ITEM 1. BUSINESS
GENERAL
Since its inception in 1977, OroAmerica, Inc. ("OroAmerica" or the "Company") has grown to become the largest manufacturer and distributor of karat gold jewelry in the United States. The Company offers its customers a large selection of jewelry styles, consistent product quality, and prompt delivery of product orders, and provides a wide range of specialized services. The Company's customers include mass merchandisers, discount stores, home shopping networks, catalog showrooms, warehouse clubs, and jewelry wholesalers and distributors. In fiscal 2001, sales were made to approximately 2,600 customers, and sales to the Company's ten largest customers accounted for approximately 58.4% of net sales.
OroAmerica's principal product line is an extensive selection of 14-karat gold chains that are offered in a variety of popular styles, gauges, and lengths. The Company also offers its customers a wide assortment of 14-karat gold charms, earrings, rings, and bracelets and a line of 10-karat gold jewelry that includes both chain and non-chain products. Although OroAmerica intends to continue to aggressively market its karat gold chain product lines, it also intends to continue its strategy of attempting to increase its sales of non-chain karat gold products by regularly introducing new styles and building upon relationships with existing customers. The Company also has a line of sterling silver jewelry and, since May 1994, has designed, manufactured, and distributed karat gold jewelry accented with diamonds and colored gemstones.
The Company operates a manufacturing plant at its Burbank, California, facilities where it makes a substantial portion of its products from semi-finished materials, gold bullion, and other raw materials. The Company also has three other manufacturing plants at which the Company manufactures rope chain and other karat gold jewelry products. These plants are located in South America and the Caribbean. The Company believes that its manufacturing capabilities better enable it to respond to customer requests for customized products, provide it with greater flexibility, and complement its outside sources of supply. The Company's manufacturing expertise and experience also enable it to better support and monitor the operations of its outside suppliers.
JEWELRY PRODUCTS
The Company seeks to provide its customers with a full line of high quality karat gold jewelry products that incorporate traditional styles and designs. While the Company regularly updates its product lines and offers new products, it seeks to avoid designs incorporating fashion trends which are expected to have short life cycles. The Company currently offers over 2,000 styles of gold chains, charms, earrings, bracelets, and rings and over 1,000 styles of sterling silver chains, charms, earrings, bracelets, and rings. Together these styles represent in total approximately 18,000 SKU's. The Company's products are moderately priced, with the majority of its gold products retailing at prices between $30 and $200 and a majority of its sterling silver products retailing at prices between $10 and $30. The Company's products are intended to appeal to consumers who are value-conscious as well as fashion-conscious.
The Company's principal product line consists of an extensive selection of 14-karat gold rope and flat chains. Rope chains, as their name implies, have a woven, rope-like appearance and typically are handmade. Flat chains are made by specialized machinery, which hammers the chain into various patterns. The Company's other jewelry products include 14 karat gold charms, earrings, bracelets and rings, 14 karat gold jewelry set or accented with diamonds and colored gemstones, a line of 10 karat gold jewelry which includes both chain and non-chain products, and sterling silver jewelry. A major portion of the Company's jewelry is finished using the diamond-cut process, a technique which etches the surface of the jewelry to create a brilliant, faceted appearance. The Company believes it was one of the first manufacturers to utilize the diamond-cut process in the production of rope chains.
The following table shows sales by product category as a percentage of total net sales of karat gold and sterling silver products for fiscal 2001, 2000, and 1999.
- ------------------------------------------------ (1) Includes both chain and non-chain products
The Company maintains a staff of designers at its Burbank facilities who work directly with the Company's senior officers and marketing personnel to create and develop new products meeting the needs and desires of the Company's customers. In addition, the Company works closely with major customers to develop products that are sold exclusively by those customers.
The Company's product line includes approximately 1,000 products that are a permanent part of its jewelry line. These products are traditionally designed karat gold chains and other jewelry products for which there has been consistent demand. The Company continually strives to update the balance of its product line with innovative, new styles. New styles are primarily introduced two times each year in connection with major trade shows and replace older styles whose performance has declined. However, the Company routinely shows new products to customers throughout the year. The Company closely monitors sales of its new styles and promptly discontinues any styles which fail to achieve desired sales levels.
The Company seeks to obtain proprietary protection for its products whenever possible. The Company generally applies for copyrights covering the design of its charms and other selected products. During fiscal 2001, sales of products manufactured or marketed pursuant to patents, license agreements, copyrights and trademarks accounted for approximately 50.5% of the Company's net sales. See "Patents and Trademarks" below.
SALES AND MARKETING
The Company's jewelry sales and marketing operations are divided into retail and wholesale divisions, with the retail division accounting for approximately 85% of the Company's total net sales. The marketing efforts of the Company's retail division are directed towards large retailers, such as mass merchandisers and discount stores, catalog showrooms, national and regional jewelry chains, home shopping networks, warehouse clubs, and department stores. The wholesale division markets to jewelry wholesalers and distributors. The Company's marketing efforts emphasize maintaining and building upon the Company's relationships with existing customers.
Providing exceptional customer service is an essential element of the Company's marketing program. The Company maintains an extensive inventory of finished goods which, when coupled with its manufacturing capabilities, enables it to rapidly fill customer orders. The Company's marketing efforts emphasize its ability to fill orders promptly and reliably.
In addition to prompt and reliable order fulfillment, the Company offers a wide variety of customized customer support services designed to meet the individual needs of its customers. For many of the Company's retail customers, the Company prepackages, price tags, and bar codes individual pieces of jewelry, and then ships an assortment of many prepackaged items to individual retail locations. Other services provided to retail customers include advertising and merchandising support, point-of-sale displays, and training for sales employees. The Company also is able to provide to its customers computer-generated reports analyzing the customers' sales and information regarding market trends.
In order to fill customer orders more quickly and efficiently, the Company uses an Electronic Data Interchange ("EDI") program with certain retail customers. Under this program, the Company electronically receives purchase orders from participating customers
and electronically transmits to the customer order acknowledgements, invoices, and advance shipping notices. Certain large retailers require their vendors to utilize EDI programs. During fiscal 2001, approximately 62% of the Company's net sales were made pursuant to orders received through the EDI program.
Marketing of the Company's products is conducted primarily from the Company's Burbank offices through its direct sales force, which includes sales personnel and customer service representatives. In addition, the Company maintains a showroom in New York City and a sales office in the Jewelry Mart area of Los Angeles, which serves small, wholesale customers. The Company also uses independent sales representatives who market to retail customers and are compensated on a commission basis. The Company's products are promoted through the use of product catalogs and brochures, advertisements in trade publications, trade show exhibitions, and promotional events with retailers. The Company does not advertise its products directly to consumers.
Prices are based in large part on the price of gold. Prices charged to individual customers may vary based on the services required by the customer. The Company protects itself from fluctuations in the price of gold between order dates and dates of sale by maintaining forward contracts for the purchase of gold in amounts and for periods of time that approximately correspond to the Company's obligations under such orders. If the market price of gold increases between the order date and the date of sale, the Company is able to offset the increase in the cost of the gold included in the products shipped to the customer by the gain resulting from the liquidation of its position under the related forward contracts. To the extent the Company does not maintain appropriate forward contracts, the Company is exposed to the costs associated with a subsequent increase in the price of gold. The Company also protects itself from fluctuations in the price of gold through consignment arrangements. See "Gold Consignment Arrangements".
The Company accepts returns of products with defects in materials or workmanship. Returns of products which are not defective generally are made as part of stock balancing transactions in which the returned products are replaced with products better suited to the customer's needs. In addition, the Company also makes sales on a consignment basis. In these consignment transactions, products are delivered to customers for more than 30 days under terms which permit the customer to defer paying for the products until they are sold to its customers. For further information regarding product returns, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - General".
The Company sold products to approximately 2,600 customers in fiscal 2001. Sales to the Company's ten largest customers accounted for approximately 58.4% of net sales, and sales to the Company's 50 largest customers accounted for approximately 85.6% of net sales. During fiscal 2001, sales to Wal-Mart accounted for approximately 20.2% of net sales. No other customer accounted for more than 10% of net sales. The Company has no long-term contractual relationships with any of its customers.
MANUFACTURING AND PURCHASING
The Company's products are acquired through three sources: (1) products manufactured by the Company from gold bullion and other raw materials; (2) products completed by the Company from materials ("semi-finished materials") partially fabricated by outside manufacturers; and (3) products purchased as finished goods. During fiscal 2001, the Company manufactured approximately 59% of its products from semi-finished materials and from gold bullion and other raw materials and purchased approximately 41% of its products as finished goods. The principal products manufactured by the Company from raw materials are cast jewelry, such as charms, rings, earrings and bracelets, and certain styles of rope chain. Semi-finished materials primarily consist of spools of rope chain in which the individual links have been woven and soldered by hand by outside manufacturers and at offshore manufacturing facilities operated by the Company.
The Company performs the following manufacturing operations at its Burbank facilities: combining pure gold with other metals to produce karat gold; manufacturing cast jewelry; fabricating links used in the manufacture of the Company's rope chains; manufacturing certain styles of rope chain through the use of specialized machinery; and
finishing operations such as cutting chains to the desired length, attaching clasps, cleaning, polishing, and diamond cutting. The Company believes that its manufacturing capabilities better enable it to respond to requests for customized products, provide it with greater flexibility, and complement its outside sources of supply. The Company also believes that the expertise derived from its manufacturing operations better enables it to support and monitor the activities of its outside manufacturers.
