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, 1997
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 13, 1997 was 4,224,876.
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, 1997.
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, August 31, August 31,
1997 1997 1996
---- ---- ----
ASSETS
Cash and cash equivalents $ 696,000 $ 42,000 $ 81,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,079,000, $2,949,000, and $2,838,000 37,970,000 35,594,000 35,141,000
Other 696,000 818,000 799,000
Merchandise inventories 36,089,000 38,248,000 34,783,000
Deferred income taxes 2,118,000 2,062,000 1,989,000
Other 490,000 940,000 1,124,000
----------- ----------- -----------
Total current assets 78,059,000 77,704,000 73,917,000
Property and equipment 27,606,000 28,369,000 26,214,000
Less: accumulated depreciation and amortization 16,302,000 15,887,000 15,885,000
----------- ----------- -----------
Net property and equipment 11,304,000 12,482,000 10,329,000
Goodwill, net of accumulated amortization of
$1,208,000, $1,431,000, and $985,000 7,187,000 6,964,000 7,410,000
Other 969,000 902,000 787,000
----------- ----------- -----------
Total other assets 8,156,000 7,866,000 8,197,000
----------- ----------- -----------
TOTAL ASSETS $97,519,000 $98,052,000 $92,443,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $11,490,000 $ 8,329,000 $10,135,000
Accrued expenses 4,549,000 3,514,000 3,663,000
Deferred revenue 1,434,000 1,432,000 1,346,000
Income taxes 1,746,000 (285,000) (320,000)
Current portion of long-term debt 2,404,000 3,263,000 1,884,000
----------- ----------- -----------
Total current liabilities 21,623,000 16,253,000 16,708,000
Revolving credit note 38,111,000 45,000,000 39,223,000
Long-term debt and subordinated notes payable 661,000 215,000 2,681,000
Subordinated notes payable to shareholders 879,000 879,000 879,000
Deferred income taxes 1,948,000 1,889,000 2,331,000
Deferred revenue 1,102,000 1,040,000 1,019,000
----------- ----------- -----------
Total long-term liabilities 42,701,000 49,023,000 46,133,000
Common stock, par value $0.10 per share;
10,000,000 shares authorized; 4,224,876 shares
issued and outstanding at February 28, 1997 and
August 31, 1997; 4,222,456 shares issued and
Outstanding at August 31, 1996 422,000 422,000 422,000
Additional paid-in capital 10,925,000 10,925,000 10,918,000
Retained earnings 21,848,000 21,429,000 18,262,000
----------- ----------- -----------
Total shareholders' equity 33,195,000 32,776,000 29,602,000
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $97,519,000 $98,052,000 $92,443,000
=========== =========== ===========
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended August 31, Six months ended August 31,
1997 1996 1997 1996
----- ---- ---- ----
Revenues:
Net sales $ 19,802,000 $ 20,168,000 $40,078,000 $ 40,869,000
Other (principally finance 2,935,000 2,680,000 5,777,000 5,133,000
charges) ------------ ------------ ----------- ------------
Total revenues 22,737,000 22,848,000 45,855,000 46,002,000
Costs and expenses:
Cost of sales (including
occupancy costs) 12,705,000 12,573,000 25,667,000 25,063,000
Selling, general, and 8,075,000 8,304,000 17,306,000 17,068,000
administrative
Bad debt 871,000 796,000 1,690,000 1,476,000
Interest 882,000 869,000 1,718,000 1,737,000
------------ ------------ ----------- ------------
Total costs and expenses 22,533,000 22,542,000 46,381,000 45,344,000
------------ ------------ ----------- ------------
Earnings before income taxes and
extraordinary item 204,000 306,000 (526,000) 658,000
Income taxes 75,000 101,000 (166,000) 217,000
------------ ------------ ----------- ------------
Net earnings before
extraordinary item 129,000 205,000 (360,000) 441,000
------------ ------------ ----------- ------------
Extraordinary item - loss on early
extinguishment of debt, net of
income tax benefit of $ 40,000 (59,000) (59,000)
------------ ------------ ----------- ------------
Net earnings $ 70,000 $ 205,000 $ (419,000) $ 441,000
============ ============ =========== ============
Earnings per share
Earnings before extraordinary
item $ 0.03 $ 0.05 $ (0.09) $ 0.10
Extraordinary item - loss on early
extinguishment of debt (0.01) (0.01)
------------ ------------ ----------- ------------
Net earnings per share $ 0.02 $ 0.05 $ (0.10) $ 0.10
============ ============ =========== ============
Weighted average shares
outstanding 4,224,876 4,222,061 4,224,876 4,219,249
============ ============ =========== ============
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended August 31,
1997 1996
---- ----
Cash flows from operating activities:
Net earnings $ (419,000) $ 441,000
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,532,000 1,349,000
