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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, 1998
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 July 10, 1998 was 8,461,852.
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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 28, 1998.
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
February 28, May 31, May 31,
1998 1998 1997
------------ ------------ -----------
ASSETS
Cash and cash equivalents $ 996,000 $ 42,000 $ 42,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,338,000, $3,210,000, and $2,982,000 40,291,000 38,747,000 35,996,000
Other 627,000 646,000 744,000
Merchandise inventories 36,466,000 40,920,000 40,269,000
Deferred income taxes 2,577,000 2,285,000 2,089,000
Other 582,000 754,000 843,000
------------ ------------ -----------
Total current assets 81,539,000 83,394,000 79,983,000
Property and equipment 28,055,000 29,065,000 28,306,000
Less: accumulated depreciation and amortization 16,351,000 17,045,000 16,377,000
------------ ------------ -----------
Net property and equipment 11,704,000 12,020,000 11,929,000
Goodwill, net of accumulated amortization of
$1,655,000, $1,766,000, and $1,320,000 6,741,000 6,630,000 7,076,000
Other 1,002,000 926,000 924,000
------------ ------------ -----------
Total other assets 7,743,000 7,556,000 8,000,000
------------ ------------ -----------
TOTAL ASSETS $100,986,000 $102,970,000 $99,912,000
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 9,369,000 $ 9,597,000 $15,687,000
Accrued expenses 5,312,000 4,742,000 4,476,000
Deferred revenue (Note D) 1,548,000 1,391,000 1,438,000
Income taxes 1,998,000 170,000 0
Current portion of long-term debt 62,000 2,920,000 2,410,000
------------ ------------ -----------
Total current liabilities 18,289,000 18,820,000 24,011,000
Revolving credit note 42,914,000 45,000,000 39,080,000
Long-term debt and subordinated notes payable 11,000 0 241,000
Subordinated notes payable to shareholders 879,000 879,000 879,000
Deferred income taxes 1,768,000 1,387,000 1,920,000
Deferred revenue (Note D) 1,222,000 936,000 1,075,000
------------ ------------ -----------
Total long-term liabilities 46,794,000 48,202,000 43,195,000
Common stock, par value $0.10 per share;
10,000,000 shares authorized; 8,449,752
shares issued and outstanding at February
28, 1998 and May 31, 1998;
4,224,876 shares issued and
outstanding at May 31, 1997 (Note B) 844,000 844,000 422,000
Additional paid-in capital (Note B) 10,503,000 10,503,000 10,925,000
Retained earnings 24,556,000 24,601,000 21,359,000
------------ ------------ -----------
Total shareholders' equity 35,903,000 35,948,000 32,706,000
------------ ------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $100,986,000 $102,970,000 $99,912,000
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended May 31,
1998 1997
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Revenues:
Net sales $20,431,000 $ 20,276,000
Other (principally finance charges) 3,501,000 2,842,000
----------- ------------
Total revenues 23,932,000 23,118,000
Costs and expenses:
Cost of sales (including
occupancy costs) 13,244,000 13,230,000
Selling, general, and administrative 8,968,000 8,963,000
Bad debt 802,000 819,000
Interest 851,000 836,000
----------- ------------
Total costs and expenses 23,865,000 23,848,000
----------- ------------
Earnings before income taxes 67,000 (730,000)
Income taxes 22,000 (241,000)
----------- ------------
Net earnings $ 45,000 $ (489,000)
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Basic and diluted earnings per share (Note B) $ 0.01 $ (0.06)
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Weighted average shares outstanding (Note B) 8,449,752 8,449,752
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended May 31,
1998 1997
----------- -----------
Cash flows from operating activities:
Net earnings $ 45,000 $ (489,000)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 816,000 748,000
Provision for loss on accounts receivable 802,000 819,000
(Gain) loss on sale of property and equipment (1,000) 14,000
Changes in assets and liabilities:
Accounts receivable 723,000 1,107,000
Merchandise inventories (4,454,000) (4,180,000)
Other assets (104,000) (32,000)
Trade payables 230,000 4,168,000
Accrued expenses (660,000) 36,000
Deferred revenue 135,000 33,000
Income taxes (2,405,000) (1,959,000)
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Net cash provided by (used in) operating activities (4,873,000) 265,000
Cash flows from investing activities:
Proceeds from sale of property and equipment 0 4,000
Capital expenditures (1,014,000) (1,276,000)
----------- -----------
Net cash used in investing activities (1,014,000) (1,272,000)
Cash flows from financing activities:
Net proceeds from revolving credit note 4,948,000 969,000
Principal payments on debt (15,000) (616,000)
----------- -----------
Net cash provided by financing activities 4,933,000 353,000
----------- -----------
Net change in cash (954,000) (654,000)
Cash, beginning of period 996,000 696,000
----------- -----------
Cash, end of period $ 42,000 $ 42,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 851,000 $ 848,000
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Income taxes $ 2,207,000 $ 1,796,000
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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, 1998.
