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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 NOVEMBER 30, 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 January 12, 1999 was 8,476,372.
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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, November 30, November 30,
1998 1998 1997
------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 996,000 $ 46,000 $ 45,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $3,338,000, $3,369,000, and $3,040,000 40,291,000 40,676,000 36,695,000
Other 627,000 701,000 1,069,000
Merchandise inventories 36,466,000 49,559,000 45,323,000
Deferred income taxes 2,577,000 2,175,000 2,102,000
Other 582,000 1,659,000 911,000
------------ ------------ ------------
Total current assets 81,539,000 94,816,000 86,145,000
Property and equipment 28,055,000 30,016,000 28,755,000
Less: accumulated depreciation and amortization 16,351,000 17,717,000 16,541,000
------------ ------------ ------------
Net property and equipment 11,704,000 12,299,000 12,214,000
Goodwill, net of accumulated amortization of
$1,654,000, $1,989,000, and $1,543,000 6,741,000 6,407,000 6,853,000
Other 1,002,000 963,000 1,248,000
------------ ------------ ------------
Total other assets 7,743,000 7,370,000 8,101,000
------------ ------------ ------------
TOTAL ASSETS $100,986,000 $114,485,000 $106,460,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 9,369,000 $ 21,957,000 $ 15,590,000
Accrued expenses 5,312,000 4,825,000 5,238,000
Deferred revenue (Note D) 1,548,000 1,068,000 1,441,000
Income taxes 1,998,000 192,000 (277,000)
Current portion of long-term debt 62,000 2,872,000 2,674,000
------------ ------------ ------------
Total current liabilities 18,289,000 30,914,000 24,666,000
Revolving credit note 42,914,000 45,000,000 45,000,000
Long-term debt and subordinated notes payable 11,000 0 27,000
Subordinated notes payable to shareholders 879,000 845,000 879,000
Deferred income taxes 1,768,000 1,132,000 1,991,000
Deferred revenue (Note D) 1,222,000 473,000 1,039,000
------------ ------------ ------------
Total long-term liabilities 46,794,000 47,450,000 48,936,000
Common stock, par value $0.10 per share;
25,000,000 shares authorized; 8,449,752 shares
issued and outstanding at February 28, 1998;
8,464,272 shares issued and outstanding at
November 30, 1998; 4,224,876 shares issued
and outstanding at November 30, 1997 (Note B) 844,000 846,000 422,000
Additional paid-in capital (Note B) 10,503,000 10,541,000 10,925,000
Retained earnings 24,556,000 24,734,000 21,511,000
------------ ------------ ------------
Total shareholders' equity 35,903,000 36,121,000 32,858,000
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $100,986,000 $114,485,000 $106,460,000
============ ============ ============
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended November 30; Nine months ended November 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues:
Net sales $24,339,000 $23,087,000 $65,822,000 $63,165,000
Other (principally finance charges) 3,424,000 2,760,000 10,240,000 8,538,000
----------- ----------- ----------- -----------
Total revenues 27,763,000 25,847,000 76,062,000 71,703,000
Costs and expenses:
Cost of sales (including occupancy costs) 15,768,000 15,300,000 42,827,000 41,509,000
Selling, general, and administrative 9,788,000 8,444,000 27,414,000 25,208,000
Bad debt 1,167,000 1,053,000 2,882,000 2,743,000
Interest 904,000 929,000 2,673,000 2,647,000
----------- ----------- ----------- -----------
Total costs and expenses 27,627,000 25,726,000 75,796,000 72,107,000
----------- ----------- ----------- -----------
Earnings before income taxes and
extraordinary item 136,000 121,000 266,000 (404,000)
Income taxes 45,000 40,000 88,000 (126,000)
----------- ----------- ----------- -----------
Net earnings before
extraordinary item 91,000 81,000 178,000 (278,000)
Extraordinary item - loss on early
extinguishment of debt, net of
income tax benefit of $ 40,000 (59,000)
----------- ----------- ----------- -----------
Net earnings $ 91,000 $ 81,000 $ 178,000 $ (337,000)
=========== =========== =========== ===========
Earnings per share
Basic and diluted earnings per share
before extraordinary item $ 0.01 $ 0.01 $ 0.02 $ (0.03)
Extraordinary item - loss on early
extinguishment of debt (0.01)
----------- ----------- ----------- ------------
Basic and diluted earnings per share $ 0.01 $ 0.01 $ 0.02 $ (0.04)
=========== =========== =========== ============
Weighted average shares
outstanding (Note B) 8,464,272 8,449,752 8,457,522 8,449,752
=========== =========== =========== ============
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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended November 30,
1998 1997
------------ -----------
Cash flows from operating activities:
Net earnings $ 178,000 $ (337,000)
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,623,000 2,385,000
Provision for loss on accounts receivable 2,882,000 2,743,000
(Gain) loss on sale of property and equipment 5,000 (108,000)
Changes in assets and liabilities:
Accounts receivable (3,341,000) (1,841,000)
Merchandise inventories (13,093,000) (9,234,000)
Other assets (1,064,000) (731,000)
Trade payables 12,626,000 4,152,000
Accrued expenses (487,000) 872,000
Deferred revenue (1,229,000) (56,000)
Income taxes (2,040,000) (1,964,000)
------------ -----------
Net cash used in operating activities (2,940,000) (4,119,000)
Cash flows from investing activities:
Proceeds from sale of property and equipment 0 20,000
Capital expenditures (2,901,000) (3,077,000)
