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 AUGUST 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 October 4, 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, August 31, August 31,
1996 1996 1995
---- ---- ----
ASSETS
Cash and cash equivalents $ 186,000 $ 81,000 $ 137,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $2,934,000, $2,838,000, and $2,695,000 36,697,000 35,141,000 33,035,000
Other 705,000 799,000 363,000
Merchandise inventories 30,411,000 34,783,000 29,991,000
Deferred income taxes 1,923,000 1,989,000 1,791,000
Other 392,000 1,124,000 975,000
----------- ----------- -----------
Total current assets 70,314,000 73,917,000 66,292,000
Property and equipment 25,133,000 26,214,000 22,108,000
Less: accumulated depreciation and amortization 14,955,000 15,885,000 12,013,000
----------- ----------- -----------
Net property and equipment 10,178,000 10,329,000 10,095,000
Goodwill, net of accumulated amortization of
$762,000, $985,000, and $570,000 7,633,000 7,410,000 2,155,000
Other 761,000 787,000 619,000
----------- ----------- -----------
Total other assets 8,394,000 8,197,000 2,774,000
----------- ----------- -----------
TOTAL ASSETS $88,886,000 $92,443,000 $79,161,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 9,572,000 $10,135,000 $ 8,572,000
Accrued expenses 4,675,000 3,663,000 2,753,000
Deferred revenue 1,307,000 1,346,000 1,159,000
Income taxes 999,000 -320,000 118,000
Current portion of long-term debt 1,891,000 1,884,000 3,320,000
----------- ----------- -----------
Total current liabilities 18,444,000 16,708,000 15,922,000
Revolving credit note 33,691,000 39,223,000 24,200,000
Long-term debt and subordinated notes payable 3,428,000 2,681,000 8,400,000
Subordinated notes payable to shareholders 900,000 879,000 900,000
Deferred income taxes 2,250,000 2,331,000 2,182,000
Deferred revenue 1,030,000 1,019,000 905,000
----------- ----------- -----------
Total long-term liabilities 41,299,000 46,133,000 36,587,000
Common stock, par value $0.10 per share;
Authorized: 10,000,000 shares; issued and
outstanding: 4,216,406, 4,222,456, and
4,201,081 (Note B) 422,000 422,000 420,000
Additional paid-in capital (Note B) 10,898,000 10,918,000 10,796,000
Retained earnings (Note B) 17,823,000 18,262,000 15,436,000
----------- ----------- -----------
Total shareholders' equity 29,143,000 29,602,000 26,652,000
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $88,886,000 $92,443,000 $79,161,000
=========== =========== ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended August 31, Six months ended August 31,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net sales $20,168,000 $16,185,000 $40,869,000 $33,330,000
Other (principally finance charges) 2,680,000 2,356,000 5,133,000 4,727,000
----------- ----------- ----------- -----------
Total revenues 22,848,000 18,541,000 46,002,000 38,057,000
Costs and expenses:
Cost of sales (including
occupancy costs) 12,573,000 9,790,000 25,063,000 19,943,000
Selling, general, and administrative 8,304,000 6,596,000 17,068,000 13,976,000
Bad debt 796,000 682,000 1,476,000 1,263,000
Interest 869,000 810,000 1,737,000 1,642,000
----------- ----------- ----------- -----------
Total costs and expenses 22,542,000 17,878,000 45,344,000 36,824,000
----------- ----------- ----------- -----------
Earnings before income taxes 306,000 663,000 658,000 1,233,000
Income taxes 101,000 219,000 217,000 407,000
----------- ----------- ----------- -----------
Net earnings $ 205,000 $ 444,000 $ 441,000 $ 826,000
=========== =========== =========== ===========
Earnings per share (Note B) $ 0.05 $ 0.11 $ 0.10 $ 0.20
=========== =========== =========== ===========
Weighted average shares
outstanding (Note B) 4,222,061 4,201,281 4,219,249 4,201,281
=========== =========== =========== ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended August 31,
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 441,000 $ 826,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,349,000 996,000
Provision for loss on accounts receivable 1,476,000 500,000
Gain on sale of property and equipment 11,000 31,000
Changes in assets and liabilities:
Accounts receivable -214,000 2,319,000
Merchandise inventories -4,372,000 -3,553,000
Other assets -767,000 -651,000
Trade payables 596,000 4,000
Accrued expenses -1,142,000 -1,770,000
Deferred revenue -28,000 134,000
Income taxes -854,000 -1,615,000
---------- ----------
Net cash used in operating activities -3,504,000 -2,779,000
Cash flows from investing activities:
Proceeds from sale of property and equipment 10,000 14,000
Capital expenditures -1,148,000 -1,462,000
---------- ----------
Net cash used in investing activities -1,138,000 -1,448,000
Cash flows from financing activities:
Proceeds from exercise of options on common stock - -
Proceeds from revolving credit note 5,532,000 5,201,000
Principal payments on debt -995,000 -971,000
