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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 MAY 31, 1996
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 June 30, 1996 was 4,222,456.
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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, 1996.
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 29, May 31, May 31,
1996 1996 1995
------------ ----------- -----------
ASSETS
Cash and cash equivalents $ 186,000 $ 151,000 $ 255,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $2,934,000, $2,839,000, and $2,777,000 36,697,000 35,389,000 34,032,000
Other 705,000 814,000 523,000
Merchandise inventories 30,411,000 35,478,000 31,281,000
Deferred income taxes 1,923,000 1,926,000 1,817,000
Other 392,000 443,000 470,000
------------ ----------- -----------
Total current assets 70,314,000 74,201,000 68,378,000
Property and equipment 25,133,000 25,495,000 21,566,000
Less: accumulated depreciation and amortization 14,955,000 15,409,000 11,630,000
------------ ----------- -----------
Net property and equipment 10,178,000 10,086,000 9,936,000
Goodwill, net of accumulated amortization of
$762,000, $873,000, $553,000 7,633,000 7,522,000 2,172,000
Other 761,000 784,000 574,000
------------ ----------- -----------
Total other assets 8,394,000 8,306,000 2,746,000
------------ ----------- -----------
TOTAL ASSETS $88,886,000 $92,593,000 $81,060,000
============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 9,572,000 $10,140,000 $10,113,000
Accrued expenses 4,675,000 4,123,000 2,883,000
Deferred revenue 1,307,000 1,332,000 1,122,000
Income taxes 999,000 0 286,000
Current portion of long-term debt 1,891,000 1,829,000 3,320,000
------------ ----------- -----------
Total current liabilities 18,444,000 17,424,000 17,724,000
Revolving credit note 33,691,000 38,469,000 24,249,000
Long-term debt and subordinated notes payable 3,428,000 3,132,000 8,857,000
Subordinated notes payable to shareholders 900,000 900,000 900,000
Deferred income taxes 2,250,000 2,258,000 2,204,000
Deferred revenue 1,030,000 1,033,000 918,000
------------ ----------- -----------
Total long-term liabilities 41,299,000 45,792,000 37,128,000
Common stock, par value $0.10 per share;
10,000,000 shares authorized; 4,216,406 shares
issued and outstanding at February 29, 1996 and,
May 31, 1996; 4,201,326 shares issued and
outstanding at May 31, 1995 (Note B) 422,000 422,000 420,000
Additional paid-in capital (Note B) 10,898,000 10,898,000 10,796,000
Retained earnings (Note B) 17,823,000 18,057,000 14,992,000
------------ ----------- -----------
Total shareholders' equity 29,143,000 29,377,000 26,208,000
------------ ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $88,886,000 $92,593,000 $81,060,000
============ =========== ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended May 31,
1996 1995
----------- -----------
Revenues:
Net sales $20,701,000 $17,145,000
Other (principally finance charges) 2,453,000 2,371,000
----------- -----------
Total revenues 23,154,000 19,516,000
Costs and expenses:
Cost of sales (including
occupancy costs) 12,490,000 10,153,000
Selling, general, and administrative 8,764,000 7,380,000
Bad debt 680,000 581,000
Interest 868,000 832,000
----------- -----------
Total costs and expenses 22,802,000 18,946,000
----------- -----------
Earnings before income taxes 352,000 570,000
Income taxes 116,000 188,000
----------- -----------
Net earnings $ 236,000 $ 382,000
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Earnings per share $ 0.06 $ 0.09
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Weighted average shares outstanding 4,216,406 4,201,326
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended May 31,
1996 1995
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Cash flows from operating activities:
Net earnings $ 236,000 $ 382,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 666,000 488,000
Provision for loss on accounts receivable 680,000 500,000
Loss / (gain) on sale of property and equipment 1,000 13,000
Changes in assets and liabilities:
Accounts receivable 610,000 1,162,000
Merchandise inventories (5,067,000) (4,843,000)
Other assets (80,000) (93,000)
Trade payables 602,000 1,545,000
Accrued expenses (780,000) (1,640,000)
Deferred revenue 22,000 71,000
Income taxes (690,000) (1,411,000)
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Net cash provided by (used in) operating activities (3,800,000) (3,826,000)
Cash flows from investing activities:
Purchases of property and equipment (504,000) (792,000)
Proceeds from sale of property and equipment 10,000 3,000
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Net cash used in investing activities (494,000) (789,000)
Cash flows from financing activities:
Net proceeds from revolving credit note 4,779,000 5,249,000
Principal payments on debt (520,000) (513,000)
---------- ----------
Net cash provided by financing activities 4,259,000 4,736,000
---------- ----------
Net decrease in cash (35,000) 121,000
Cash, beginning of period 186,000 134,000
---------- ----------
Cash, end of period $ 151,000 $ 255,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 883,000 $ 848,000
Income taxes 1,207,000 1,604,000
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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 29, 1996.