As part of its manufacturing operations, the Company also completes the fabrication of semi-finished jewelry items, principally handmade rope chain. While the Company uses machinery to manufacture certain styles of rope chain, the individual links in most of the Company's rope chain styles are woven by hand to form gold chains. Because this process is highly labor intensive, the Company typically uses manufacturers located in countries with lower labor costs to perform the required weaving and soldering, both with links fabricated by the Company and with links fabricated by the outside manufacturers from gold supplied, in most instances, by the Company. The principal manufacturers currently employed by the Company are located in South America. After the hand soldering operations have been completed, the chains are returned to the Company for finishing. Finishing operations performed by the Company include diamond cutting, cutting the chain to the desired length, soldering a clasp to the chain and tumbling, polishing and cleaning the finished products.
The Company maintains a close working relationship with, and provides ongoing technical support to, the outside manufacturers who participate in the production of its rope chains. For further information regarding the Company's use of outside manufacturers, including certain risks associated therewith, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - General".
In order to reduce OroAmerica's reliance on outside manufacturers of its rope chain products, the Company manufactures rope chain at two facilities operated by the Company in South America and one facility in the Caribbean. In fiscal 2001, production from these facilities accounted for approximately 51% of the rope chain products sold by the Company. While the Company anticipates that its overseas manufacturing facilities will reduce its use of outside manufacturers for the production of rope chain products, the Company does not intend to consolidate the production of rope chain products at Company-operated facilities. Instead, the Company anticipates that it will continue to rely on the services of independent outside manufacturers for the production of a substantial portion of its rope chain products.
In addition to products manufactured from gold bullion and semi-finished materials, the Company purchases finished products from suppliers located principally in Europe and the United States. The principal items purchased by the Company are machine-made flat chains. Other items purchased as finished goods include rings, bracelets, earrings, and charms. Jewelry purchased by the Company frequently is manufactured under an arrangement whereby the Company supplies all necessary gold bullion and pays a manufacturing charge and applicable duties at the time of delivery.
During fiscal 2001, the Company purchased gold products from approximately 140 suppliers. The largest outside supplier accounted for approximately 14.2% of the Company's total purchases, and the ten largest outside suppliers accounted for approximately 57.5% of total purchases. Although a substantial portion of the Company's purchases are concentrated with a relatively small number of suppliers, the Company believes the loss of any supplier would not have a material adverse effect on its business. Alternative sources of supply for the finished goods purchased by the Company are readily available. During recent years, the Company has increased its outside manufacturing sources and believes it could shift production to other manufacturers currently providing services to it and that other sources of supply would be available if the Company were to lose the services of any of these outside manufacturers. The Company also believes that the establishment of its own overseas manufacturing facilities for the production of rope chain products has served to lessen its reliance on the services provided by independent outside manufacturers. The Company has no long-term contractual relationships with any of its suppliers.
GOLD CONSIGNMENT ARRANGEMENTS
Gold used by the Company in the manufacturing process (including gold supplied by the Company to its outside manufacturers) is typically acquired through consignment
arrangements with various banks and bullion dealers. The cost to the Company of the consignment program is substantially less than the costs that would be incurred if the Company were to finance the purchase of all of its gold requirements at the commencement of the production process with borrowings under its revolving credit facility or other credit arrangements. The consignment program allows the Company to maintain high inventory levels at a relatively low cost, thereby enabling it to respond more promptly to customer demand.
The Company currently has in place agreements with several institutions that consign gold to the Company. Title to consigned gold, including consigned gold incorporated into finished products, remains with the consigning institution until the Company purchases the gold. This substantially insulates the Company from the risk of gold price fluctuation; however, during the period of consignment, the entire risk of loss or damage to the gold is borne by the Company.
Under the consignment arrangements, the Company may defer the purchase of gold used in the manufacturing process and held in inventory until the time of sale of finished products to customers. Financing costs under the consignment arrangements currently are approximately 3% per annum of the market value of the gold held under consignment, computed daily. At the time of sale, the Company purchases the gold included in the finished products at current market prices. Alternatively, the Company may "replace" the consigned gold with gold purchased from another institution. The Company generally eliminates the risk of market fluctuations in the price of the consigned gold by either using the price it pays for the gold to determine the prices it charges to its customers for finished products incorporating the consigned gold or by maintaining appropriate forward contracts for the purchase of gold which protect the Company against fluctuations in the price of gold between the order date and the date of sale. See "Sales and Marketing".
In addition to gold acquired through the consignment arrangements, the Company purchases gold from financial institutions in the form of gold bullion and from outside manufacturers and vendors in the form of semi-finished materials and finished goods. During fiscal 2001, the Company satisfied approximately 74% of its gold requirements through purchases under the consignment program and purchased the remaining 26% of its gold requirements from manufacturers and vendors. The value of the gold purchased by the Company and held in inventory, as well as the value of the gold included in returned merchandise and other gold owned by the Company, is subject to fluctuation based on changes in the market value of gold. The Company does not engage in hedging transactions to protect against fluctuations in the market value of the gold owned by it.
The Company's consignment agreements include provisions which generally limit both the fair market value and amount (by weight) of gold which the Company may hold under consignment. Based on the value of gold on March 2, 2001, the Company currently is able to hold an aggregate of approximately 335,000 ounces of gold under consignment; the actual amount of gold held by the Company under consignment on that date was approximately 191,200 ounces. The amount of gold, which the Company is able to acquire under consignment is subject to fluctuations based on changes in the market value of gold. The consignment agreements contain covenants restricting the amount of consigned gold the Company may re-consign or otherwise have outside of its possession.
The Company's consignment arrangements generally are terminable upon 30 days advance notice to the Company. Gold consignment arrangements are common in the jewelry industry, and the Company historically has not experienced any difficulties in obtaining sufficient quantities of consigned gold to meet its operating needs. If one or more institutions were to terminate the consignment arrangements, the Company believes that it would not experience any interruption in its gold supply that would materially adversely affect its business, as it believes that a number of other institutions would be willing to enter into similar arrangements. In addition, if the Company's requirements for consigned gold were to increase, the Company believes that appropriate modifications could be made to its existing arrangements or consignment arrangements could be entered into with additional institutions, so that the amount of gold available to the Company on consignment would be increased to meet its operating needs. Nevertheless, there can be no assurance that fluctuations in the credit or precious metals markets would not result in an interruption of the Company's gold supply or the contractual arrangements necessary to allow the Company to continue the use of consigned gold.
For further information regarding the consignment agreements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources".
BACKLOG
Substantially all of the Company's wholesale customers' orders are for immediate shipment and typically are shipped within two to four days of receipt. Orders from retailers typically have shipment dates which range from 24 hours to 90 days. The approximate aggregate dollar value of the Company's backlog at April 6, 2001 and April 7, 2000, was $6.8 million and $6.3 million, respectively. The Company expects that substantially all of the current backlog will be shipped during the next 90 days. Annual comparisons of backlog as of any given date are not necessarily indicative of sales trends, and the Company believes that backlog is not indicative of the Company's future results of operations.
COMPETITION
The jewelry industry in the United States is highly fragmented and characterized by a large number of small to medium-sized manufacturers, wholesalers, and distributors. The Company's business is highly competitive, and the Company's competitors include domestic and foreign jewelry manufacturers, wholesalers and importers who may operate on a national, regional or local level. Based upon its knowledge of the domestic jewelry industry and a review of available information, the Company believes that it is the largest manufacturer and distributor of karat gold jewelry in the United States and that its resources generally are equal to or greater than the resources of most of its competitors. However, some companies in the jewelry industry may be larger and have greater financial and other resources than the Company.
OroAmerica believes that competition is based primarily on product availability, timeliness of shipment, customer service, product quality, design, and price. The diverse distribution channels in which the Company markets its products frequently involve different competitive factors. The ability to provide customized special services is a particularly important competitive factor in sales to certain large retailers such as mass merchandisers, discount stores, and warehouse clubs. The Company dedicates substantial resources to meeting such customer requirements, which are subject to change on short notice. Product availability and the ability to offer consistent product quality at competitive prices tend to be the key competitive factors in sales to catalog showrooms and wholesale customers. Some of the Company's competitors may specialize in sales to particular distribution channels and may have relationships with customers in those distribution channels that make competition by the Company more difficult. The Company believes that recent consolidations at the retail level in the jewelry industry have increased the level of competition in the markets in which the Company competes.
INSURANCE
The Company maintains primary all-risk insurance to cover thefts and damage to inventory and insurance on all goods in transit. Additional insurance coverage is provided by some of the Company's suppliers. The Company also maintains limited fidelity insurance which provides coverage against theft or embezzlement by employees of the Company or its suppliers.