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 SPLIT
Adjusted for two-for-one stock split effective in the form of a 100% stock
dividend on February 20, 1998.
C. RECLASSIFICATIONS
Certain reclassifications were made to the 1997 financial statements to
conform to the classifications used in 1998.
D. DEFERRED REVENUE
For the fiscal years ended February 28, 1998, February 28, 1997 and February
29, 1996, in accordance with FASB Technical Bulletin 90-1, "Accounting for
Separately Priced Extended Warranty and Product Maintenance Contracts,"
revenue from these contracts was deferred and recognized in income on a
straight-line basis over the contract period. This deferred revenue has been
separated into its current and long-term portions on the balance sheet.
Commission costs that are directly related to the acquisition of these
contracts are deferred and charged to expense in proportion to the revenue
recognized. All other costs, such as costs of services performed under the
contracts, general and administrative expenses, and advertising expenses,
are charged to expense as incurred.
During the first quarter of the current year, the Company stopped selling
its own extended service contracts and began selling such contracts on
behalf of unrelated third parties only. These contracts provide for warranty
periods of 24 to 36 months. As a result of this change, the Company will
continue to recognize existing deferred revenues from previously sold
contracts through February 28, 2001 and will now recognize commission
revenue for the unrelated third-party extended warranty plans at the time of
sale.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITI0N AND
RESULTS OF OPERATIONS
Results of Operations
Sales
Net sales of $20,431,000 for the three months ended May 31, 1998 were nearly 1%
higher than the same period a year earlier, although the Company operated three
fewer stores during the first quarter of 1998 and ended the period with 99
stores. Comparable store sales of 1.8% in March, 3.9% in April, and 2.6% in May
resulted in a 3.1% same-store increase for the quarter.
Total transactions fell 6.7%, but were only 0.4% lower in comparable stores. The
decrease in total transactions was the result of fewer stores being operated.
The decrease in comparable store transactions occurred primarily because the
Company did not repeat a low-priced traffic promotion that it ran a year ago. On
the other hand, as a result of the low-priced promotion not being repeated, the
average price of each piece of merchandise sold increased 20% to $238 from $199
during the quarter.
The Company averaged 92.1% in-stock on its key and core items during the first
quarter of both years. The Company averaged 81.8% in-stock on its entire basic
merchandise mix compared to 86.4% during the same quarter last year. During the
first quarter of 1998, key and core merchandise accounted for 49.9% of net
sales, 52.3% of the items in the Company's basic merchandise mix, and 40.5% of
its inventory investment. In the first quarter of last year, key & core
merchandise represented 52.9% of net sales, 63.2% of the items offered, and
41.2% of inventory.
Advertising expenditures were 17% less for the quarter than a year earlier. The
Company reduced the size of its newspaper insert for Mother's Day by 67%, but
plans to spend the savings from this quarter to increase its marketing efforts
in select markets during the remainder of the year.
Sales on the Company's proprietary credit card were down 1.0% while cash sales
rose 2.5%. Credit sales accounted for 48.7% of total net sales, compared to
49.6% during the first quarter of last year. The average credit sale during the
first quarter of 1998 was 6.1% higher than the same quarter in 1997. The average
credit sale was also 4.8 times the size of the average cash sale, compared to
4.9 times in 1997; the primary reason for this difference, however, is the large
number of cash repair sales the Company transacts. The Company's credit
marketing efforts resulted in 18.1% more applications being obtained and 14.4%
more new accounts being opened during the first quarter of the current year than
during the same period a year ago.