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 CONDITI0N AND
RESULTS OF OPERATIONS
Results of Operations
Net sales of $20,701,000 for the three months ended May 31, 1996 were 21%
higher than the same quarter a year earlier. The average sales transaction
decreased to $140 from $142. Although the Company increased its number of
locations by 25%, the number of transactions increased 22%. Comparable store
sales increased 2% for the quarter, while comparable store transactions
increased 0.4%. At quarter end, the Company had a 98.5% in-stock position on
key items compared to 94.5% a year earlier, and was 90.4% in-stock on its
entire basic merchandise mix. The Company spent 13% more on advertising in the
first quarter of 1996 compared to the same quarter in 1995. While the Company
competed in more markets in the first quarter of this year, it did not build
market share in its previously existing markets resulting in our conclusion
that the increase in first quarter sales resulted from the Company's expansion
into additional locations.
Other revenues were 3% higher for the three month period than a year earlier.
The $2,453,000 of other revenues resulted from a 2% increase in finance charge
revenue (69% of other revenues), a 24% increase in extended service agreements
(17% of other revenues), and a 6% decrease in credit insurance income (9% of
other revenues), and a 17% decrease in various other smaller items (5% of other
revenues). The higher finance charge revenue resulted from customer
receivables being higher by an average of 3% during the first quarter of 1996.
The Company sold 8% more extended service agreements in the first quarter of
this year; the remaining increase in revenues resulted from the recognition of
deferred revenues for previous sales. Credit insurance income was adversely
affected by a drop to 34% from 36% in penetration (the percentage of active
accounts that purchase the credit insurance product).
Gross profits were 39.7% during the quarter, down from 40.8% in the first
quarter of 1995, primarily because occupancy costs increased to 14.1% of net
sales from 13.2%. While the Company was successful in increasing gross margins
in the higher-margin categories (diamonds, gold, and semi-precious) by 88 basis
points, only 73.7% of its business was done in those areas compared to 76.2% a
year earlier. The combination of higher occupancy costs associated primarily
the recently-acquired Melart stores and the change in sales mix caused the
reduction in gross margins for the quarter.
Selling, general and administrative expenses increased 19%, but as a percentage
of net sales decreased to 42.3% from 43.0%. Salaries & wages increased 25%
with payroll at the stores increasing 32% and increasing 7% in the corporate
office; as a percentage of sales, this item increased to 23.2% from 22.5% of
net sales. In the first quarter of 1996, salaries & wages accounted for 54.7%
of SG&A compared to 52.2% a year earlier.
Bad debt expense was 17% higher this year, but fell to 3.3% of net sales from
3.4% of net sales. Gross write-off for bad debts increased 15%, but net
write-off increased only 8% as a result of a 30% increase in collections of
accounts previously written off. Delinquency at the end of the quarter was 11%
higher than a year earlier; customer receivables were 3% higher.
Although interest expense was $36,000 higher, as a percentage of net sales it
fell to 4.2% of net sales from 4.9% of net sales. The increased interest
expense resulted from an increase in the average level of debt --- up 25% in
the first quarter of 1996 compared to 1995. The effective annualized interest
rate on borrowings dropped 16% to 8.2% from 9.8%.
The Company's anticipated tax rate was 33% in the first quarter of both years.
After income taxes of $116,000 and $188,000 in the first quarters of 1996 and
1995, respectively, the Company earned $236,000 and $382,000. Earnings per
share was $ .06 per share in 1996 and $ .09 per share in 1995, adjusted for the
stock dividend of June 1995.
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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 forces during the periods reported herein.
Liquidity and Capital Resources
Working capital increased 12% to $56,777,000 at May 31, 1996 from $50,654,000
at May 31, 1995; 69% of the $6,123,000 increase represents investment in
inventories and 22% resulted from increased customer receivables. The ratio of
current assets to current liabilities as of May 31, 1996 was 4.3 to 1, compared
to 3.9 to 1 a year earlier.