---------- ----------
Net cash provided by financing activities 4,537,000 4,230,000
---------- ----------
Net change in cash -105,000 3,000
Cash, beginning of period 186,000 134,000
---------- ----------
Cash, end of period $ 81,000 $ 137,000
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $1,761,000 $1,662,000
Income taxes 1,592,000 1,972,000
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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. 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 of $20,168,000 for the three months ended August 31, 1996 were 25%
higher than the same quarter a year earlier. The average size of all
transactions, including repairs, was $137 during the second quarter of the
current year, compared to $139 in the second quarter of last year. At August
31, 1996, the Company operated 99 stores, 24% more than a year earlier; the
number of transactions during the quarter increased 27% over the same quarter
last year. Comparable store transactions rose 1% during the quarter and
comparable store sales increased 2%. During the second quarter, the Company
averaged a 99.6% in-stock position on key items and 92.3% in-stock on its entire
basic merchandise mix. For the first six months of the year, net sales of
$40,869,000 were 23% higher than the same period last year. The average
transaction size was $139, slightly lower than the $141 a year earlier; the
Company recorded 25% more transactions. Comparable store sales increased 2%
year-to-date on a 1% comparable store transaction increase.
Other revenues increased to 2,680,000, up 14% over the second quarter of last
year. The increase in other revenues resulted from a 5% increase in finance
charge revenue (64% of other revenues), a 19% increase in extended service
agreements (19% of other revenues), a 16% increase in credit insurance income
(10% of other revenues), and a 115% increase in various other smaller items (10%
of other revenues). Customer receivables were higher by an average of 6% during
the quarter ended August 31, 1996 compared to the same period a year earlier.
During the first six months of the fiscal year, other revenues increased 9% to
$5,133,000 as a result of a 3% increase in finance charge revenue (67% of other
revenues), a 22% increase in extended service agreements (17% of other
revenues), a 4% increase in credit insurance income (9% of other revenues) and a
48% increase in the various other items (7% of other revenues).
Gross margins were 37.7% during the quarter ended August 31, 1996, down from
39.6% a year earlier. Occupancy costs were lower this year in the second
quarter compared to the same period last year, but the Company gave up margins
in diamonds, watches, and gold --- categories that account for 83% of net
sales. For the first six months of the current year, occupancy costs were
higher than the previous year, and, as a result of the weakness in margins in
the second quarter, margins in diamonds, watches, and gold fell behind last
year's levels.
Selling, general, and administrative expenses increased 26% in the second
quarter, increasing to 41.1% of net sales from 40.7% in the prior year period,
primarily because of an 88% increase in advertising costs. Salaries and wages
increased 22% in the quarter; as a percentage of net sales, the expense rose 50
basis points in the stores and fell 90 basis points in the corporate office,
resulting in an overall reduction to 23.1% from 23.5% of net sales. Salaries
and wages accounted for 56.2% of SG&A in the second quarter of this year
compared to 57.8% in the same period last year. For the first half of the year,
SG&A expenses decreased to 41.7% of net sales from 41.9%. Year-to-date,
salaries and wages increased 23%; as a percentage of net sales, the expense rose
100 basis points in the stores and fell 80 basis points in the corporate office,
resulting in an overall increase to 23.1% of net sales from 22.9%.
Bad debt expense was 17% higher in the second quarter of this year, but fell to
3.9% of net sales from 4.2% in the same period last year. Year-to-date, the
expense was also 17% higher, but fell to 3.6% of net sales from 3.8% in the
first six months of last year. Delinquency at the end of the quarter was 7%
higher than a year ago; customer receivables were 6% higher.
Interest expense increased $59,000 over the second quarter of last year, but as
a percentage of net sales fell to 4.3% from 5.0%. Year-to-date, the expense is
up $95,000, but decreased to 4.3% of net sales from 4.9%. The effective
annualized interest rate was 7.75% in the second quarter of this year and 8.01%
for the first six months, compared to 9.02% in the second quarter of last year
and 9.55% for the first six months of last year. The increase in expense
resulted from 22% more debt in the second quarter of this year compared to the
same quarter last year, and a 26% increase in average debt for the first six
months.
