Edgar Filing: REEDS JEWELERS INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549

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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, 2001
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 incorporation or (I.R.S. Employer Identification No.)
organization)

2525 SOUTH SEVENTEENTH STREET
WILMINGTON, NORTH CAROLINA 28401
(Address of principal executive offices) (Zip code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(910) 350-3100

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 13, 2001 was 8,476,372.

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, 2001.

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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

FEBRUARY 28 MAY 31 MAY 31
2001 2001 2000
------------ ------------ ------------
ASSETS (UNAUDITED) (UNAUDITED)

Current assets:
Cash and cash equivalents ............................... $ 685,000 $ 832,000 $ 666,000
Accounts receivable:
Customers, less allowance for doubtful accounts
of $4,262,000, $3,903,000 and $3,845,000 .............. 49,008,000 44,883,000 46,416,000
Other ................................................. 1,191,000 1,361,000 991,000
Merchandise inventories ................................. 48,552,000 53,401,000 54,777,000
Income taxes receivable ................................. 604,000 1,258,000 344,000
Deferred income taxes, net of valuation allowance of
$149,000, $138,000 and $144,000 ...................... 2,194,000 2,065,000 2,124,000
Other ................................................... 1,018,000 769,000 696,000
------------ ------------ ------------
Total current assets ............................... 103,252,000 104,569,000 106,014,000

Property, furniture and equipment:
Land and building ....................................... 83,000 83,000 83,000
Furniture and equipment ................................. 25,421,000 26,585,000 24,481,000
Leasehold improvements .................................. 12,336,000 12,524,000 11,747,000
------------ ------------ ------------
37,840,000 39,192,000 36,311,000
Less accumulated depreciation and amortization .......... 19,662,000 20,361,000 20,081,000
------------ ------------ ------------
Net property, furniture and equipment .............. 18,178,000 18,831,000 16,230,000

Other assets:
Goodwill, net of accumulated amortization of
$2,993,000, $3,104,000 and $2,658,000 ................. 5,403,000 5,291,000 5,737,000
Deferred income taxes, net of valuation allowance of
$13,000, $18,000 and $12,000 .......................... 195,000 275,000 178,000
Restricted investments (Note C) ......................... 2,580,000 2,514,000 --
Miscellaneous ........................................... 829,000 893,000 759,000
------------ ------------ ------------
9,007,000 8,973,000 6,674,000
------------ ------------ ------------
TOTAL ASSETS ............................................. $130,437,000 $132,373,000 $128,918,000
============ ============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 13,418,000 $ 18,441,000 $ 15,657,000
Accrued compensation .................................... 2,305,000 1,827,000 1,880,000
Accrued expenses ........................................ 2,348,000 2,331,000 3,107,000
Deferred revenue (Note D) ............................... -- -- 182,000
------------ ------------ ------------
Total current liabilities .......................... 18,071,000 22,599,000 20,826,000

Revolving credit note (Note E) ........................... 63,761,000 63,224,000 61,583,000
Subordinated notes payable to shareholders ............... 845,000 845,000 845,000
Deferred income taxes .................................... 2,517,000 2,212,000 1,148,000
Other long-term liabilities .............................. 211,000 212,000 213,000
------------ ------------ ------------
Total liabilities .................................. 85,405,000 89,092,000 84,615,000

Shareholders' equity:
Common stock, par value $0.10 per share;
25,000,000 shares authorized; 8,476,372 shares
issued and outstanding in 2001 and 2000 ............... 847,000 847,000 847,000
Additional paid-in capital ............................... 10,560,000 10,560,000 10,560,000
Retained earnings ........................................ 33,625,000 31,874,000 32,896,000
------------ ------------ ------------
Total shareholders' equity ........................ 45,032,000 43,281,000 44,303,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............... $130,437,000 $132,373,000 $128,918,000
============ ============ ============

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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

THREE MONTHS ENDED MAY 31
2001 2000
------------ ------------

Net sales ........................................ $ 21,293,000 $ 24,139,000
Cost of sales .................................... 10,883,000 11,726,000
------------ ------------
Gross profit ................................ 10,410,000 12,413,000
Selling, general and administrative expenses ..... 10,863,000 11,310,000
Depreciation and amortization .................... 1,014,000 960,000
------------ ------------
Operating (loss) earnings ................... (1,467,000) 143,000
Interest expense ................................. 1,108,000 1,138,000
------------ ------------
Loss before income taxes ......................... (2,575,000) (995,000)
Income tax benefit ............................... (824,000) (328,000)
------------ ------------
Net loss ......................................... $ (1,751,000) $ (667,000)
============ ============