Customer receivables, net of allowance for doubtful accounts, were $35,389,000
and $34,032,000 at May 31, 1996 and 1995, respectively. The 4% increase
resulted from an 8% increase in proprietary credit sales, although such sales
fell to 51% of net sales from 57% a year earlier, and the 17% increase in bad
debt expense. The decrease in the mix of credit sales resulted from the
decision of our customers to pay by cash; cash sales grew by 38%. The Company
processed 20% more credit applications and approved 22% more in the first
quarter of this year than the same period last year. Credit extension policies
and criteria remained consistent during each of the two periods.
Merchandise inventories at the end of the first quarter were 13% higher than a
year earlier (9% higher in comparable stores) --- $35,478,000 compared to
$31,281,000. The investment in inventories on a per store basis is down 10%
from a year earlier, although the Company is attempting to achieve a 100%
in-stock position on key items and a 98%-100% in-stock position on core items.
Approximately 39% of the Company's sales are of items designated as key or
core. At May 31, 1996, the Company was 98.5% in-stock on key items and 93.3%
in-stock on core items.
Capital expenditures for leaseholds, equipment, furniture and fixtures were
$533,000 during the three months ended May 31, 1996, compared to $792,000 for
the same period a year earlier. During the quarter, the Company opened two
stores in Wichita KS and one store in Chesapeake VA. In June, the Company
opened its third store in the greater Richmond VA market and plans to open 2-3
more stores during the year. Management plans to invest approximately
$3,200,000 in capital expenditures during the current fiscal year.
The Company maintains a $40,000,000 revolving credit facility with two
commercial banks that expires July 31, 1998. Interest is paid under the
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; the rate is set quarterly. As of May 1, 1996, the Company's rate was
reduced to 30-day LIBOR plus 180 basis points from 30-day LIBOR plus 200 basis
points; the current rate is effective through September 30, 1996.
In addition, the Company has $4,570,000 in a senior subordinated note with an
insurance company, with interest payable quarterly at 12.11% and quarterly
principal payments of $457,000 through October 1998. The Company also has
subordinated notes totaling $900,000 with three related parties, with interest
payable monthly at the prime rate as 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.
In order to cap the interest expense related to the revolving credit facility,
on February 2, 1996 the Company purchased an interest rate cap with a major
commercial bank as the counterparty. The cap is for a term of two years ending
February 2, 1998 at a notional amount of $30 million, approximating 80% of the
expected outstanding average balance on the revolving credit facility. At the
end of each month during the term of the cap, if the 30-day LIBOR rate exceeds
6.00%, the Company will receive a payment for the difference between the 30-day
LIBOR rate and 6.00% times the $30 million notional amount for the 30-day
period. The Company paid $78,000 to purchase the cap and has no further
obligations for any
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payments during the term. As of May 31, 1996, the Company has received no
payments under the agreement.
At this time, management believes its credit lines are adequate to support its
plans for the current year 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.
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, a subsidiary of the Company purchases non-file UCC insurance
from an unaffiliated insurance carrier for accounts originated in certain
states and charges its customers in those states a non-file UCC insurance
fee equal to the subsidiary's premium cost for that insurance. Non-file
insurance reimburses the subsidiary for losses on accounts that result
from its decision not to file a UCC financing statement for the collateral
securing the account. A civil action has been brought in the United
States District Court for the Middle District of Georgia, Columbus
Division, by several plaintiffs against numerous finance companies,
jewelry retailers, furniture and appliance retailers, and insurance
companies specifically including the Company whereby the plaintiffs have
challenged certain aspects of the Company's non-file insurance practices.
If the non-file insurance practices of the Company were determined to be
invalid under applicable federal law or the laws of certain states, the
Company could be required to refund non-file insurance fees, pay other
damages to its former and current customers in those states and pay fines,
penalties, and attorney's fees. A specific amount claimed is not set
forth and is not determinable at this time. There exists a possibility
that the final resolution of this issue could result in the Company
recording an additional obligation. In the opinion of management, the
claim is without merit and the Company is contesting this suit vigorously.
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.
None.
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.
June 30, 1996 /s/ James R. Rouse
- ---------------- --------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
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