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The Company's anticipated tax rate was 33% in the second quarter and
year-to-date in both years.
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 14% to $57,209,000 at August 31, 1996 from $50,370,000
a year earlier. Inventories were 16% higher than a year earlier, customer
receivables were 6% higher, and accounts payable were 18% higher. The resulting
ratio of current assets to current liabilities at August 31, 1996 was 4.4 to 1,
compared to 4.2 to 1 at the same time in the prior year.
Customer receivables, net of allowance for doubtful accounts, were $35,141,000
and 33,035,000 at August 31, 1996 and 1995, respectively. Proprietary credit
sales increased 11% in the quarter, although such sales fell to 51% of net sales
from 56% of net sales a year earlier; the additions primarily from credit sales
were reduced by a 4% increase in payments on accounts and a 17% increase in bad
debt expense. Cash sales during the first six months of this year grew by 38%,
causing a distinct shift in our cash and credit mix. The Company processed 22%
more credit applications in the first six months of this year, with an approval
rate that was slightly lower at 47.1% compared to 47.6%. Credit extension
policies and criteria remained consistent during each of the two periods.
Merchandise inventories were $34,783,000 at the end of the first six months of
this year, compared to $29,991,000 at the same time last year. The investment
in inventories on a per store basis was 8% lower than a year earlier. Items
designated as key and core items accounted for approximately 45% of sales in the
first six months of this year. At August 31, 1996, the Company was 99.7%
in-stock on key items (compared to 95.4% at August 31, 1995) and 94.0% in-stock
on core items.
Capital expenditures were $1,148,000 during the six months ended August 31,
1996, 22% lower than the $1,462,000 for the same period in 1995. 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 one store during the quarter in the greater Richmond VA market and plans
to open 2-3 more during the last half of the fiscal year.
On October 1, 1996, the Company increased its revolving credit facility with two
commercial banks to $45,000,000 from $40,000,000; the increase is to support the
holiday selling season and the facility will return to $40,000,000 after January
31, 1997. 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. The
rate charged to the Company during the second quarter was LIBOR plus 180 basis
points; the same rate is effective through December 31, 1996.
In addition, at August 31, 1996 the Company owed $4,114,000 under a senior
subordinated note with an insurance company. Effective October 1, 1996, the
holder of this note agreed to permit the increased revolving credit facility and
the Company agreed to pay a fee of $45,000 and also agreed to a rate increase of
20 basis points to an annual rate of 12.31% from 12.11% (the cost of the rate
increase to the Company will be approximately $4,000 over the remaining life of
the note); the two parties also agreed to shorten the maturity of the note from
October 1, 1998 to April 1, 1998, thereby eliminating two payments and
increasing the six remaining quarterly payments to $588,000 from $457,000, plus
interest. By shortening the maturity, the Company will save $118,000 in
interest payments to the note holder over the remaining life of the note.
9
The Company also has subordinated notes totaling $879,375 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
credit facility notes, which are 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, approximately 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 payments during the term. Through August 31, 1996, the
Company had 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.
(a) The Annual Meeting of Shareholders was held on Tuesday, July 11,
1996, and the following matters were submitted to a vote of the
shareholders:
(b) To elect nine directors (Garland Waddy Garrett, James R. Rouse,
Arlene Z. Schreiber, Richard F. Sherman, Alan M. Zimmer, Herbert J.
Zimmer, Jeffrey L. Zimmer, Roberta G. Zimmer, and William R. Zimmer)
to serve until the 1997 Annual Meeting of Shareholders or until
their successors are elected and qualified: for James R. Rouse,
Arlene Z. Schreiber, and Herbert J. Zimmer, 4,041,529 votes were
cast in favor, 2,232 votes were withheld, and 173,195 were not
voted; for Garland Waddy Garrett, 4,041,364 were cast in favor,
1,847 were withheld, and 173,195 were not voted; for Alan M. Zimmer,
Jeffrey L. Zimmer, Roberta G. Zimmer, and William R. Zimmer,
4,040,979 were cast in favor, 2,232 were withheld, and 173,195 were
not voted.
(c) To ratify the appointment of Ernst & Young as independent auditors
of the Company for the fiscal year ending February 28, 1997:
4,041,089 votes were cast in favor, 1,320 votes were against, 802
votes abstained, and 173,195 were not voted.
(d) Not applicable.
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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.
October 4, 1996 /s/ James R. Rouse
- ---------------------- ---------------------------
James R. Rouse
Treasurer and
Chief Financial Officer