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, 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 January 10, 1997 was 4,222,456.
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, 1996.
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 29, November 30, November 30,
1996 1996 1995
---- ---- ----
ASSETS
Cash and cash equivalents $ 186,000 $ 81,000 $ 154,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $2,934,000, $2,885,000, and $2,739,000 36,697,000 35,580,000 34,109,000
Other 705,000 1,396,000 1,257,000
Merchandise inventories 30,411,000 43,036,000 39,719,000
Deferred income taxes 1,923,000 2,034,000 1,831,000
Other 392,000 1,099,000 1,161,000
----------- ------------ -----------
Total current assets 70,314,000 83,226,000 78,231,000
Property and equipment 25,133,000 26,820,000 25,379,000
Less: accumulated depreciation and amortization 14,955,000 16,326,000 15,247,000
----------- ------------ -----------
Net property and equipment 10,178,000 10,494,000 10,132,000
Goodwill, net of accumulated amortization of
$762,000, $1,097,000, and $552,000 7,633,000 7,299,000 7,527,000
Other 761,000 913,000 713,000
----------- ------------ -----------
Total other assets 8,394,000 8,212,000 8,240,000
----------- ------------ -----------
TOTAL ASSETS $88,886,000 $101,932,000 $96,603,000
=========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 9,572,000 $ 15,590,000 $19,914,000
Accrued expenses 4,675,000 4,627,000 5,471,000
Deferred revenue 1,307,000 1,357,000 1,213,000
Income taxes 999,000 (324,000) (95,000)
Current portion of long-term debt 1,891,000 5,085,000 6,354,000
----------- ------------ -----------
Total current liabilities 18,444,000 26,335,000 32,857,000
Revolving credit note 33,691,000 40,000,000 24,655,000
Long-term debt and subordinated notes payable 3,428,000 1,491,000 8,049,000
Subordinated notes payable to shareholders 900,000 879,000 900,000
Deferred income taxes 2,250,000 2,378,000 2,231,000
Deferred revenue 1,030,000 1,005,000 921,000
----------- ------------ -----------
Total long-term liabilities 41,299,000 45,753,000 36,756,000
Common stock, par value $0.10 per share;
Authorized: 10,000,000 shares; issued and
outstanding: 4,216,406, 4,222,456, and
4,216,406 (Note B) 422,000 422,000 422,000
Additional paid-in capital (Note B) 10,898,000 10,918,000 10,898,000
Retained earnings (Note B) 17,823,000 18,504,000 15,670,000
----------- ------------ -----------
Total shareholders' equity 29,143,000 29,844,000 26,990,000
----------- ------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $88,886,000 $101,932,000 $96,603,000
=========== ============ ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended November 30, Nine months ended November 30,
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
Net sales $21,870,000 $21,214,000 $62,739,000 $54,544,000
Other (principally finance charges) 2,649,000 2,268,000 7,782,000 6,995,000
----------- ----------- ----------- -----------
Total revenues 24,519,000 23,482,000 70,521,000 61,539,000
Costs and expenses:
Cost of sales (including
occupancy costs) 13,783,000 12,996,000 38,846,000 32,939,000
Selling, general, and administrative 8,506,000 8,445,000 25,574,000 22,421,000
Bad debt 974,000 892,000 2,450,000 2,155,000
Interest 899,000 867,000 2,636,000 2,509,000
----------- ----------- ----------- -----------
Total costs and expenses 24,162,000 23,200,000 69,506,000 60,024,000
----------- ----------- ----------- -----------
Earnings before income taxes 357,000 282,000 1,015,000 1,515,000
Income taxes 118,000 63,000 335,000 470,000
----------- ----------- ----------- -----------
Net earnings $ 239,000 $ 219,000 $ 680,000 $ 1,045,000
=========== =========== =========== ===========
Earnings per share (Note B) $ 0.06 $ 0.05 $ 0.16 $ 0.25
=========== =========== =========== ===========
Weighted average shares
outstanding (Note B) 4,222,456 4,204,768 4,220,314 4,211,819
=========== =========== =========== ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended November 30,
1996 1995
---- ----
Cash flows from operating activities:
Net earnings $ 680,000 $ 1,045,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,072,000 1,552,000
Provision for loss on accounts receivable 2,450,000 2,155,000
Gain on sale of property and equipment 15,000 38,000
Changes in assets and liabilities:
Accounts receivable (2,205,000) (226,000)
Merchandise inventories (12,625,000) (9,188,000)
Other assets (879,000) (665,000)
Trade payables 6,053,000 8,423,000
Accrued expenses (177,000) (31,000)
Deferred revenue (62,000) 148,000
Income taxes (905,000) (862,000)
------------ -----------
Net cash (used in) provided by operating activities (5,583,000) 2,389,000
Cash flows from investing activities:
Net effect of acquisition of The Melart Jewelers, Inc.,
net of cash acquired 0 (3,690,000)
Proceeds from sale of property and equipment 19,000 14,000
Capital expenditures (1,928,000) (1,594,000)
------------ -----------
Net cash used in investing activities (1,909,000) (5,270,000)
Cash flows from financing activities:
Proceeds from exercise of options on common stock 0 102,000
Proceeds from revolving credit note 8,987,000 5,655,000
Principal payments on debt (1,600,000) (2,856,000)
------------ -----------
Net cash provided by financing activities 7,387,000 2,901,000
Net change in cash (105,000) 20,000
Cash, beginning of period 186,000 134,000
------------ -----------
Cash, end of period $ 81,000 $ 154,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,671,000 $ 2,560,000
Income taxes 1,757,000 2,223,000
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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 CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended November 30, 1996 were up 3% over the same
quarter in 1995 to a third quarter record of $21,870,000. Comparable store
sales, however, were down 5% for the quarter. The number of sales transactions
during the quarter increased 6%, but the average sale decreased 3% to $153 from
$158. The Company operated 100 stores at November 30, 1996, compared to 99 at
the same time in the previous year. Net sales for the nine month period
increased 15% to $62,739,000, but same store sales were flat during the
nine-month period. The increased sales year-to-date resulted from an 18%
increase in customer transactions but a decrease in the average transaction
size to $143 from $144. On a trailing twelve-month basis, net sales through
November 30, 1996 increased 17% over the same period through November 30, 1995,
resulting from a 20% increase in transactions but a 2% decrease in the average
transaction to $144.
