36% for both periods ended November 30, 1994; the actual rates of 22%
and 31% for the quarter and nine months ended November 30, 1995, respectively,
resulted from refunds of state income taxes. Net income after taxes was
$219,000 ($0.05 per share and 1.0% of net sales) for the quarter ended November
30, 1995, compared to $681,000 ($0.16 per share and 3.7% of net sales) for the
same quarter last year. For the first nine months, the
8
Company earned $1,045,000 ($0.25 per share and 1.9% of net sales) compared to
$1,418,000 ($0.34 per share and 2.9% of net sales) for the same period last
year.
Management expects comparable store sales to be flat or only slightly positive
during the final quarter of the current fiscal year that will end February 29,
1996. Gross margin pressure is expected to continue, and gross margins may be
100-200 basis points lower than in the fourth fiscal quarter of last year
because of competitive pressures and because of the desire to build market
share in the very important Washington-Baltimore market. Management further
expects no savings in SG&A expenses during the final fiscal quarter compared to
the same period last year, but plans to begin adjusting advertising, payroll,
and other expenses to sales levels in its newly-acquired and newly-opened
stores now that the holiday selling season is over. Bad debt expense, as a
percentage of accounts receivable, is expected to remain in line with levels
experienced during the past three years.
The Company's comparable stores (those stores operating for the entire 21
months since March 1, 1994) generally performed in line with expectations.
Therefore in the coming year, management plans to focus its efforts on
increasing the average sales volumes in its newly-acquired and newly-opened
stores, and causing gross margins and certain expense ratios in those stores to
be more in line with the performance of the Company's comparable stores.
The Company generally follows the practice of passing on price changes to its
customers. As a result, management believes its operations have not been
materially affected by inflationary or deflationary forces during the periods
reported herein.
Liquidity and Capital Resources
Working capital increased 5% to $45,374,000 at November 30, 1995 from
$43,138,000 at November 30, 1994. However, the resulting ratio of current
assets to current liabilities as of November 30, 1995 was 2.4 to 1, compared to
2.5 to 1 at the same date in the prior year.
Customer receivables, net of allowance for doubtful accounts, were $34,109,000
and $31,630,000 at November 30, 1995 and 1994, respectively. The 8% increase
resulted from 54% of total net sales being done on the Company's proprietary
credit card and related finance charges and credit insurance fees. Credit
extension and collection policies and criteria remained consistent during both
years.
Merchandise inventories were 8% higher at the end of the third quarter of 1995
than at the same time in the previous year. The entire increase in inventories
resulted from the acquisition of The Melart Jewelers, Inc. Management expects
inventory levels to be approximately 34% higher at year-end than at the end of
last year, primarily as a result of the nearly 30% increase in the number of
stores.
In addition to the net effect of $3,690,000 for the acquisition of The Melart
Jewelers, Inc., capital expenditures for the Company were $1,594,000 during the
nine months ended November 30, 1995, compared to $2,382,000 for the same period
in 1994. Expenditures during both periods were primarily for tenant
improvements in new and remodeled stores and for additional office, security,
and computer equipment. The Company opened five new stores during the first
nine months of this year, and has closed one under-performing stores in the
fourth quarter.
The Company did not finalize its new $40,000,000 revolving credit facility with
two commercial banks during December 1995, as expected, but does expect to
close before the end of January 1996. At this time, management believes its
credit lines are adequate to support its plans and knows of no other material
events or uncertainties which would cause the financial information herein not
to be indicative of the operating results or future financial condition of
Reeds Jewelers, Inc.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
Not applicable.
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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 9, 1996 /s/ James R. Rouse
- -------------------------- -----------------------------
James R. Rouse
Treasurer and
Chief Financial Officer