Gross Profit
Gross profit increased 2.0% to $7,187,000 from $7,046,000; the resulting gross
margins rose to 35.2% from 34.8%. The improvement in gross margins resulted from
a reduction of 4.5% in occupancy costs, saving 88 basis points. Excluding
occupancy costs, gross profit was 0.6% lower and gross margins were 75 basis
points lower. The deterioration in gross margins excluding occupancy costs
resulted from changes in the sales mix. Sales of gold and semi-precious color,
the Company's highest margin category, fell 14.6%. Sales of watches, the
Company's lowest margin merchandise category, rose 29.4%. Sales of diamonds, the
Company's largest category, rose 2.4%.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative costs were essentially flat, rising only
$5,000 in the current quarter over the same quarter a year earlier. The slight
increase resulted in a reduction of the expense as a percentage of net sales to
43.9% from 44.2%. Salary costs were 2.8% higher in the current quarter, but
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were offset by a 14.5% reduction in supplies costs and a 32.0% reduction in
communications expense as the Company began to realize the benefits of the voice
and data network it implemented last year.
Bad Debt Expense
Bad debt decreased 2.1% to $802,000 from $819,000 and fell to 3.9% of net sales
for the quarter compared to 4.0% a year earlier. Gross write-off for bad debts
increased 1.0% and net write-off, after recovery of amounts previously written
off, increased 1.8%.
Other Revenues
Other revenues increased 23.2% for the three-month period over a year ago. The
$3,501,000 of other revenues resulted from an 8.7% increase in finance charge
revenue, a 96.4% increase in revenues from extended service agreements, a 6.3%
increase in credit insurance income, a 30.6% increase in late fee income, and an
11.3% reduction in various other smaller items. Finance charges represented
54.0% of other revenues, extended service agreements were 26.0%, credit
insurance income was 7.3%, late fee income was 8.1%, and other items were 4.6%.
During the first quarter of the current year, the Company stopped selling its
own extended service contracts and began selling such contracts on behalf of
unrelated third parties only. These contracts provide for warranty periods of 24
to 36 months. As a result of this change, the Company will continue to recognize
existing deferred revenues from previously sold contracts through February 28,
2001 and will now recognize commission revenue for the unrelated third-party
extended warranty plans at the time of sale. The effect of this change during
the first quarter of this year was an additional $370,000, or about 56% of the
increase in other revenues.
Interest Expense
Interest expense rose $15,000 during the quarter to $851,000. Average borrowings
were 8.5% higher than during the first quarter of last year. However, the
Company's effective interest rate during the current quarter fell to 7.3% from
8.1% a year ago. The lower effective rate resulted primarily from a reduction of
13 basis points in the LIBOR rate upon which the Company's bank revolver rate is
based and from a reduction of 20 basis points in the spread resulting from
improvement in its debt to equity ratio. The balance of the savings resulted
because the Company paid off its subordinated debt in June of last year.
Income Taxes and Net Earnings
The Company's anticipated tax rate was 33% in the first quarter of both years.
The Company earned $45,000 in the quarter ended May 31, 1998, compared to a loss
of $489,000 in the previous year. On a basic and diluted basis, the Company
earned $0.01 per share in the first quarter of 1998 compared to a loss of $0.06
per share in the same quarter of 1997.
Non-File UCC Insurance Litigation
In May 1998, the Company received a preliminary approval order for a settlement
in this previously discussed action. In anticipation of settling this action,
the Company recorded a $700,000 charge during the fourth quarter of the fiscal
year ended February 28, 1998.The final hearing on fairness was held July 2, 1998
and the order was approved. The final order provided for, among other things,
the following: the payment of $486,000 to a settlement fund and the payment of
administrative fees that are expected to be no more than $135,000.
Additional details are available in Item 1 of Part II of this report.
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Year 2000
The Company is currently undertaking a full review of all its systems to ensure
that they are able to operate efficiently after December 31, 1999. The Company
believes that all of its operating systems will have been modified where
necessary and that the problem does not pose a material operational issue or
expense for the Company. Discussions with the Company's external suppliers are
taking place to ensure that, as far as possible, they are taking similar action
towards Year 2000 compliance with respect to their products and services.