Basic and diluted net loss per common share....... $ (0.21) $ (0.08)
============ ============

Weighted average shares outstanding - diluted..... 8,476,372 8,476,372
============ ============

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REEDS JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

THREE MONTHS ENDED MAY 31
2001 2000
----------- -----------

OPERATING ACTIVITIES
Net loss ..................................................... $(1,751,000) $ (667,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation ............................................. 882,000 830,000
Amortization ............................................. 132,000 130,000
Loss on sale of property, furniture and equipment ........ 12,000 42,000

Changes in operating assets and liabilities:
Accounts receivable ...................................... 3,955,000 1,904,000
Merchandise inventories .................................. (4,849,000) (8,524,000)
Other current assets and other assets .................... 231,000 (254,000)
Accounts payable ......................................... 5,023,000 2,802,000
Accrued compensation and expenses ........................ (495,000) (1,294,000)
Deferred revenue ......................................... -- (132,000)
Income taxes ............................................. (910,000) (2,232,000)
Other long-term liabilities .............................. 1,000 --
----------- -----------
Net cash provided by (used in) operating activities .......... 2,231,000 (7,395,000)

INVESTING ACTIVITIES
Purchases of property, furniture and equipment ............... (1,547,000) (2,058,000)
----------- -----------
Net cash used in investing activities ........................ (1,547,000) (2,058,000)

FINANCING ACTIVITIES
Net (payments on) proceeds from revolving credit note ........ (537,000) 9,224,000
----------- -----------
Net cash (used in) provided by financing activities .......... (537,000) 9,224,000
----------- -----------

Net increase (decrease) in cash and cash equivalents ......... 147,000 (229,000)
Cash and cash equivalents at beginning of period ............. 685,000 895,000
----------- -----------
Cash and cash equivalents at end of period ................... $ 832,000 $ 666,000
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................... $ 1,134,000 $ 1,046,000
=========== ===========
Income taxes ............................................... $ 10,000 $ 2,250,000
=========== ===========

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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 included in the
Company's Form 10-K for the fiscal year ended February 28, 2001.

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. RECLASSIFICATIONS

Certain reclassifications were made to the 2000 financial statements to conform
to the classifications used in 2001. The reclassifications had no effect on net
loss or shareholders' equity as previously reported.

C. RESTRICTED INVESTMENTS

05/31/01 5/31/00
---------- --------

Cash ............................................. $ 17,000 $ --
Held-to-maturity investments ..................... 2,437,000 --
Equity investment ................................ 60,000 --
---------- --------
Total restricted investments ................. $2,514,000 $ --
========== ========

Restricted investments in the accompanying balance sheet represent cash, bonds
and stock being held by the Company's subsidiary, First Retail Bank N.A., to
comply with the Federal Banking Regulations.

The held-to-maturity investments consist of Federal Home Loan Bank bonds that
mature in June 2001 and Atlanta Georgia Urban Housing bonds that mature in April
2019. These bonds are stated at amortized cost, as it is the intent of the
Company to hold these securities until maturity.

The Company's equity investment, carried at cost, consists of 1,200 shares of
Federal Reserve Bank stock with a $50 par value at May 31, 2001.

D. DEFERRED REVENUE

For the fiscal years ended prior to February 28, 1999, 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 were directly related to the
acquisition of these contracts were 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, were charged to expense as incurred.

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During the first quarter of the fiscal year ended February 28, 1999, the Company
stopped selling its own extended service contracts and began selling such
contracts on behalf of unrelated third parties only. As a result of this change,
the Company continued to recognize existing deferred revenues from previously
sold contracts through January 31, 2001 and now recognizes commission revenue
for the unrelated third-party extended warranty plans at the time of sale.
Previously deferred extended service contract revenue recognized for the
quarters ended May 31, 2001 and 2000 of $0 and $121,000, respectively, has been
reflected as a reduction of selling, general, and administrative expenses.