PATENTS AND TRADEMARKS
The Company manufactures two lines of diamond cut rope chain using processes covered by United States utility patents and manufactures a line of diamond cut rope chain under the terms of a license agreement with an unaffiliated party. The Company generally applies for copyrights for the designs of its charms and other selected products. In addition, the Company maintains and regularly seeks to register trademark applications for marks that it uses or intends to use on or in connection with certain of its selected jewelry products. The level of protection available to the Company for proprietary products, processes,
designs, and trademarks varies depending on a number of factors, including the degree of originality and the distinctiveness of these intellectual properties. No assurance can be given that the Company's patents, copyrights, trademarks, and other proprietary rights will preclude competitors from developing substantially equivalent products. See "Jewelry Products."
EMPLOYEES
At March 2, 2001, the Company employed 392 persons in the United States, of whom 204 were engaged in jewelry manufacturing and distribution operations, 130 were engaged in jewelry marketing, customer service, and merchandising, and 58 were engaged in management and administration. At that date, the Company also employed 549 persons at its manufacturing facilities in South America and the Caribbean. None of the Company's employees are covered by a collective bargaining agreement, and the Company considers its relations with its employees to be good.
ENVIRONMENTAL MATTERS
The Company's jewelry manufacturing operations routinely involve the use of small quantities of materials that are classified as hazardous. The Company believes that its use of such materials is in compliance in all material respects with applicable federal, state, and local laws and regulations concerning the environment and health and safety. The costs incurred by the Company in complying with such laws and regulations have not been material to the Company's results of operations.
The Company's Burbank facility is located in an area of the San Fernando Valley which is either included in, or adjacent to, an extensive area of groundwater contamination known as the San Fernando Valley Superfund Site (the "Site"). In 1986, the United States Environmental Protection Agency (the "EPA") included portions of the Site on the National Priorities List as "Superfund Sites" pursuant to the provisions of the Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"). The Company is not a party to any litigation involving the Site, has not been identified by the EPA as a potentially responsible party under CERCLA and does not believe that it has contributed to the existing groundwater contamination at the Site. Nevertheless, given the location of the Company's manufacturing facility and the fact that the Company's operations involve the use of small quantities of hazardous materials, no assurances can be given that the Company will not be named as a party to litigation, or as a potentially responsible party, with respect to the Site.
CIGAR BUSINESS
In April 1997, the Company launched its premium cigar business through its wholly owned subsidiary, CigarAmerica, Inc. The Company manufactured, distributed, and sold two core brands of cigars, including a line of premium cigars which retailed at prices between $3.00 and $10.00 per cigar and a line of super-premium cigars which retailed at prices of $20.00 and up per cigar. Both brands were sold to the mass market through wholesale distributors, tobacconists, and upscale stores.
In order to promote the Company's super premium cigars, the Company leased a 1,300 square foot store on Rodeo Drive in Beverly Hills, California, where the Company operated a flagship cigar store. The store sold the Company's own brand of super premium cigars, as well as cigars manufactured by other companies. In June 1999, the Company closed its flagship Cigar store and wrote off approximately $585,000 of leasehold improvements and other property in connection with this closure. The Company has subleased the store to an unrelated third party through May 2002, the duration of the original lease.
The Company also had a number of disputes with its former Indonesian partner in its cigar business. In connection with this dispute, the Company was denied access to its Indonesian tobacco inventories, which approximated $1.4 million at October 29, 1999. The Company was unable to resolve these disputes and regain control of its Indonesian tobacco inventories. As a result, the Company filed a claim under its insurance policy for the recovery of the cost of the related inventories. The Company's insurance carrier paid the claim in full in January 2000.
In January 2000, the Company decided to discontinue its cigar operating segment. Accordingly, the Company's cigar operations have been classified as discontinued operations for all periods presented in the consolidated financial statements included elsewhere herein. During fiscal 2001, the Company ceased production of cigars and closed all cigar operations. In September 2000, Company sold all finished cigars, packaging, and certain other assets to a third party. At February 2, 2001, remaining cigar assets consist of tobacco leaf inventories totaling $80,000.
FORWARD LOOKING STATEMENTS
Certain sections of this Form 10-K contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies, including the risks identified below, could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the success or failure of our efforts to implement our business strategy. Among these risks and uncertainties are the following:
o fluctuations in the price of gold; o changes in the demand for jewelry in general and gold jewelry in particular; o changes in tastes and styles that may impact the demand for the Company's products or require changes in the Company's product mix; o increased competition in any of the Company's product lines; o any changes in the Company's ability to obtain gold under consignment or any material changes of the terms of the consignment agreements; o loss of any major customers; o loss of a material number of outside suppliers; o unexpected credit losses on receivable; o unexpected disappearance or loss inventory; o increases in the rates of returns; o increases in customs duties, handling charges and freight; o failure to maintain appropriate forward contracts to hedge outstanding orders; o domestic and international political, military, regulatory and economic conditions that may impact the demand for gold or the availability of gold; o political, military, regulatory or economic conditions in the countries outside the United States in which the Company has manufacturing facilities or third party manufacturers; and o the Company's success in its ability to protect its patents, trademarks and copyrights.
We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
ITEM 2.
ITEM 2. PROPERTIES
The Company maintains manufacturing and administrative facilities in a 52,000 square foot building owned by the Company in Burbank, California. The Company currently utilizes approximately 20,000 square feet of this building as manufacturing space, approximately 25,000 square feet as distribution, warehouse, and storage space (including vaults), and approximately 7,000 square feet as administrative offices. The Company also owns a 15,000 square foot building, which is located in the vicinity of its current manufacturing facility. The Company currently utilizes approximately 8,000 square feet of this building as sales offices and approximately 7,000 square feet as administrative facilities. In February 1999, the Company purchased an 8,000 square foot building near its Burbank manufacturing facility which provides both office and warehouse space. In November 1999, the Company purchased a 23,000 square foot building near its Burbank manufacturing
facility, which will provide office, distribution and warehouse space for new product development activities. The Company also owns two buildings adjacent to its manufacturing facility, with an aggregate of 3,000 square feet, which are used for storage space.
The Company also leases a sales office and showroom in New York City pursuant to a lease which expires in April 2004. The Company also leases a sales office and a purchasing office in the Jewelry Mart area of Los Angeles, on a month-to-month basis. The Company also owns a jewelry manufacturing facility and leases another in South America. The Company also leases two manufacturing facilities in the Caribbean.
In connection with its discontinued cigar business, the Company is leasing a 29,600 square foot manufacturing facility in the Dominican Republic, pursuant to a lease which expires in June 2003. The Company is currently evaluating this facility for use in its jewelry operations. The Company also has leased a 1,300 square foot retail cigar shop in Beverly Hills, California, pursuant to a lease which expires in May 2002. The retail store has been subleased to a third party from January 2000 through May 2002.
The Company believes that its facilities are adequate for the Company's current operating levels and presently foreseeable growth.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation incidental to the conduct of its business. The Company currently is not involved in any litigation which, individually or in the aggregate, is material to its business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report.
SUPPLEMENTAL ITEM: EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
GUY BENHAMOU is a co-founder of the Company and has been its President, Chief Executive Officer and a member of its Board of Directors since its inception in January 1977. Mr. Benhamou was appointed Chairman of the Board in May 1993.
SHIU SHAO has been employed by the Company since April 1981. Mr. Shao served as Controller of the Company from 1981 to 1984 and Vice President - Finance from 1984 until September 1991, when he was appointed Chief Financial Officer. Mr. Shao also has served as a director of the Company since May 1993 and was appointed a Vice President in May 1994. In October 1998, Mr. Shao was appointed Chief Operating Officer.
Executive officers are elected by and serve at the discretion of the Board of Directors. No family relationships exist between any of the officers or directors of the Company.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded in the Nasdaq National Market under the trading symbol "OROA" since the Company's initial public offering on September 23, 1993.
The following table sets forth the range of the high and low sales prices for the fiscal periods indicated, as reported on the Nasdaq National Market. On April 9, 2001, there were 22 holders of record of the Common Stock.
YEAR ENDED FEBRUARY 2, 2001 HIGH LOW ------ ----- First quarter $8.00 $5.88 Second quarter $7.75 $6.25 Third quarter $8.50 $6.38 Fourth quarter $8.50 $6.94
YEAR ENDED JANUARY 28, 2000
First quarter $11.00 $8.06 Second quarter $8.63 $6.81 Third quarter $8.00 $6.63 Fourth quarter $7.00 $6.00
The Company has not paid dividends on the Common Stock since its initial public offering in September 1993 and does not intend to pay dividends in the foreseeable future. The Board of Directors currently intends to retain earnings for use in the Company's business. In addition, the Company's revolving credit facility and gold consignment agreements contain covenants which prohibit the payment of dividends on the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other selected data of the Company. The selected historical financial data in the table for the five years in the period ended February 2, 2001 are derived from the audited consolidated financial statements of the Company. The data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes and other financial information included elsewhere herein.
OROAMERICA, INC. SELECTED FINANCIAL DATA
1) Selling, general and administrative, and other expenses include bad debt expense, depreciation and amortization expense, and other income and other expense, in addition to selling, general and administrative expenses. In fiscal 1998, selling, general and administrative, and other expenses have been reduced by other income of $6.6 million, including $4.7 million of proceeds from the settlement of litigation with the Company's insurer to recover losses from two former gold jewelry manufacturers.