------------ -----------
Net cash used in investing activities (2,901,000) (3,057,000)
Cash flows from financing activities:
Proceeds from revolving credit note 4,932,000 9,501,000
Principal payments on debt (47,000) (2,976,000)
Proceeds from exercise of options on common stock 6,000 0
------------ -----------
Net cash provided by financing activities 4,891,000 6,525,000
------------ -----------
Net change in cash (950,000) (651,000)
Cash, beginning of period 996,000 696,000
------------ -----------
Cash, end of period $ 46,000 $ 45,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,632,000 $ 2,707,000
============ ===========
Income taxes $ 1,895,000 $ 1,858,000
============ ===========
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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
Weighted average shares and per share amounts have been adjusted for the
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 REVENUES
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 January 31, 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 CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Sales
Net sales of $24,339,000 for the quarter ending November 30, 1998 were up 5.4%
over the same quarter in 1997. Comparable store sales of 9.2% in September, 3.2%
in October, and 0.6% in November resulted in a 2.4% same-store increase for the
third quarter. Total transactions were down 2.5%, and comparable store
transactions were 0.9% lower than the same quarter last year. As a result the
average sale per transaction increased 8.1% over the same period last year. For
the nine-month period, net sales increased 4.2% to $65,822,000, same store sales
rose 2.7%, total transactions were down 3.0%, and the average sales per
transaction increased 7.4%.
The Company averaged 97.2% in-stock on its key and core items during the third
quarter this year, up 54 basis points from last year same quarter. The Company
averaged 83.5% in-stock on its entire basic merchandise mix compared to 89.8%
during the third quarter last year. Key and core merchandise accounted for 52.8%
of net sales, 57.1% of the items in the Company's basic merchandise mix, and
32.1% of its inventory investment. During the third quarter of last year, key
and core merchandise accounted for 63.9% of net sales, 74.7% of the items in the
Company's basic merchandise mix, and 45.8% of its inventory investment.
Sales on the Company's proprietary credit card were up 4.7% and cash sales rose
6.2%. Credit sales accounted for 50.9% of total net sales, compared to 51.3%
during the third quarter of last year. The average credit sale during the third
quarter was 2.8% higher than the same time last year. The average credit sale
was also 4.7 times the size of the average cash sale, compared to 5.0 times a
year ago, the primary reason for the difference in the average cash and credit
sale is the large number of cash repair sales that yield a lower price per
transaction. The Company's credit marketing efforts resulted in 5.1% more
applications being obtained and 12.9% more new accounts being opened during the
third quarter this year compared to last year. For the nine-month period ending
November 30, 1998, the Company's credit card sales were up 2.6% and cash sales
were up 5.8%. Year to date credit sales accounted for 49.8% of total net sales.
The average credit sale for the current year was 5.8% higher than the same
period a year ago, and was 4.8 times the size of the average cash sale. Year to
date the Company has obtained 10.4% more credit applications and has approved
12.5% more than the same nine-month period a year ago.
Gross Profit
Gross profit increased 10.1% to $8,571,000 from $7,787,000; the resulting gross
margins increased to 35.2% from 33.7%. Excluding occupancy costs, gross profit
was up 8.9% and gross margins were 161 basis points higher. Sales of gold and
semi-precious color, the Company's highest margin category, fell 10.4%. Sales of
watches, the Company's lowest margin category, rose 7.3%. Sales of diamonds, the
Company's largest category, rose 9.9%. Year to date, gross profit increased
6.2%, and gross margins were 66 basis points higher compared to same time last
year.
Selling, General, and Administrative Expenses (SG&A)
Selling, general, and administrative costs increased 15.9% to $9,788,000 from
$8,444,000 in the current quarter over the same quarter a year ago. Advertising
increased 42.8%, and salaries and commissions increased 11.6% over the same
quarter last year. For the nine-month period ending November 30, 1998, selling,
general, and administrative cost increased 8.8% over the same period a year ago.
Year to date, advertising increased 5.7%, salaries increased 6.2%, and
commissions increased 11.7% over the same time a year ago. The dollar increases
are due primarily to the opening of five new stores this year, but as a
percentage of sales, these expenses reflect little change. Advertising
represented 4.3% of net sales both
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years, salaries represented 18.5% of net sales this year compared to 18.1% a
year ago, and commissions represented 3.3% of net sales this year compared to
3.1% a year ago.
Bad Debt Expense
Bad debt increased 10.8% to $1,167,000 from $1,053,000 and rose to 4.8% of net
sales for the quarter compared to 4.6% a year earlier. Gross write-offs for bad
debts increased 1.3%, and net write-offs, after recovery of amounts previously
written off, increased 3.4%. For the nine-month period ending November 30, 1998,
the expense was 5.1% higher than a year earlier, representing 4.4% of net sales.