E. DEBT

In April 1999, the Company, its existing banks, and three additional banks
entered into an amended revolving credit agreement whereby the Company may
borrow up to $65,000,000 through June 30, 2002. Under this agreement, the
Company pays interest monthly at an interest rate ranging from the 30-day LIBOR
rate (3.96% at May 31, 2001) plus 200 basis points to 260 basis points or prime
(7.00% at May 31, 2001), depending upon the Company's debt-to-worth ratio. As of
June 1, 2001, the Company's rate was 30-day LIBOR plus 240 basis points. The
Company had $63,224,000 outstanding on this revolver at May 31, 2001, which is
classified as a long-term liability based on its expiration date. The revolving
credit agreement is collateralized by substantially all of the Company's assets.
The various loan agreements contain financial covenants including those that
limit dividend payments and additional borrowings and prohibit new store
openings if an event of default exists. The Company is in compliance with these
covenants, as amended or waived.

F. OPERATING SEGMENT INFORMATION

In accordance with SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," the Company reports two segments, retail operations and
credit operations. Separate financial information is produced internally and is
regularly reviewed by the chief operating decision-maker ("CODM"). The retail
operations segment consists of all store locations and corporate headquarters.
The stores have all been combined into one segment because they have similar
basic characteristics, such as the nature of products, and the class of
customers for their products. Corporate headquarters is included in this same
segment due to the fact that its revenues earned are incidental to the Company's
activities and it serves as a support system to the stores. The credit
operations segment is primarily engaged in providing and maintaining financing
for the Company's customers. This operation is segregated since the CODM
evaluates it separately. It also meets one of the three quantitative thresholds,
the asset test, since it represents 10.0% or more of the combined assets of all
operating segments.

The following table summarizes the net sales, revenues, operating earnings,
interest expense, assets, depreciation, and capital expenditures for each
reportable segment for the quarters ended May 31, 2001 and 2000. In the
financial statements, other revenues are reflected as a reduction of selling,
general, and administrative expenses and inter-segment revenue eliminates in
consolidation.

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RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
-----------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED MAY 31, 2001
-----------------------------------------------------------------------------------------------------

NET SALES .............................. $ 21,293,000 $ -- $ 21,293,000
OTHER REVENUES ......................... 394,000 3,429,000 3,823,000
INTER-SEGMENT REVENUE .................. -- 169,000 169,000
OPERATING (LOSS) EARNINGS .............. (3,080,000) 1,613,000 (1,467,000)
INTEREST EXPENSE ....................... 488,000 620,000 1,108,000
IDENTIFIABLE ASSETS .................... 84,375,000 47,998,000 132,373,000
DEPRECIATION AND AMORTIZATION .......... 980,000 34,000 1,014,000
CAPITAL EXPENDITURES ................... 1,547,000 -- 1,547,000
-----------------------------------------------------------------------------------------------------

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RETAIL CREDIT
OPERATIONS OPERATIONS TOTAL
----------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED MAY 31, 2000
----------------------------------------------------------------------------------------------------

Net Sales .............................. $ 24,139,000 $ -- $ 24,139,000
Other revenues ......................... 650,000 2,978,000 3,628,000
Inter-segment revenue .................. -- 219,000 219,000
Operating (loss) earnings .............. (1,309,000) 1,452,000 143,000
Interest expense ....................... 333,000 805,000 1,138,000
Identifiable assets .................... 81,955,000 46,963,000 128,918,000
Depreciation and amortization .......... 947,000 13,000 960,000
Capital expenditures ................... 2,026,000 32,000 2,058,000
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Net Sales

Net sales for the first quarter ended May 31, 2001 were down 11.8% to
$21,293,000 from $24,139,000 at the end of the first quarter last year. Same
store sales, or stores open in comparable periods, decreased 14.5% in the first
quarter this year. The lower sales resulted primarily from the general weakness
in consumer spending. During the first quarter of fiscal 2002, the Company
opened its first store in the state of Missouri in the city of Joplin. The
Company also opened stores in the Gaithersburg MD and Waldorf MD markets. At May
31, 2001, the Company operated 118 stores in 20 states compared to 112 stores in
17 states at May 31, 2000.

The sales of a retail jeweler depend upon having the right mixture of
merchandise available in its stores. Inventory items that have the most
favorable turnover and are the most profitable have been identified as core
inventory items. The Company averaged 92.0% in-stock on its core items during
first quarter fiscal 2002, compared to 92.2% last year; it averaged 88.7%
in-stock on its entire basic merchandise mix compared to 87.0% during the same
quarter a year ago. During the quarter ended May 31, 2001, core merchandise
accounted for 55.0% of net sales, 71.4% of the items offered in the Company's
basic merchandise mix, and 35.8% of its inventory investment. In the same
quarter last year, core merchandise accounted for 57.1% of net sales, 78.1% of
the items offered in the Company's basic merchandise mix, and 47.0% of its
inventory investment. In the first quarter of fiscal 2002 and 2001, the average
price of each piece of merchandise sold was $246 and $247, respectively.