2) Based on the Second London Gold Fixing.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the consolidated financial statements and notes thereto included elsewhere herein.
GENERAL
Gross Sales; Returns
The Company reduces gross sales by the amount of returns and discounts to determine net sales. Each month the Company estimates a reserve for returns based on historical experience and the amount of gross sales. The total of actual returns and the provision for the returns reserve amounted to 12.0% of gross sales in fiscal 2001, 10.9% of gross sales in fiscal 2000, and 11.2% of gross sales in fiscal 1999. The Company has implemented quality control procedures to reduce returns of defective merchandise. Discounts to customers have not had a material effect on the Company's results of operations. For further information regarding the reserve for returns, see Note 1 of Notes to Consolidated Financial Statements.
Prices for the Company's jewelry products generally are determined by reference to the current market price of gold. Consequently, the Company's sales are affected by increases, decreases or volatility in the price of gold.
Inventories
The Company accounts for its jewelry inventories at the lower of cost or market, using the last-in, first-out (LIFO) method to determine cost, less the allowance for uncollectible vendor advances. As a result, the Company's gross profit margin can be affected by changes in LIFO reserves and the allowance for vendor advances, as well as by changes in the amount of gold owned at each period end and fluctuations in the price of gold.
Consigned gold is not included in inventory, and there is no related liability recorded on its balance sheet. Financing costs under the consignment arrangements currently are approximately 3% per annum of the market value of the gold held under consignment, computed daily. If the market value of gold increases, and assuming consignment levels remain constant, the financing costs incurred by the Company under the consignment arrangements will increase in proportion to the increase in the market value of gold. At February 2, 2001 and January 28, 2000, the Company held 191,800 and 227,600 ounces, respectively, under the consignment arrangements. At February 2, 2001 and January 28, 2000, the Company owned approximately 3,700 ounces and 7,300 ounces of gold, respectively.
For further information regarding the accounting policies applicable to the Company's inventories, see Note 2 of Notes to Consolidated Financial Statements.
Outside Manufacturers
In fiscal 2001, the Company purchased approximately 41% of its products as finished goods and completed the manufacture of approximately 59% of its products from semi-finished materials partially fabricated by outside manufacturers. Of the total amount of products purchased from outside manufacturers in fiscal 2001, approximately 64% were purchased from foreign manufacturers and approximately 36% were purchased from domestic manufacturers. The Company's use of domestic and foreign outside manufacturers minimizes the capital invested in property, plant and equipment and the overhead associated with a Company-employed manufacturing labor force. The use of foreign manufacturers also allows the Company to take advantage of the lower labor costs prevailing in developing countries. Risks generally inherent in the use of outside manufacturers include security at the manufacturer's facility, transport of materials to and from the manufacturer, theft by the manufacturer or its employees and bankruptcy or other financial problems of the manufacturer. The Company's arrangements with its foreign manufacturers are subject to the additional risks of doing business abroad, including risks associated with economic or political instability in the countries in which such manufacturers are located, labor strikes, risks associated with potential import restrictions and risks associated with United States and foreign governmental policies, regulations and restrictions affecting
the purchase, import and export of gold. Purchases from foreign vendors are dollar denominated and, therefore, the Company is not exposed to currency fluctuation risk.
Both finished and semi-finished materials frequently are manufactured under an arrangement whereby the Company supplies all necessary gold (or, in some instances, supplies funds to purchase the required gold) to an outside manufacturer and pays a manufacturing charge and applicable duties at the time of delivery. These arrangements, which the Company believes are common in the jewelry industry, reduce the costs charged to the Company by its outside manufacturers and allow the Company to employ qualified manufacturers who might be unable to finance the acquisition of the gold required in the production process. The Company from time to time advances to its manufacturers sufficient gold to cover manufacturing requirements for a two-to-three week cycle, and as completed products are shipped to the Company, additional gold is advanced to the manufacturer.
The Company utilizes certain controls and procedures to minimize the credit risks associated with advancing funds or gold to its outside manufacturers. The Company believes its procedures will reduce, but will not eliminate, its exposure to credit losses. The procedures employed by the Company include monitoring the performance and financial condition of outside manufacturers, monitoring each manufacturer's "credit limit", inspection visits made to the production facilities of outside manufacturers and management's review and evaluation of credit worthiness. The Company attempts to diversify its sources of supply and broadly allocate production over its base of manufacturers in order to reduce the amount of orders it places with any single manufacturer. As of March 2, 2001, $2.4 million of gold owned by or consigned to the Company was in the possession of outside manufacturers. On that date, the largest amount held by a single manufacturer was $900,000.
The Company believes its use of outside manufacturers provides it with a cost-effective source for products. The Company believes that advancing gold to its outside manufacturers has resulted in significant cost savings and that any credit risks associated with this practice can be maintained at an acceptable level by careful management of the Company's relationships with its outside manufacturers, the continued diversification of the Company's sources of supply and the maintenance of adequate reserves. However, no assurances can be given that possible future financial problems or other factors affecting its outside manufacturers will not have a material adverse effect on the Company's financial condition or results of operations.
Seasonality
The Company's business, and the jewelry business in general, are highly seasonal. The third and fourth quarters of the Company's fiscal year, which include customers' purchases for the Christmas shopping season, historically have accounted for approximately 60% of the Company's annual net sales and a somewhat higher percentage of the Company's income before taxes. While the fourth quarter generally produces the strongest results, the relative strengths of the third and fourth quarters are subject to variation from year to year based on a number of factors, including the purchasing patterns of the Company's customers. The seasonality of the Company's business places a significant demand on working capital resources to provide for a buildup of inventory in the third quarter (which is primarily satisfied by an increase in the amount of gold held under consignment) and in turn has led to a seasonal buildup in customer receivables in the fourth quarter and the first quarter of the succeeding fiscal year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items included in the Consolidated Statements of Income.
FISCAL 2001 COMPARED TO FISCAL 2000
Net sales increased $2.2 million, or 1.3%, to $171.7 million for fiscal 2001 from $169.5 million for fiscal 2000. This increase was due to an increase in the amount of gold jewelry (by weight) sold.
Gross profit increased by $1.9 million, or 5.9%, to $34.5 million for fiscal 2001 from $32.6 million for fiscal 2000. As a percentage of net sales, gross profit increased to 20.1% in fiscal 2001, from 19.2% in fiscal 2000. Excluding the effect of gold price fluctuations and LIFO reserve adjustments, the gross profit margins for fiscal 2001 and fiscal 2000 would have been 20.0% and 18.8%, respectively. The increase in gross profit margin in fiscal 2001 is primarily due to changes in sales product mix. The gold prices used to value inventory at year-end for fiscal 2001 and fiscal 2000 were $266.70 and $286.75, respectively.
Selling, general and administrative expense for fiscal 2001 increased by $3.8 million, or 21.1%, to $22.0 million for fiscal 2001 from $18.2 for fiscal 2000. As a percentage of sales, these expenses increased to 12.8%, from 10.8% in fiscal 2000. The increase in the dollar amount of selling, general and administrative expense results primarily from increased personnel costs of $2.2 million, increased professional and consulting services of $501,000, and increased selling and product expense of $911,000. Personnel costs have risen due to expanded product development activities. Selling and product expenses have increased due to expanded efforts at trade shows and increased magazine and catalog advertising of the Company's products, including the Pushlock(TM) clasp and omega chain. Professional and consulting services have risen due to increased use of computer consultants and increased legal fees related to certain ongoing efforts by the Company to protect its intellectual property.
Depreciation and amortization expense decreased by $15,000, or 0.4%, from the prior year. This decrease results primarily from the $583,000 write-off of goodwill related to the fiscal 1995 acquisition of Jerry Madison Enterprises in fiscal 2000, which was not repeated in the current year. This decrease was offset by additional depreciation expense from prior year capital expenditures, which totaled approximately $6.9 million.
Interest expense for the year ended February 2, 2001 decreased approximately $361,000, or 16.1%, from the prior year. This decrease results from reduced borrowings under the gold consignment agreements, offset by an increase in gold forward purchase contracts outstanding and an increase in the rates charged thereon.
Other income for the year ended February 2, 2001 increased by $1.3 million, or 163.0%, from the prior year. This increase is primarily due to the gain resulting from sale of certain jewelry machinery and from increased interest income on invested funds.
The provision for income taxes in fiscal 2001 decreased by $8,000 as compared to fiscal 2000, primarily due to a decrease in taxable income between years. The effective tax rates for fiscal 2001 and fiscal 2000 were 38% and 37%, respectively. See Note 6 - Income Taxes.
Income from discontinued operations results from the Company's actual closing of cigar operations during fiscal 2001. In September 2000, a third party purchased the Company's finished cigars, packaging and certain other assets. The assets related to the cigar operating segment at February 2, 2001 consists of $80,000 of tobacco leaf inventories, which have been classified as available for sale assets in the Consolidated Financial Statements included elsewhere herein. In fiscal 2000, the Company decided to discontinue its cigar operating segment and recorded an estimated net loss on disposal of the cigar operations of $1,176,000, which was not repeated for the current year.