Other revenues in the third quarter increased 17% over last year to $2,649,000.
Finance charges and credit insurance income from customer receivables
accounted for 71% of other revenues. Year-to-date, other revenues increased
11% over the same period a year earlier, and finance charges and credit
insurance income represented 74% of the total.
Gross margins were 37% of net sales during the third quarter ended November 30,
1996, down from 39% in the same quarter last year; approximately 72% of the
decrease was caused by higher occupancy costs and the balance resulted from
lower merchandise margins during the period. For the first nine months of the
year, gross margins were 38% of net sales, down from 40% of net sales for the
same period last year primarily as a result of higher occupancy costs. Gross
margins were also negatively affected by a reduction in the mix of diamond and
gold sales to 67% of net sales from 71% of net sales for the first nine months
of the current year when compared to last year.
Selling, general, and administrative expenses decreased in the third quarter to
39% of net sales from 40% a year ago. Advertising expenses for the quarter
were 12% lower, decreasing to 4% of net sales from nearly 5% of net sales.
Salaries and wages increased 1% in the third quarter of 1996 over the third
quarter of 1995, but were lower by 30 basis points as a percentage of net
sales. Year-to-date, SG&A expenses were 41% for both years. Advertising
increased 14% for the nine months, but remained flat as a percentage of net
sales. Salaries and wages for the first three quarters increased 15% and rose
10 basis points as a percentage of net sales.
Bad debt expense was 4% of net sales for both quarters ended November 30, 1996
and 1995, respectively, and was also 4% for both nine-month periods. As a
percentage of average customer receivables, bad debt was 2.5% in the current
third quarter and 2.5% in the same quarter last year; for the first nine months
of this year, bad debt was 6.0% of customer receivables, compared to 5.9% last
year. Balances on delinquent accounts were about 3% lower at November 30, 1996
than they were at the same date in 1995, representing nearly 16% of total
accounts receivable at November 30, 1996 compared to 17% a year earlier; gross
customer receivables were 4% higher at November 30, 1996 than a year earlier.
The allowance for bad debts at November 30, 1996 and 1995 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 $32,000 higher in the third quarter and $127,000 higher in
the first nine months than for the same periods last year. The increase
resulted from increased average borrowings of approximately 22% during the
third quarter and 21% during the nine-month period. The Company's effective
interest rate during the quarter was 8.0%, 150 basis points lower than the same
quarter a year earlier, and for the nine-month period was 8.1%, 130 basis
points lower than the same period in the previous year.
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The Company's anticipated tax rate was 33% for both periods ending November 30,
1996; 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 $239,000 ($0.06 per share and 1.1% of net sales) for
the quarter ended November 30, 1996, compared to $219,000 ($0.05 per share and
1.0% of net sales) for the same quarter last year. For the first nine months,
the Company earned $680,000 ($0.16 per share and 1.1% of net sales) compared to
$1,045,000 ($0.25 per share and 1.9% of net sales) for the same period last
year.
Management expects comparable store sales to be flat during the final quarter
of the current fiscal year that will end February 29, 1996. Gross margin
pressure is expected to continue, but anticipates that gross margins will be no
worse than in the fourth fiscal quarter of last year. Management further
expects no change in SG&A expenses, as a percentage of net sales, during the
final fiscal quarter compared to the same period last year. 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 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 25% to $56,891,000 at November 30, 1996 from
$45,374,000 at November 30, 1995. The resulting ratio of current assets to
current liabilities as of November 30, 1996 was 3.2 to 1, compared to 2.4 to 1
at the same date in the prior year.
Customer receivables, net of allowance for doubtful accounts, were $35,580,000
and $34,109,000 at November 30, 1996 and 1995, respectively. The 4% increase
resulted from 49% 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 1996
than at the same time in the previous year. The increase resulted from the
Company's commitment to maintaining a high in-stock ratio for key, core, and
advertised items. At November 30, 1996, the Company was 99.5% in-stock on key
items and 95.3% in-stock on core items.
Capital expenditures for the Company were $1,928,000 during the nine months
ended November 30, 1996, compared to $1,594,000 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 store in the fourth quarter.
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 was 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 bank's 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 third quarter was LIBOR
plus 180 basis points; the same rate is effective through March 31,1997.
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 the 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
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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.
The Company also has subordinated notes totaling $879,000 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
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 November 30, 1996, the
Company had received no payments under the agreement.
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 10, 1997 /s/ James R. Rouse
- -------------------------- ---------------------------
James R. Rouse
Treasurer and
Chief Financial Officer