Provision for loss on accounts receivable 1,690,000 1,476,000
(Gain) loss on sale of property and equipment (122,000) 11,000
Changes in assets and liabilities:
Accounts receivable 564,000 (214,000)
Merchandise inventories (2,159,000) (4,372,000)
Other assets (406,000) (767,000)
Trade payables (3,135,000) 596,000
Accrued expenses (751,000) (1,142,000)
Deferred revenue 54,000 (28,000)
Income taxes (2,046,000) (854,000)
----------- -----------
Net cash used in operating activities (5,198,000) (3,504,000)
Cash flows from investing activities:
Proceeds from sale of property and equipment 19,000 10,000
Capital expenditures (2,588,000) (1,148,000)
----------- -----------
Net cash used in investing activities (2,569,000) (1,138,000)
Cash flows from financing activities:
Proceeds from revolving credit note 10,091,000 5,532,000
Principal payments on debt (2,978,000) (995,000)
----------- -----------
Net cash provided by financing activities 7,113,000 4,537,000
----------- -----------
Net change in cash (654,000) (105,000)
Cash, beginning of period 696,000 186,000
----------- -----------
Cash, end of period $ 42,000 $ 81,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,778,000 $ 1,761,000
=========== ===========
Income taxes $ 1,826,000 $ 1,592,000
=========== ===========
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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, 1997.
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.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Net sales of $19,802,000 for the three months ended August 31, 1997 were 2%
lower than the same quarter a year earlier. The average size of all
transactions, including repairs and other non-inventoried items, was $142
during the second quarter of the current year, compared to $137 in the second
quarter of last year. The average price point sold during the quarter,
excluding repairs and other non-inventoried items was $241. At August 31, 1997,
the Company operated 100 stores, 1% more than a year earlier; the number of
transactions during the quarter decreased 5% from the same quarter last year.
Comparable store transactions fell 6% during the quarter and comparable store
sales decreased 4%. During the second quarter, the Company averaged a 99.7%
in-stock position on key items and 90.5% in-stock on its entire basic
merchandise mix. For the first six months of the year, net sales of $40,078,000
were 2% lower than the same period last year. The average transaction size,
including repairs and other non-inventoried items, was $137, slightly lower
than the $139 a year earlier; the average price point sold during the first six
months, excluding repairs and other non-inventoried items was $218. The Company
recorded 1% fewer transactions. Comparable store sales decreased 5%
year-to-date on a 3% comparable store transaction decrease.
Other revenues increased to $2,935,000, up 10% over the second quarter of last
year. The increase in other revenues resulted from a 9% increase in finance
charge revenue (59% of other revenues), a 7% increase in extended service
agreements (16% of other revenues), a 11% decrease in credit insurance income
(8% of other revenues), and a 94% increase in various other smaller items (17%
of other revenues). Customer receivables were higher by an average of 1% during
the quarter ended August 31, 1997 compared to the same period a year earlier.
During the first six months of the fiscal year, other revenues increased 13% to
$5,777,000 as a result of a 2% increase in finance charge revenue (60% of other
revenues), an 8% increase in extended service agreements (16% of other
revenues), a 2% decrease in credit insurance income (8% of other revenues), an
82% increase in late fees charged on past due accounts receivable (resulting
from the Company increasing the amount it charges for late fees) (8% of other
revenues), and a 252% increase in the various other items (8% of other
revenues).
Gross margins were 35.8% during the quarter ended August 31, 1997, down from
37.7% a year earlier because occupancy costs were 16% higher in the second
quarter of this year compared to the same period last year. For the first six
months of the current year, occupancy costs were 11% higher than the previous
year, accounting for 60% of the gross margin reduction during the first six
months of the current year.
Selling, general, and administrative expenses decreased 3% in the second
quarter, and decreased to 40.8% of net sales from 41.2% in the prior year
period. Salaries and wages increased 2% during the quarter and for the first
six months of the year. SG&A, for the six months ended August 31, 1977 was 1%
higher than during the same period a year earlier, but because of the lower
sales rose to 43.2% of net sales from 41.8%.