FISCAL 2000 COMPARED TO FISCAL 1999
Net sales for fiscal 2000 increased by $243,000, or 0.1%, from fiscal 1999. This increase was due primarily to an increase in the amount of gold jewelry (by weight) sold, offset by decreases in sales prices due to a reduction in the average market price of gold.
Gross profit for fiscal 2000 increased by $1.3 million, or 4.2%, from fiscal 1999. As a percentage of net sales, gross profit increased to 19.2% in fiscal 2000, from 18.5% in fiscal 1999. Excluding the effect of gold price fluctuations and LIFO reserve adjustments, the gross profit margins for fiscal 2000 and fiscal 1999 would have been 18.8% and 18.1%, respectively. The increase in gross profit margin in fiscal 2000 is primarily due to changes in sales product mix. The gold prices used to value inventory at year-end for fiscal 2000 and fiscal 1999 were $286.75 and $285.40, respectively.
Selling, general and administrative expense increased by $524,000, or 3.0%, from the prior year. As a percentage of sales, these expenses increased to 10.7%, from 10.4% in fiscal 1999. The increase in the dollar amount of selling, general and administrative expense results primarily from increased personnel costs of $476,000 and increased professional, consulting and outside services of $501,000. Personnel costs have increased primarily due to increased head count resulting from expanded product development and customer service activities.
Depreciation and amortization expense increased by $1.3 million, or 58.4%, from the prior year. Depreciation and amortization expense has increased due to depreciation expense related to increased capital expenditures, and to a $583,000 write-off of goodwill related to the fiscal 1995 acquisition of Jerry Madison Enterprises.
Interest expense for the year ended January 28, 2000 increased approximately $710,000, or 46.4%, from the prior year. Interest expense increased due to increased consignment rates and expanded borrowing under consignment agreements.
Other income declined $1.2 million, or 61.0%, to $790,000 in fiscal 2000, from $2.0 million in fiscal 1999. Other income declined due to the absence in fiscal 2000, of certain non-recurring miscellaneous income recorded in the prior year.
The provision for income taxes in fiscal 2000 decreased by $921,000 as compared to fiscal 1999 primarily due to a decrease in taxable income between years. The effective tax rate for both fiscal 2000 and fiscal 1999 was 37%. See Note 6 - Income Taxes.
Loss from discontinued operations results from the Company's decision to discontinue its cigar operating segment. The increase in loss from discontinued operations primarily results from the estimated net loss on disposal of $1,176,000 recorded in January 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has satisfied its working capital requirements through internally generated funds, a gold consignment program and borrowings under its revolving credit facility.
A substantial portion of the Company's gold supply needs are satisfied through gold consignment arrangements with several financial institutions. During fiscal 2001, the Company satisfied approximately 74% of its gold requirements through purchases under the consignment program and purchased the remaining 26% of its gold requirements from financial institutions, manufacturers and vendors. Under the consignment arrangements, the Company may defer the purchase of gold used in the manufacturing process and held in inventory until the time of sale of finished goods to customers. Financing costs under the consignment arrangements currently are approximately 3% per annum of the market value of the gold held under consignment, computed daily. The maximum amount of gold that the Company may hold on consignment was 365,000 ounces at February 2, 2001 and is subject to fluctuation based on changes in the market value of gold. The gold consignment agreements contain covenants regarding the amount of consigned gold the Company may reconsign or otherwise have outside its possession at any one time. At February 2, 2001, the Company held approximately 191,800 ounces of gold under consignment. During fiscal 2001, 2000, and 1999, the largest amount of gold held under consignment was 262,900 ounces, 288,500 ounces, and 220,500 ounces, respectively, and the average amount of gold held under consignment was 183,300 ounces, 251,900 ounces, and 171,900 ounces, respectively. Use of the consignment arrangements tends to be highest during the third quarter.
The Company has a $10 million revolving credit facility with Bank of America NT&SA, which expires May 1, 2001. Available borrowings may not exceed the lesser of $10 million or 75% of eligible accounts receivable minus a reserve amount as provided for under the credit facility. No amounts were outstanding under the revolving credit facility at February 2, 2001 or January 28, 2000. During fiscal 2001, 2000, and 1999, the Company's highest outstanding balances under its revolving credit facilities were $0 million, $9.3 million, and $400,000, respectively, and the average amounts outstanding were $0, $72,000, and $1,100, respectively. Borrowings under the revolving credit facility tend to be highest in the fourth quarter. For further information regarding the consignment agreements and the revolving credit facility, see "Business - Gold Consignment Arrangements" and Notes 2 and 4 of Notes to Consolidated Financial Statements.
The Company incurred capital expenditures of approximately $1.2 million in fiscal 2001, principally related to the acquisition and improvement of manufacturing and office facilities, and purchase of manufacturing and computer equipment. The Company expects to incur capital expenditures related to its jewelry business of approximately $3.2 million in fiscal 2002, principally for the acquisition of new manufacturing facilities, distribution systems, and manufacturing and computer equipment. During fiscal 2001, the Company repurchased 565,450 shares of its outstanding common stock for an aggregate purchase price of $4.0 million. The Company believes that funds generated from operations, the gold consignment program and the borrowing capacity under its revolving credit facility will be sufficient to finance its working capital and capital expenditure requirements, and treasury stock purchases for the next 12 months. The Company is not aware of any material expenditures, significant balloon payments or other payments on long-term obligations or any other demands or commitments, including off-balance sheet items to be incurred within the next 12 months. Inflation has not materially impacted the Company's revenues or income.
NEW ACCOUNTING PRONOUCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." As subsequently amended by FASB Statement No. 138, Statement No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Statement No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company will adopt the provisions of Statement No. 133 in the first quarter of fiscal 2002. The adoption of Statement No. 133 will not have a material impact on the earnings and financial position of the Company.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in the price of gold, and selectively uses forward contracts to manage this risk. The Company enters into forward contracts for the purchase of gold to hedge outstanding customer orders for future delivery in order to mitigate the risk of price fluctuations. The Company does not enter into forward contracts or other financial instruments for speculation or trading purposes. At February 2, 2001, outstanding forward purchase contracts totaled $7.8 million and expire no later than April 2001. The carrying values of these forward purchase contracts approximate their fair values because of the relatively short maturity of these contracts.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The following consolidated financial statements are included as a separate section following the signature page to this Form 10-K and are incorporated herein by reference:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable. PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth, in part, in the Supplemental Item, "Executive Officers" in Part I of this report. The balance of the information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders scheduled to be held on June 7, 2001.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders scheduled for June 7, 2001.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders scheduled for June 7, 2001.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders scheduled for June 7, 2001.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS:
The following consolidated financial statements are filed as part of this report:
(A) 2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this report:
Schedules other than the schedule listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the consolidated financial statements or notes thereto.
(B) REPORTS ON FORM 8-K None.