Liquidity and Capital Resources
Working Capital
Working capital increased 15% to $64,574,000 at May 31, 1998 from $55,972,000 at
May 31, 1997. Of the $8,602,000 increase, 60.3% resulted from a reduction in
current liabilities, 32.0% from increased accounts receivable, and 7.6% from
higher investments in inventories. The ratio of current assets to current
liabilities as of May 31, 1998 was 4.43 to 1, compared to 3.3 to 1 a year
earlier.
Customer receivables at the end of the first quarter, net of allowance for
doubtful accounts, were $38,747,000, up $2,751,000 or 7.6% from the same date
last year. Contractual delinquency at the end of the quarter was 6.6% lower than
at May 31, 1997, representing 8.5% of the portfolio compared to 9.1%. In
calculating delinquency, the Company considers the entire balance of an account
to be delinquent when an account becomes three payments behind. Credit extension
and collection policies were consistent during each of the two periods.
Merchandise inventories at the end of the first quarter of 1998 were 1.6% higher
than a year earlier --- $40,920,000 compared to $40,269,000. The investment in
inventories on a per store basis was up 4.7% from a year earlier. In addition to
owned inventories, the Company's offerings included an additional 22.2%, or
$8,537,000, in consigned inventories at May 31, 1998 and an additional 21.3%, or
$9,091,000, at May 31, 1997.
Debt
On December 21, 1995, the Company entered into a revolving credit agreement with
two commercial banks whereby the Company could borrow up to $40,000,000 based on
specified percentages of eligible inventory and accounts receivable. In June
1997, the Company increased its revolving credit facility to $45,000,000 and
extended its expiration to July 31, 2000; covenants and other terms remained
unchanged. In May 1998, the Company and the banks agreed to an additional
seasonal increase to $50,000,000 from May 10 through December 31, 1998. The
Company pays interest under the revolving credit 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. As of May 31, 1998,
the Company's rate was 30-day LIBOR plus 160 basis points.
Borrowings under the Company's revolving credit facility averaged $43.9 million
during the quarter ended May 31, 1998 and $38.8 million during the same quarter
of 1997. The maximum borrowings outstanding under the facility at any time
during the two quarters were $47.9 and $40.0, respectively. At May 31, 1998,
$47.9 was outstanding under the facility, compared to $39.1 at May 31, 1997.
Substantially all of the Company's assets serve as collateral for the revolving
bank facility.
The Company also has subordinated notes totaling $879,000 with three related
parties, with interest payable monthly at the prime rate quoted in The Wall
Street Journal. The notes are unsecured and are subordinate to the revolving
bank note.
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Capital Expenditures
Capital expenditures for leaseholds, equipment, furniture and fixtures were
$1,014,000 during the three months ended May 31, 1998, compared to $1,276,000
for the same period in the previous year. During the quarter the Company opened
one additional store in the metropolitan Richmond VA market. In June, the
Company opened stores in Atlanta GA, Lexington KY, and Johnson City TN. The
Company has existing commitments to open one additional store in the current
year and has two commitments towards the 8-10 planned openings for next year.
Disclosure Regarding Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information about their companies without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in the statement. Accordingly,
the Company hereby identifies the following important factors that could cause
the Company's actual financial results to differ materially from those projected
by the Company in forward-looking statements: (a) unexpected changes in the
marketing and pricing strategies of competitors; (b) adverse changes in the
political environments of countries providing raw materials for the jewelry
industry; (c) lack of available locations on terms acceptable to the Company;
(d) significant changes in interest rates; and (e) loss of key executives.
Impact of Inflation
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 factors during the periods reported herein.
Increases in labor and other costs must be recovered through operating
efficiencies and improved gross profits.
At this time, management knows of no other material events or uncertainties that
would cause the financial information contained herein not 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. Several plaintiffs
have brought a civil action 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. In May 1998, the Company received a preliminary approval
order for a settlement in this previously discussed action. In
anticipation of settling this action, the Company recorded a $700,000
charge during the fourth quarter of the fiscal year ended February 28,
1998. The final hearing on fairness was held July 2, 1998 and the order
was approved. The final order provided for, among other things, the
following: the payment of $486,000 to a settlement fund and the payment
of administrative fees that are expected to be no more than $135,000.
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.
July 11, 1998 /s/ James R. Rouse
------------- -----------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
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