Credit sales for the first quarter of fiscal 2002 accounted for 42.7% of net
sales compared to 46.9% a year earlier. Although the total transactions during
the quarter were down 9.9% compared to last year same quarter, the average
transaction size increased 3.9% for credit sales and 2.7% for cash sales.
Management believes that its proprietary financing program is a strategic
competitive strength and seeks to optimize its risk-reward ratio by financing up
to 55.0% of net sales.

Gross Profit

Gross margins were 48.9% of net sales for the first quarter this year, down from
51.4% for the first quarter last year. The decline resulted primarily from
increased promotional activity and a change in sales mix. A higher percentage of
the sales for the quarter ended May 31, 2001 were higher-priced, specialty items
that carry a lower gross profit.

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Selling, General, and Administrative Expenses (SG&A)

Selling, general, and administrative expenses as a percentage of net sales were
51.0% and 46.9% for the quarters ended May 31, 2001 and 2000, respectively.
Significant expense categories are reflected on a normalized basis for the first
quarters of the last two fiscal years in the following table:

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2002 2001
------ ------

Compensation - salaries & hourly wages ........... 25.3% 20.3%
Compensation - bonuses & commissions ............. 2.9% 3.8%
Compensation - benefits & other personnel costs .. 5.6% 5.7%
Rents for space .................................. 13.9% 11.4%
Advertising ...................................... 3.9% 5.3%
Bad debt ......................................... 5.2% 4.7%
Finance charges .................................. (11.2)% (9.3)%
Late charge income ............................... (3.4)% (1.4)%

------------------------------------------------------------------------------

Selling, general, and administrative expenses increased as a percentage of net
sales primarily because of lower sales this year compared to a year ago. Fixed
costs, on a per store basis, including occupancy, base compensation and benefits
increased 2% from the first quarter of the prior year. However, due to decreased
variable expenses relating to sales and the effort by management to control
other expenses, total SG&A expenses have decreased $447,000 or 4.0% over the
prior year.

Bad debt expense decreased to $1,109,000 from $1,141,000 although lower sales
caused it to be higher as a percentage of net sales - 5.2% for the quarter
compared to 4.7% a year earlier. Gross write-offs for bad debts were $1,780,000
versus $1,614,000 in the same quarter last year. Net write-offs, after recovery
of amounts previously written off, were $1,468,000 and $1,357,000 for the first
quarter of the current and prior fiscal year, respectively. The allowance for
doubtful accounts was 8.00% and 7.65% of gross customer receivables at the end
of the first fiscal quarter of 2002 and 2001, respectively. The average
delinquent account (accounts more than 90 days past due) represented 12.2% and
10.1% of the Company's accounts receivable portfolio for the first quarter of
fiscal 2002 and 2001, respectively. The Company's policies and procedures
regarding credit authorization, collection, and write-offs have not changed
significantly during each of the two periods. The average approval rate on
applications was 42.0% for the first quarter of the current year and 45.3% for
the first quarter last year.

In the first quarter of fiscal 1999 the Company began selling extended service
agreements on behalf of an unrelated third party versus selling them in-house.
The Company continued to recognize deferred revenue from extended service
agreements previously sold by the Company through January 31, 2001. The Company
now recognizes commission revenue for the unrelated third-party extended service
agreements at the time of sale. Previously deferred extended service agreements
revenue recognized for the quarters ended May 31, 2001 and 2000 of $0 and
$121,000, respectively, as well as commission revenues of $394,000 and $528,000
for the quarters ended May 31, 2001 and 2000, respectively, have been reflected
as a reduction of selling, general, and administrative expenses. Extended
service agreements equaled 1.8% and 2.7% of net sales during the quarters ended
May 31, 2001 and 2000, respectively.

Interest Expense

Interest expense decreased $30,000 or 2.6% over the prior year to $1,108,000 for
the quarter. The Company's effective pre-tax interest rate during the quarter
dropped to 6.8% from 7.8% for the same period in the previous year, however,
savings from the reduced interest rate were offset by an 11.3% increase in
average borrowings.