(C) EXHIBITS
The following exhibits are filed as part of this report:
3.1 Certificate of Incorporation of the registrant, together with amendments filed June 15, 1993 and September 23, 1993.(l)
3.2 Certificate of Amendment to Certificate of Incorporation dated July 3, 1995.(6)
3.3 Bylaws of the registrant.(1)
10.1 Form of Consignment Agreement between the registrant and each of the consigning institutions.(2)
10.2 Form of Loan Agreement between the registrant and each of Fleet Precious Metals Inc. and ABN AMRO Bank N.V.(2)
10.3 Sixth Amended and Restated Credit Agreement, dated July 22, 1994, between the registrant and Bank of America National Trust and Savings Association.(3)
10.4 Amendment No. Six to Sixth Amended and Restated Credit Agreement, dated November 1, 1996, between the registrant and Bank of America National Trust and Savings Association.(8)
10.5 First Amendment and Agreement, dated July 22, 1994, among the consigning institutions and the lenders named therein and the registrant.(3)
10.6 Second Amendment and Agreement, dated December 2, 1994, among the consigning institutions and the lenders name therein and the registrant.(5)
10.7 Third Amendment and Agreement, dated May 30, 1995, among the consigning institutions and the lenders named therein and the registrant.(6)
10.8 Fourth Amendment and Agreement, dated July 28, 1995, among the consigning institutions and the lenders named therein and the registrant.(7)
10.9 Second Amended and Restated Intercreditor Agreement, dated July 22, 1994, among the lenders named therein and the registrant.(3)
10.10 Amended and Restated Security Agreement, dated February 25, 1994, among the lenders named therein and the registrant.(2)
10.11 Trademark Collateral Assignment, dated February 25, 1994, among the lenders named therein and the registrant.(2)
10.12 First Amendment to Trademark Collateral Assignment, dated July 22, 1994, among the lenders named therein and the registrant.(3)
10.13 Trademark Collateral Assignment, dated July 22, 1994, among the lenders named therein and the registrant.(3)
10.14 Patent Collateral Assignment, dated February 25, 1994, among the lenders named therein and the registrant.(2)
10.15 First Amendment to Patent Collateral Assignment, dated July 22, 1994, among the lenders named therein and the registrant.(3)
10.16 Patent Collateral Assignment, dated April 3, 1989, among the lenders named therein and the registrant, together with amendments dated August 11, 1989, December 4, 1989 and May 1, 1992.(1)
10.17 Fourth Amendment to Patent Collateral Assignment.(2)
10.18 Fifth Amendment to Patent Collateral Assignment, dated July 22, 1994.(3)
10.19 Sixth Amendment to Patent Collateral Assignment, dated May 30, 1995, among the lenders named therein and the registrant.(6)
10.20 Patent Collateral Assignment, dated July 22, 1994, among the lenders named therein and the registrant.(3)
10.21 First Amendment to Trademark Collateral Assignment, dated May 30, 1995, among the lenders named therein and the registrant.(6)
10.22 Second Amendment to Trademark Collateral Assignment, dated May 30, 1995, among the lenders named therein and the registrant.(6)
10.23 First Amendment to Patent Collateral Assignment, dated May 30, 1995, among the lenders named therein and the registrant.(6)
10.24 Second Amendment to Patent Collateral Assignment, dated May 30, 1995, among the lenders named therein and the registrant.(6)
10.25 Business Loan Agreement, dated September 10, 1993, between the registrant and Cathay Bank. (1)
10.26 Business Loan Agreement, dated February 10, 1993, between the registrant and Cathay Bank. (1)
10.27 Mortgage Loan, dated March 9, 1995, between the registrant and Cathay Bank.(6)
10.28 Mortgage Loan, dated March 9, 1995, between the registrant and Cathay Bank.(6)
10.29 Mortgage Loan, dated November 1995, between the registrant and Cathay Bank.(9)
10.30 Note Secured by Deed of Trust, dated July 31, 1989, by the registrant in favor of Chester Scott and Elizabeth D. Scott.(1)
10.31 All-Inclusive Purchase Money Promissory Note Secured by Long Form All-Inclusive Purchase Money Deed of Trust, dated April 13, 1981, by the registrant in favor of Carl Mattera, together with amendments dated May 1, 1991 and August 9, 1991.(1)
10.32 Employment Agreement, dated June 10, 1993, between the registrant and Guy Benhamou.*(1)
10.33 Tax Indemnification Agreement, dated June 10, 1993, between the registrant and Guy Benhamou.*(1)
10.34 Amended and Restated OroAmerica, Inc. 1988 Incentive Stock Option Plan.*(1)
10.35 OroAmerica, Inc. Salary Deferral and Profit Sharing Plan, as amended.*(1)
10.36 Form of awards under the OroAmerica, Inc. Executive/Key Employee Bonus Plan. *(1)
10.37 Form of Indemnification Agreement between the registrant and its directors and executive officers.*(1)
10.38 Summary of dependent medical insurance coverage for executive officers.*(1)
10.39 OroAmerica, Inc. Directors' Stock Option Plan.*(4)
10.40 OroAmerica, Inc. 1994 Chief Executive Officer Bonus Plan. *(5)
10.41 Letter Agreement, dated August 8, 1996, between the registrant and Shiu Shao. *(10)
10.42 Exclusive License Agreement, dated December 15, 1996, between Fragrance Business Company Limited and the registrant. (10)
10.43 Stock Option Agreement, dated as of April 14, 1997, between the registrant and Bertram K. Massing. *(11)
10.44 OroAmerica, Inc. 1998 Incentive Stock Option Plan. *(12)
10.45 OroAmerica, Inc. Supplemental Non-Employee Director Stock Option Plan.*(13)
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
- ------------------------------------------------------------------------------- * Management contract, compensatory plan or arrangement.
(1) Previously filed in the Exhibits to the registrant's Registration Statement on Form S-1 (File No. 33-63422) and incorporated by reference herein.
(2) Previously filed in the Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 28, 1994 and incorporated by reference herein.
(3) Previously filed in the Exhibits to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 29, 1994 and incorporated by reference herein.
(4) Previously filed in the Exhibits to the registrant's Registration Statement on Form S-8 (File No. 33-84028) and incorporated by reference herein.
(5) Previously filed in the Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 27, 1995 and incorporated by reference herein.
(6) Previously filed in the Exhibits to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended July 28, 1995 and incorporated by reference herein.
(7) Previously filed in the Exhibits to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended October 27, 1995 and incorporated by reference herein.
(8) Previously filed in the Exhibits to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended November 1, 1996 and incorporated by reference herein.
(9) Previously filed in the Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1997 and incorporated by reference herein.
(10) Previously filed in the Exhibits to the registrant's Annual Report on Form 10-K for the fiscal year ended January 30, 1998 and incorporated by reference herein.
(11) Previously filed in the Exhibits to the registrant's Registration Statement on Form S-8 (File No. 333-51703) and incorporated by reference herein.
(12) Previously filed in the Exhibits to the registrant's Registration Statement on Form S-8 (File No. 333-58699) and incorporated by reference herein.
(13) Previously filed in the Exhibits to the registrant's Registration Statement on Form S-8 (File No. 333-63811) and incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
OROAMERICA, INC.
Date: April 16, 2001 By: /s/ Guy Benhamou ----------------------------------------- Guy Benhamou, Chairman of the Board, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: April 16, 2001 /s/ Guy Benhamou ----------------------------------------- Guy Benhamou, Chairman of the Board, President and Chief Executive Officer
Date: April 16, 2001 /s/ Shiu Shao ----------------------------------------- Shiu Shao, Chief Operating Officer, Chief Financial Officer, Vice President and Director
Date: April 16, 2001 /s/ Betty Sou ----------------------------------------- Betty Sou, Controller (Principal Accounting Officer)
Date: April 16, 2001 /s/ Bertram K. Massing ----------------------------------------- Bertram K. Massing, Director
Date: April 16, 2001 /s/ David Rousso ----------------------------------------- David Rousso, Director
Date: April 16, 2001 /s/ John Arzoian ----------------------------------------- John Arzoian, Director
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of OroAmerica, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1), present fairly, in all material respects, the financial position of OroAmerica, Inc. and its subsidiaries at February 2, 2001 and January 28, 2000, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Los Angeles, California April 2, 2001
OROAMERICA, INC. CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
OROAMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME
See accompanying notes to consolidated financial statements.
OROAMERICA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See accompanying notes to consolidated financial statements.
OROAMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
OROAMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Line of business
OroAmerica, Inc. (the Company) is a Delaware corporation primarily engaged in importing, manufacturing and distributing gold jewelry products to large retailers such as mass merchandisers and discount stores, catalog showrooms, national and regional jewelry chains, home shopping networks, warehouse clubs and department stores and to jewelry wholesalers and distributors. The Company's jewelry operations are essentially one operating segment.
During fiscal 1998, the Company entered the premium cigar manufacturing and distribution business. In fiscal 1998, Cigar operations consisted primarily of securing tobacco inventories and establishing manufacturing facilities in the Dominican Republic and Indonesia. In fiscal 1999, the Company began selling cigars to retailers and opened its retail cigar store in Beverly Hills, California. In January 2000, the Company decided to discontinue its cigar operations. (See Note 13)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Investments in 20% to 50% owned affiliated companies are accounted for on the equity method where the Company exercises significant influence over operating and financial affairs. Otherwise, investments are included at cost. Significant intercompany transactions are eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fiscal Years
The Company reports results of operations for a fiscal year consisting of a 52 or 53 week period ending the Friday closest to January 31. Each of the fiscal years ended January 28, 2000 and January 29, 1999, consists of fifty-two weeks. The fiscal year ended February 2, 2001 consists of fifty-three weeks.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents include amounts held at financial institutions or highly liquid investments with original maturities of ninety days or less when purchased. The fair value of cash and cash equivalents approximates their carrying amount.
Supplemental cash flow information and non-cash investing and financing activities are as follows:
Concentrations of Credit Risk
The Company's financial instruments subject to credit risk consist primarily of cash equivalents and accounts receivable. The Company places its cash equivalents in high quality securities with a major bank and financial institution. With respect to accounts receivable, the Company extends credit based on an evaluation of a customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company's ten largest customers accounted for approximately 58% of net sales in 2001, 62% of net sales in 2000 and 59% of net sales in 1999. One customer, Wal-Mart, accounted for 20%, 25% and 22% of the Company's net sales for the years ended February 2, 2001, January 28, 2000, and January 29, 1999, respectively. No other individual customer accounts for more than 10 percent of sales. At February 2, 2001 and January 28, 2000, gross accounts receivable included balances totaling $20.7 million and $17.5 million, respectively, from the Company's ten largest customers.
Allowance for Sales Returns and Doubtful Accounts
The Company reduces gross sales by the amount of discounts and returns to determine net sales. Each month the Company estimates a reserve for returns based on historical experience and the amount of gross sales. The reserve is adjusted periodically to reflect the Company's actual return experience. The Company provides allowances for doubtful accounts receivable when it determines that such amounts are uncollectible. Actual bad debt and sales return experience has been in line with management's expectations. The allowances are as follows at the following dates:
February 2, January 28, 2001 2000 ------------ ------------ Doubtful accounts $ 1,802,000 $ 1,960,000 Sales returns $10,825,000 $ 9,880,000
Cost of Goods Sold and Inventories
The principal component of inventories and cost of goods sold is the cost of the bullion and other raw materials used in the production of the Company's jewelry. Other components of inventories and cost of goods sold include direct costs incurred by the Company in its manufacturing operations, fees paid to outside manufacturers, procurement costs such as customs duties, handling charges and freight, and provisions for uncollectible vendor advances.