Other Revenues
Other revenues in the third quarter increased 24.1% over last year to
$3,424,000. Finance charges represented 54.6% of other revenues, extended
service agreements were 20.9%, credit insurance income was 7.9%, and late fee
income was 8.3%. Year-to-date, other revenues increased 19.9% over the same
period a year earlier.
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 January 31,
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 third quarter of this year was an additional $375,000 increase in other
revenues.
Interest Expense
Interest expense fell $25,000 from last year to $904,000 from $929,000. Year to
date interest expense has increased $26,000 over the same period a year ago.
Average borrowings were 1.0% lower than during the third quarter of last year.
The Company's effective interest rate during the current quarter was 7.25%
compared to 7.38% a year ago.
The Company's anticipated tax rate was 33% in the third quarter of both years.
The Company earned $91,000 in the quarter ended November 30, 1998 compared to
$81,000 in the previous year. On a basic and diluted basis, the Company earned
$0.01 per share in both the third quarters of 1998 and 1997. For the nine-month
period ending November 30, 1998, the Company earned $178,000 ($0.02 per share)
compared to a loss of $337,000 ($0.04 loss per share) for the same period last
year.
The Company generally follows the practice of passing on price changes to its
customers. As a result, management believes inflationary or deflationary forces
have not materially affected its operations during the periods reported herein.
Year 2000
The Company has completed 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 have been modified, where necessary, and that
the Year 2000 does not pose a material operational issue or expense for the
Company. The Company upgraded its primary accounting software a year ago, and
since the upgrade was already Y2K compliant, no extra costs were incurred to
prepare for the Year 2000. The Company will test all software packages before
fiscal year end February 28, 1999 to ensure compliance with Year 2000.
Discussions with the Company's external suppliers have been taking place with
respect to their products and services and the Company does not foresee any
material problems with any of the third party service providers.
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Liquidity and Capital Resources
Working Capital
Working capital increased 3.9% to $63,902,000 at November 30, 1998 from
$61,479,000 at November 30, 1997. The resulting ratio of current assets to
current liabilities as of November 30, 1998 was 3.1 to 1, compared to 3.5 to 1
at the same date in the prior year. Current liabilities increased 25.3%; and
current assets increased 10.1% over the same period last year.
Customer receivables, net of allowance for doubtful accounts, were $40,676,000
and $36,695,000 at November 30, 1998 and 1997, respectively. The 10.8% increase
resulted from 50.9% of total net sales being done on the Company's proprietary
credit card and related finance charges and credit insurance fees. Contractual
delinquency as a percent of the portfolio at the end of the quarter was 7.1%
lower than at November 30, 1997, representing 9.1% of the portfolio compared to
9.8%. In calculating delinquency, the Company considers the entire balance of an
amount to be delinquent when an account becomes three payments behind. Credit
extension and collection policies and criteria remained consistent during both
years.
Merchandise inventories at the end of the third quarter of 1998 were 9.3% higher
than a year earlier -- $49,559,000 compared to $45,323,000. The investment in
inventories on a per store basis was up 5.3% from a year earlier. In addition to
owned inventories, the Company's offerings included an additional 29.8% or
$14,744,000 in consigned inventories at November 30, 1998 and an additional
31.9%, or $14,453,000 at November 30, 1997.
Debt
On December 21, 1995 the Company entered into a revolving credit agreement with
two commercial banks whereby the Company could borrow based on specific
percentages of eligible inventory and accounts receivable. In June 1997, the
Company increased its revolving credit facility to $45,000,000 from $40,000,000
and extended its expiration to July 31, 2000, and in May 1998, the Company and
the banks agreed to an additional seasonal increase of $5,000,000; covenants and
other terms remained unchanged. The seasonal increase to $50,000,000 is 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 November 30, 1998, the Company's rate was 30-day
LIBOR plus 170 basis points.
Borrowings under the Company's revolving credit facility averaged $49.1 million
during the quarter ended November 30, 1998 and $48.4 million during the same
quarter of 1997. The maximum borrowings outstanding under the facility at any
time during the two quarters were $50.0 and $49.4, respectively. At November 30,
1998, $47.8 was outstanding under the facility, compared to $47.6 at November
30, 1997. Substantially all of the Company's assets serve as collateral for the
revolving bank facility.
The Company also has subordinated noted totaling $845,000 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.
Capital Expenditures
Capital expenditures for the Company were $2,901,000 during the nine months
ended November 30, 1998, compared to $3,077,000 for the same period in 1997. At
November 30, 1998, the Company operated 107 stores, compared to 103 at the same
time in the previous year. The Company purchased four
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stores in Iowa and opened one new store in Augusta, GA during the third quarter.
The Company has five existing commitments towards its planned openings for the
next year.
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.
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.
EX-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 12, 1999 /s/ James R. Rouse
---------------------- -----------------------------
James R. Rouse
Treasurer and
Chief Financial Officer
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