Bad debt expense was 9% higher in the second quarter of this year, and rose to
4.4% of net sales from 3.9% in the same period last year. Year-to-date, the
expense was also 14% higher, and increased to 4.2% of net sales from 3.6% in
the first six months of last year. Of the increase in bad debt expense for the
first six months of the current fiscal year, 94% resulted from a planned
acceleration of write-offs to offset the increase in late fees collected.
Delinquency at the end of the quarter was 3% higher than a year ago; customer
receivables were 2% higher.
Interest expense increased $13,000 over the second quarter of last year, and as
a percentage of net sales rose to 4.5% from 4.3%. Year-to-date, the expense is
down $19,000, and remained constant at 4.3% of net sales. The effective
annualized interest rate was 7.43% in the second quarter of this year and 7.66%
for the first six months, compared to 7.75% in the second quarter of last year
and 8.01% for the first six months of last year. The Company averaged 8% more
debt in the second quarter of this year compared to the same
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quarter last year, and 4% more for the first six months. During the second
quarter of the current year, the Company retired its remaining 12.31%
subordinated debt and recognized an extraordinary charge, net of income tax
benefit, of $59,000; this charge is not included in interest expense for the
quarter or the year-to-date.
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 7% to $61,451,000 at August 31, 1997 from $57,209,000
a year earlier. Inventories were less than planned but 10% higher than a year
earlier, net customer receivables were 1% higher, and accounts payable were 18%
lower. The resulting ratio of current assets to current liabilities at August
31, 1997 was 4.8 to 1, compared to 4.4 to 1 at the same time in the prior year.
Customer receivables, net of allowance for doubtful accounts, were $35,594,000
and $35,141,000 at August 31, 1997 and 1996, respectively. Proprietary credit
sales decreased 3% in the six months ended August 31, 1997. Cash sales during
the first six months of this year fell less than 1%. The Company processed 10%
fewer credit applications in the first six months of this year, with an
approval rate that was higher at 49.2% compared to 47.6%. Credit extension
policies and criteria remained consistent during each of the two periods.
Merchandise inventories were $38,248,000 at the end of the first six months of
this year, compared to $34,783,000 at the same time last year. Items designated
as key and core items accounted for approximately 54% of sales in the first six
months of this year compared to 45% in the same period last year . At August
31, 1997, the Company was 99.5% in-stock on key items (compared to 99.8% at
August 31, 1996) and 95.5% in-stock on core items compared to 96.5% a year
earlier.
Capital expenditures were $2,569,000 during the six months ended August 31,
1997, 125% higher than the $1,138,000 for the same period in 1996. 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 Newport News VA and closed 3
under-performing stores during the three month period.
In June 1997, the Company increased its revolving credit facility with two
commercial banks to $45,000,000 and extended its expiration to July 31, 2000;
pricing, covenants, and other terms were unchanged. This agreement also
provides for an additional seasonal increase to $50,000,000 from July 1 through
December 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. As of September 1, 1997, the Company's rate was 30-day LIBOR plus
180 basis points.
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
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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, 1997, 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 has purchased non-file UCC
insurance from an unaffiliated insurance carrier for accounts
originated in certain states and has charged 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 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 attorneys' 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.
On or about June 20, 1997, U.W. Clemon, United States District Judge
in the United States District Court for the Middle District of
Alabama, Northern Division, signed a Conditional Class Certification
Order for this matter. On or about October 6, 1997 the same judge
signed a Decertification Order in this matter.
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 Wednesday,
July 9, 1997, and the following matters were submitted to a
vote of the shareholders:
(b) To elect nine directors (Garland Waddy Garrett, Fenton N.
Hord, 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 1998 Annual
Meeting of Shareholders or until their successors are elected
and qualified: for Garland Waddy Garrett, Fenton N. Hord,
Richard F. Sherman, Jeffrey L. Zimmer, and Roberta G. Zimmer,
4,052,549 votes were cast in favor and 1,900 abstained; for
Alan M. Zimmer, 4,052,524 votes were cast in favor and 1,925
abstained; for Herbert J. Zimmer, 4,052,449 votes were cast
in favor and 2,000 abstained; and for Arlene Z. Schreiber and
William R. Zimmer, 4,051,959 votes were cast in favor and
2,490 abstained.
(c) To ratify the appointment of Ernst & Young as independent
auditors of the Company for the fiscal year ending February
28, 1998: 4,052,522 votes were cast in favor, 279 votes were
against, and 1,648 votes abstained.
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(d) 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.
October 13, 1997 /s/ James R. Rouse
- -------------------------- --------------------
James R. Rouse
Treasurer and
Chief Financial Officer