The Company accounts for its jewelry inventories at the lower of cost or market, using the last-in, first-out (LIFO) method to determine cost. Year end gold inventory cost used in determining incremental LIFO layers is based on the year end gold market price at the Second London Gold Fixing. The LIFO cost may increase or decrease from year to year as a result of changes in quantities and unit prices in ending inventory. Consigned gold is not included in inventory, and there is no related liability recorded at year-end.
"Market" consists of the market value of gold in inventory, determined as of the last day of the reporting period, plus allocated manufacturing costs (labor and overhead). When
market value is lower than LIFO cost and market value declines from period to period, the carrying value of inventory is reduced, resulting in an increase in cost of goods sold.
The Company accounts for its tobacco and other inventories at the lower of cost or market, using the first-in, first-out (FIFO) method to determine cost.
Forward Purchase Contracts
The Company enters into forward contracts for the purchase of gold to hedge outstanding customer orders for future delivery in order to mitigate the risk of price fluctuations. The Company does not enter into forward contracts for trading purposes. The effects of hedging transactions are recognized when contracts are settled. The aggregate amounts of forward contracts were $7.8 million and $10.0 million at February 2, 2001 and January 28, 2000, respectively. The forward contracts outstanding at February 2, 2001 expire no later than April 2001. The contract values of the forward purchase contracts approximate their fair values because of the relatively short maturity of these contracts.
Property and Equipment
Property and equipment are stated at cost. Expenditures for major renewals and improvements, which substantially increase the useful lives of assets, are capitalized. Repair and maintenance costs are expensed as incurred. Depreciation of buildings and equipment is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Amortization of leasehold improvements is provided using the straight-line method over the life of the lease or asset, whichever is shorter. The useful lives range from three to twenty years.
Goodwill and Other Intangible Assets
Goodwill in the amount of $5,793,000, which arose in connection with the acquisition of a former stockholder's interest in the Company and its affiliates in 1987, is amortized over twenty-five years. Goodwill in the amount of $973,000, which arose in connection with the fiscal 1995 acquisition of Jerry Madison Enterprises, a jewelry company specializing in the production and distribution of diamond-accented and gemstone jewelry merchandise, was deemed to be impaired and written-off in fiscal 2000. (See "Impairment of Long-Lived Assets" below.) In fiscal 1998, the Company recorded $200,000 of goodwill related to the Jerry Prince acquisition, which is being amortized over five years. In fiscal 1999, the Company recorded goodwill related to the Eclipse and Jene acquisitions of approximately $1.1 million, which is being amortized over periods of five and fifteen years, respectively (See Note 8). Amortization expense for fiscal 2001, 2000 and 1999 was $350,000, $412,000 and $361,000, respectively. Accumulated amortization at February 2, 2001 and January 28, 2000 was $3,397,000 and $3,047,000, respectively.
Covenants-not-to-compete in the amount of $540,000 were executed in connection with the fiscal 1999 acquisitions of Jene and Eclipse (See Note 8). These covenants-not-to-compete are being amortized on a straight-line basis, over terms ranging from four to five years. Amortization expense for fiscal 2001, 2000 and 1999 approximated $110,000, $110,000 and $39,000, respectively. Accumulated amortization at February 2, 2001 and January 28, 2000 was $259,000 and $149,000, respectively.
Patents
The Company owns patents for several of its jewelry products and amortizes its patents over their economic useful lives, estimated between fifteen and seventeen years. Amortization expense was approximately $489,000 for each of the three fiscal years in 2001, 2000, and 1999. Accumulated amortization at February 2, 2001 and January 28, 2000, was $3,808,000 and $3,319,000, respectively.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used or disposed of by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. An impairment loss is measured as the amount
by which the carrying amount of the asset exceeds its fair value. In fiscal 2000, the Company recorded an impairment loss of $583,000, resulting from the write-off of unamortized goodwill related to the acquisition of Jerry Madison Enterprises. No impairment losses were recognized in fiscal 2001 or fiscal 1999.
Income Taxes
The provision for income taxes includes amounts related to current taxable income and deferred income taxes. A deferred income tax asset or liability is determined by applying currently enacted tax laws and rates to the expected reversals of cumulative temporary differences between the carrying value of assets and liabilities for financial statement and income tax purposes. Additionally, a valuation allowance is established to reduce a deferred tax asset if it is more likely than not that all, or some portion, of such deferred tax asset will not be realized. The deferred income tax provision is measured by the change in the net deferred income tax asset or liability during the year.
Stock Compensation
The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To Employees". In February 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting For Stock-Based Compensation" (See Note 11).
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net income per share includes the dilutive effect of stock options.
Marketable Securities Available for Sale
The Company records investments in debt and equity securities, which are available for sale, at fair value in the financial statements and reports unrealized holding gains and losses as a net amount as a separate component of stockholders' equity until realized.
New Accounting Standard
The Financial Accounting Standards Board ("FASB") has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". As subsequently amended by FASB Statement No. 138, Statement No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Statement No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company will adopt the provisions of Statement No. 133 in the first quarter of fiscal 2002. The adoption of Statement No. 133 will not have a material impact on the earnings and financial position of the Company.
NOTE 2 - INVENTORIES:
Inventories consist of the following (in thousands, except per ounce data):
The Company has several consignment agreements with gold consignors, providing for a maximum aggregate consignment of 365,000 fine troy ounces. In accordance with the consignment agreements, title remains with the gold consignors until purchased by the Company.
At February 2, 2001 and January 28, 2000, the Company held 191,800 and 227,600 fine troy ounces of gold under consignment agreements, respectively. Consigned gold is not included in inventory and there is no related liability recorded at year-end. The purchase price per ounce is based on the daily Second London Gold Fixing. Manufacturing costs included in inventory represent costs incurred to process consigned and Company owned gold into finished jewelry products.
The gold consignors and the Company's revolving credit lender (Note 4) have a security interest in substantially all the assets of the Company. The Company pays to the gold consignors a consignment fee based on the dollar equivalent of ounces outstanding, computed based on the Second London Gold Fixing, as defined in the agreements. Each consignment agreement is terminable on 30 days notice by the Company or the consignor.
The gold consignment agreements require the Company to comply with certain covenants with respect to its working capital, current ratio and tangible net worth and to maintain the aggregate of its accounts receivable and inventory of gold at specified minimums. Additional provisions of the agreements:(a) prohibit the payment of dividends; (b) limit capital expenditures; (c) limit the amount of debt the Company may incur; (d) prohibit the Company from engaging in mergers and acquisitions without prior approval; (e) prohibit termination of the chief executive officer's employment for any reason other than death or disability and prohibit any material amendment to his employment contract; and (f) require notice if the Company's principal stockholder (who is also its chief executive officer) ceases to own at least 40% of the Company's outstanding common stock. At February 2, 2001, the Company was in compliance with all of the requirements of its consignment agreements.
In fiscal 2000 and 1999, the Company reduced jewelry inventory levels, which resulted in liquidations of LIFO inventory layers carried at lower costs in prior years. The effect of the liquidations for 2000 and 1999 was to decrease cost of sales by approximately $772,000 and $739,000, respectively, and to increase net income by $486,000 ($.08 per basic and dilutive net income per share), and $466,000 ($.07 per basic and dilutive net income per share), respectively.
NOTE 3 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
NOTE 4 - BORROWINGS UNDER REVOLVING CREDIT AGREEMENT:
The Company has a $10 million revolving credit facility with Bank of America, NT & SA which expires May 1, 2001. Available borrowings may not exceed the lesser of $10 million or 75% of eligible accounts receivable minus a reserve amount, as provided for under the credit facility. Advances under the credit facility bear interest at the lender's prime rate minus 0.25%, or, at the Company's option, at short-term fixed rates or rates determined by reference to offshore interbank market rates plus 1.75%. No short-term advances were outstanding at February 2, 2001 or January 28, 2000. The revolving credit facility also provides for the issuance of banker's acceptances, and for the issuance of letters of credit in an aggregate amount not to exceed $2.5 million at any one time. Banker's acceptances bear an interest rate based on the bank's prevailing discount rate at the time of issuance plus 1.75%. No banker's acceptances were outstanding as of February 2, 2001 or January 28, 2000. Stand-by letters of credit outstanding at February 2, 2001 and January 28, 2000, totaled $1,000,000 and $1,000,000, respectively. Amounts outstanding under the Bank of America credit agreement are secured by substantially all of the Company's assets; the Company's gold consignors also have security interests in these assets, and all of the consignors and Bank of America are parties to a collateral sharing agreement. The revolving credit agreement contains substantially the same covenants and other requirements as are contained in the Company's gold consignment agreements (Note 2). At February 2, 2001, the Company was in compliance with all of the requirements of its revolving credit agreement.
NOTE 5 - ACCRUED EXPENSES:
Accrued expenses consist of the following (in thousands):
NOTE 6 - INCOME TAXES:
The provision for income taxes for the fiscal years 2001, 2000 and 1999 are summarized as follows (in thousands):
Deferred tax assets by jurisdiction are as follows (in thousands):
Deferred tax assets (liabilities) are comprised of the following (in thousands):
At February 2, 2001 and January 28, 2000, other assets includes long-term net deferred tax assets of $344,000 and $303,000, respectively.