Income Taxes

The benefit for income taxes was $824,000 during the first quarter ended May 31,
2001, compared to a benefit of $328,000 for the same period a year earlier. The
Company's anticipated net effective tax rate was 32.0% and 33.0% in the first
quarters of fiscal 2002 and 2001, respectively.

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LIQUIDITY AND CAPITAL RESOURCES

The Company requires cash for purchasing inventory, opening new stores, making
leasehold improvements, enhancing technology, and acquiring equipment. Working
capital needs normally peak in the fall as the Company increases inventories to
meet anticipated demand during the Christmas selling season. Working capital
requirements will be financed by funds generated from operations and bank lines
described below. Cash provided by operations for the three months ending May 31,
2001 was $2,231,000 and cash used in operations was $7,395,000 for the three
months ending May 31, 2000.

The continuing weakness in net sales, lower accounts receivable because customer
payments are significantly exceeding new charge sales, and reduced inventory
levels for this time of year as purchases have been slowed in response to the
lower sales have had the effect of reducing the amount of borrowings the Company
can make under its revolving credit facility. As a result, the Company has
slowed payments to its suppliers.

The Company is presently negotiating for an increased revolving credit facility
with various lenders. If successful, the Company expects to enter into a 3-year
agreement within about 60 days for a revolving credit facility of $72.5 million.
However, there is no assurance that this agreement will be completed and the
inability to obtain this facility would have an adverse effect on the Company's
cash flows.

In addition, in order to reduce pressure on its cash flows, the Company has
reduced its plans for store expansion and capital expenditures until results
improve. The Company has also laid off about 2% of its staff, and continues to
review other options to relieve pressures on its cash flow.

Working Capital

Working capital decreased 3.8% at May 31, 2001 to $81,970,000 from $85,188,000
at May 31, 2000. The resulting ratio of current assets to current liabilities as
of May 31, 2001 was 4.6 to 1, compared to 5.1 to 1 at May 31, 2000. Capital
expenditures totaled $1,547,000 and $2,058,000 for the three months ended May
31, 2001 and 2000, respectively. The Company opened three stores during the
quarter ended May 31, 2001. Management plans to open 3-6 additional stores this
fiscal year.

Debt

Borrowings under the Company's revolving credit facility averaged $64.0 million
during the first quarter of fiscal 2002 and $57.4 million during the same
quarter a year ago. The maximum borrowings outstanding under the facility at any
time during each of the quarters were $65.0 million and $61.8 million,
respectively. The Company had $63,224,000 outstanding on this revolver at May
31, 2001, which is classified as a long-term liability based on its expiration
date. The revolving credit agreement is collateralized by substantially all of
the Company's assets. The various loan agreements contain financial covenants
including those that limit dividend payments and additional borrowings and
prohibit new store openings if an event of default exists. The Company is
currently in compliance with these covenants, as amended or waived. The Company
is presently negotiating for an increased revolving credit facility with various
lenders.

The Company also has subordinated notes totaling $845,000 with three related
parties, with interest payable monthly at the prime rate (7.00% at May 31, 2001)
quoted in The Wall Street Journal. The notes are unsecured and are subordinate
to the revolving bank note, which is collateralized by substantially all of the
Company's assets.

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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. Various
forward-looking statements have been made throughout this discussion, including
comments about:

(i) planned store openings;
(ii) goals for the mix of credit and cash sales; and
(iii) expected increase in approval rates on credit applications.

Accordingly, Reeds Jewelers, Inc. hereby identifies the following important
factors that could cause its actual financial results to differ materially from
those projected by the Company in forward-looking statements:

(i) availability of favorable locations on terms acceptable to the
Company;
(ii) unexpected changes in the marketing and pricing strategies of
competitors;
(iii) adverse changes in the political environments of countries
providing raw materials for the jewelry industry;
(iv) adverse changes in consumer spending or consumer
credit-worthiness;
(v) significant changes in interest rates; or
(vi) the loss of key executives.

IMPACT OF INFLATION

In management's opinion, changes in net sales and net earnings that have
resulted from inflation and changing prices have not been material during the
periods presented. There is no assurance, however, that inflation will not
materially affect Reeds Jewelers, Inc. in the future.

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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.

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.

Not applicable.

(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 13, 2001 /s/ James R. Rouse
------------------------
James R. Rouse
Treasurer and
Chief Financial Officer