At February 2, 2001, the Company has federal net operating loss carryforwards ("NOLs") of $817,000. These NOLs are subject to the limitations under Internal Revenue Code Section 382, which limit their usage to $58,000 in any given year. The federal NOLs expire in fiscal 2007.
The following is a reconciliation for the U.S. federal statutory rate and the effective tax rate:
The Company has not provided for U.S. federal income and foreign withholding taxes on $6.0 million of foreign subsidiaries' undistributed earnings as of February 2, 2001, because such earnings are intended to be reinvested indefinitely.
NOTE 7 - RELATED PARTY TRANSACTIONS:
The Company accounts for its investments in less than majority-owned entities using the equity method. The results of operations and the financial positions of the affiliates are immaterial to the Company.
During fiscal 1993, the Company made an initial capital contribution of $6,000 to a new partnership (OroIndo) whose purpose was to develop rope chain manufacturing. At January 30, 1998, the Company owned a 50 percent interest in OroIndo and accounted for this entity using the equity method. In fiscal 1999, this partnership was dissolved. No material gain or loss was recognized from the dissolution of this partnership. The purchases from OroIndo during fiscal year 1999 were approximately $7.6 million.
NOTE 8 - ACQUISITIONS:
In June 1998, the Company acquired Eclipse Design, Inc. ("Eclipse"), a privately-held company engaged in the design, manufacture and sale of gold earrings. Under the terms of the purchase agreement, the Company acquired all of the operating assets of Eclipse for approximately $300,000. In September 1998, the Company acquired the Jene Karat-gold jewelry business ("Jene"). Under the terms of the purchase agreement, the Company acquired primarily inventory and customer lists for approximately $2 million in cash. The Company financed a portion of the inventory acquired under its consignment agreements. Both acquisitions were accounted for using the purchase method of accounting; results of operations are included in the accompanying financial statements from the date of acquisition. The pro forma combined results of operations of the Company and the acquired companies as if the acquisitions had taken place at the beginning of fiscal 1999 are immaterial and are not presented.
NOTE 9 - SALARY DEFERRAL AND PROFIT SHARING PLAN:
The Company has a Salary Deferral and Profit Sharing Plan covering substantially all eligible employees. Under the plan, employees may elect to defer a percentage of their salary. The Company may, at its discretion, make contributions to the plan. The Company contributed approximately $175,000, $89,000, and $140,000 to the plan during the fiscal years ended February 2, 2001, January 28, 2000 and January 29, 1999, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company leases office space, retail space and manufacturing facilities. These leases are classified as operating leases and have original, noncancellable terms of one to five years. Certain operating leases provide for minimum annual rentals, subject to annual escalations generally based on the Consumer Price Index plus executory costs. Rent expense for fiscal years 2001, 2000 and 1999 was approximately $672,000, $630,000 and $602,000, respectively.
Future minimum annual commitments under the operating leases with initial or remaining terms of one year or more consist of the following at February 2, 2001 (in thousands):
In the normal course of business, the Company is a defendant in various lawsuits. The Company's management believes that there will be no material adverse impact on the financial condition or results of operations of the Company as a result of the ultimate resolution of these matters.
NOTE 11 - STOCK OPTION PLANS:
The Company has an Incentive Stock Option Plan under which options to purchase shares of the Company's common stock may be granted to key employees of the Company. The total number of shares issuable under the Incentive Stock Option Plan was increased to 535,000 shares during fiscal 2001, subject to stockholder approval. Options granted under the Incentive Stock Option Plan become exercisable in annual increments determined by the Compensation Committee. Incentive stock options expire 10 years from the date of grant.
The Company has a Directors' Stock Option Plan (the "Directors' Plan") under which each non-employee director of the Company, on the date of his or her election to the Board, is automatically granted an option to purchase 10,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of grant. The total number of shares issuable under the Director Stock Option Plan is 100,000. Options granted under the Director Stock Option Plan become exercisable in cumulative annual increments of 20 percent, commencing on the anniversary of the date of grant. Director stock options expire 10 years from the date of grant. In addition, the Board of Directors granted an option to purchase 5,000 shares of common stock, at an exercise price equal to the fair market value of the common stock on the date of grant, to one non-employee director in fiscal 1997 and another non-employee director in fiscal 1998. These grants were made outside of the Directors' Plan. During fiscal 1999, the Company adopted a Supplemental Non-Employee Director Stock Option Plan ("Supplemental Plan"), under which each non-employee director of the Company serving on the Board on April 14, 1998 was granted an option to purchase 1,000 shares of common stock. In addition, each non-employee director will automatically be granted an option to purchase 1,000 shares of common stock on the date of each annual meeting of stockholders at which such non-employee director is re-elected to the Board, commencing with the annual meeting in 1999. The total number of shares issuable under the Supplemental Plan is 25,000. Supplemental Plan options are granted at an exercise price equal to the fair market value on the date of grant and are exercisable in one-third increments, commencing on the anniversary of the date of grant.
The Incentive Stock Option Plan is administered by a Compensation Committee appointed by and holding office at the pleasure of the Board of Directors; the Directors' and Supplemental Plans are administered by the Board. Stock option activity for employees and directors is shown below:
The following table summarizes information about employee and director stock options outstanding at February 2, 2001:
Pro-forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for the employee and non-employee director stock options granted under the fair value method of that Statement. The weighted-average estimated grant fair values, as defined by SFAS No. 123, for options granted during fiscal years 2001, 2000 and 1999 were $3.87, $4.87 and $4.70, respectively. All options were granted at exercise prices equal to market prices during fiscal years 2001, 2000 and 1999, except for 160,000 options granted during FY 2000. The 160,000 stock options were granted at prices which were $2.44 below market price on the date of grant.
The fair values for options granted in fiscal 2001, 2000 and 1999 were estimated as of the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee or director must pay to acquire the stock. Had compensation cost for these plans been determined using fair value, rather than the quoted market price, the Company's net income and net income per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
NOTE 12 - STOCKHOLDERS' EQUITY:
Capital Stock
Each holder of Common Stock is entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Subject to any preferences which may be granted to the holders of Preferred Stock, each holder of Common Stock is entitled to receive ratably such dividends as may be declared by the Board of Directors.
The Board of Directors, without further action by the holders of Common Stock, may issue shares of Preferred Stock in one or more series and may fix or alter the rights, preferences, privileges and restrictions of any unissued series of Preferred Stock, including the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences and conversion rights. No shares of Preferred Stock are outstanding.
Stock Repurchase Program
In fiscal 1999, the Company's Board of Directors approved a stock repurchase program pursuant to which the Company is authorized to purchase up to 300,000 shares of its outstanding common stock in the open market at prevailing market prices or off the market in negotiated transactions. Since the inception of the stock repurchase program, the Board of Directors has authorized the Company to repurchase an additional 900,000 shares for a total of 1.2 million shares authorized for repurchase. During the year ended February 2, 2001, the Company repurchased 565,450 shares for an aggregate price of approximately $4.0 million. At February 2, 2001, the Company has repurchased a total of 1,076,280 shares at an approximate cost of $7.8 million.
Note Receivable from Stock Sale
The note receivable from stock sale results from the exercise of stock options by the Company's Chief Operating Officer for a note. The note is a full recourse promissory note bearing interest at 7.35% and is secured by the stock issued upon exercise of the stock options. Interest is payable quarterly and principal is due in full on August 14, 2001.
NOTE 13. DISCONTINUED OPERATIONS:
In January 2000, the Company decided to discontinue its cigar operating segment. Accordingly, the Company's cigar operations have been classified as discontinued operations for all periods presented. During fiscal 2001, the Company ceased production of cigars and closed all cigar operations. In September 2000, the Company sold all finished cigars, packaging, and certain other assets to a third party. At February 2, 2001, remaining cigar assets consist of tobacco leaf inventories totaling $80,000, which have been classified as available for sale.
Revenues of the discontinued cigar segment were $755,000 in fiscal 2001, $1,542,000 in fiscal 2000, and $862,000 in fiscal 1999. These revenues are not included in the revenues as reported in the Consolidated Statements of Income.
QUARTERLY FINANCIAL DATA (UNAUDITED): - ------------------------------------- (Amounts in thousands, except per share amounts)
OROAMERICA, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(1) Due to debtors' inability to pay, price disputes, shortages and other allowances.
(2) The Company reduces gross sales by the amount of returns processed. Each month the Company estimates a reserve for returns based on historical experience and the amount of gross sales. The reserve is adjusted periodically to reflect the Company's actual return experience.
(3) Includes $117,000 collection on trade receivables previously written-off, $100,000 adjustment to cost of sales and $1,000 write-off of other accounts receivable.
(4) Includes $3,000 collection on trade receivables previously written-off, $100,000 adjustment to cost of sales and $136,000 adjustment to trade accounts receivable.
(5) Includes $17,000 collection of trade receivable previously written-off, $8,000 write-off of other accounts receivable, and $5,000 allowance for doubtful accounts related to CigarAmerica, Inc. trade receivables which are no longer designated as "available for sale" assets.
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