ITEM 1. BUSINESS.
GENERAL
Michael Anthony Jewelers, Inc. (the "Company") is a leading designer, marketer and manufacturer of affordable fine jewelry in the United States. The Company sells its jewelry directly to jewelry chain stores, discount stores, department stores, television home shopping networks, catalogue retailers, and wholesalers. The Company manufactures jewelry targeted towards the middle market, which generally retails between $20 and $200 and between $300 and $1,200 for watches. The Company's products include rope chain, bracelets, charms, pendants, earrings, rings and watches, which is sold in over 20,000 retail locations nationwide.
Most of the Company's products are manufactured at its Mount Vernon, New York facility. The Company utilizes manufacturing processes that combine modern technology and mechanization with handcraftsmanship. In order to better meet its customers' needs, the Company has developed a wide range of customer service programs, such as inventory management assistance through electronic data interchange, customized packaging, barcoding and computerized analysis of sales and marketing trends. As a result of its vertical integration and customer service programs, the Company is able to be responsive to its customers' needs and manufacture and deliver most orders on a timely and more cost-effective basis than many of its competitors.
The Company was organized as a Delaware corporation in 1986 and is the successor to Michael Anthony Jewelers, Inc., a New York corporation, organized in 1977.
CHANGE IN FISCAL YEAR
On November 3, 1994, the Company's Board of Directors approved a change in the fiscal year end of the Company from June 30th to a fiscal year ending on the last Saturday in January, effective for the seven month period ended January 28, 1995. During fiscal 1997, the Company changed its fiscal year end from the last Saturday in January to the Saturday closest to the end of January, effective with the fiscal year ended February 1, 1997. Fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996 were comprised of 52, 53 and 52 weeks, respectively.
As used below, (a) fiscal 1998 refers to the fiscal year ended January 31, 1998, (b) fiscal 1997 refers to the fiscal year ended February 1, 1997 and (c) fiscal 1996 refers to the fiscal year ended January 27, 1996.
PRODUCT LINES
The Company offers a broad selection of handcrafted gold and silver jewelry. Many of the Company's products carry the "Ma" trademark, which has become widely recognized in the jewelry industry and with certain consumers. One of the Company's largest product lines is an extensive selection of casted gold charms and pendants. The charms and pendants manufactured by the Company include religious symbols; popular sayings ("talking charms"); sport themes and team logos; animal motifs; nautical, seashore, western, musical, zodiac and other thematic figures; initials; and abstract artistic creations.
The M.A.J. manufacturing division manufactures gold rope chain, gold locks used in the production of rope chain, and designs gold tubing and bangle blanks used in the production of bangle bracelets. The M.A.E. manufacturing division manufactures gold earrings and certain findings used to assemble jewelry.
The Company also manufactures a line of men's and ladies' 18 and 14 karat gold watches under the "Michael Anthony" and "Marc Anton" brand names.
The tables below set forth the approximate percentage of (i) sales and (ii) kilos shipped in fiscal years 1998, 1997 and 1996, respectively, attributable to each of the Company's product categories.
The Company's jewelry line includes licensed products manufactured pursuant to arrangements with such licensors as Warner Bros., Inc. (licensors of Looney Tunes(R) characters), National Football League Properties, Inc., Major League Baseball Properties, Inc., NBA Properties, Inc., NHL Enterprises, Inc., United Features Syndicate (Peanuts(R)), Playboy Enterprises, Inc., Cathy(R) and many nationally recognized colleges, including Notre Dame and the University of Florida. The Company manufactures jewelry products, particularly charms, pendants and pins, depicting the popular logos and symbols associated with these licensors. The Company pays each of these licensors a royalty ranging from 6% to 12% on sales of the licensed products. During the fiscal year ended January 31, 1998, the Company's licensed products represented approximately 11% of the Company's net sales.
The Company maintains an inhouse design staff which utilizes CAD/CAM (computer aided design/computer aided manufacturing) technology to enhance its design, modeling and production capabilities. The equipment is utilized for the design of the Company's new products and for modifying the scale of existing Company designs. The Company's policy is to obtain proprietary protection for its products and designs whenever possible.
The Company updates its product catalogue each year by adding new designs and eliminating less popular styles. Items removed from the Company's current catalogue generally remain available on a special order basis.
Management believes that the Company's future success will depend, in part, on its ability to enhance its existing product lines and develop new styles and products to meet an expanding range of customer requirements. As of April 10, 1998, the Company's product development staff consisted of 16 full time employees. The Company's product development expenses for fiscal 1998 were approximately $1,004,000. The Company anticipates that it will continue to commit substantial resources to product development in the future. The Company's policy is to capitalize 50% of its product development costs. These costs are amortized over two years.
MANUFACTURING PROCESS
At the Company's manufacturing facility in Mount Vernon, New York, manufacturing processes combine modern technology and mechanization with handcraftsmanship to produce fashionable and affordable gold jewelry. The manufacturing processes utilized by the Company include the casting (or lost wax) method, a photoetching process which has allowed the Company to enter the lower priced segment of the market through production of ultralight products and the diamond cut process, a technique which produces a sparkling effect on a finished piece of gold jewelry.
The Company's rope chain product is manufactured by machinery designed in accordance with a patented process. The equipment is capable of operating 24 hours a day and requires minimal direct labor costs, which has enabled the Company to become one of the lowest cost producers of rope chain in the United States.
During fiscal 1998, the Company manufactured approximately 95% of its products from gold bullion and other raw materials and purchased approximately 5% of its product as semi-finished or finished goods. The Company does not believe the loss of any supplier would have a material adverse effect on its business. Alternative sources of supply for the goods purchased by the Company are readily available.
OPEN ORDERS
Orders from the Company's retail customers typically have shipment dates that range from 24 hours to 60 days. Substantially all of the Company's wholesale customers' orders are for immediate shipment and generally are shipped within 7 days of receipt. As of April 10, 1998, the aggregate dollar value of the Company's orders was approximately $9,700,000. The Company expects that substantially all of the current orders will be shipped in the next 45 days. Management of the Company does not believe that open orders are indicative of the Company's future results of operations, as open orders as of any given date are not necessarily indicative of sales trends.
MARKETING AND SALES
The Company markets and sells its jewelry primarily through its inhouse sales force. Sales are made by the Company's sales personnel primarily at the Company's showroom in Mount Vernon, New York and direct presentations at customers' locations. Products are promoted through the use of catalogues, advertisements in trade publications, trade show exhibitions and cooperative advertising allowances with certain customers.
The Company's marketing strategy includes a campaign to increase brand recognition for the "Michael Anthony" name. This campaign includes advertising in consumer magazines and a specially selected and packaged line of karat gold jewelry, including watches, sold by the Company to certain retailers under the "Michael Anthony" name. The Company believes that there is growing brand recognition of the "Michael Anthony" name and the "Ma" trademark with consumers and that this recognition has enhanced sales of its products.
The Company's jewelry is sold primarily to jewelry chain stores, discount stores, department stores, television home shopping networks, catalogue retailers and wholesalers. The Company assists its customers in allocating their purchasing budget among the items in the various product lines by advising them of items having higher consumer demand as determined by the Company's computerized market analysis. Prices vary on the basis of service required by customers. The Company ships its products in bulk to wholesale distributors. For certain retail chains, such as Sterling, Inc. (a division of Signet Group PLC and the owner of Kay Jewelers and J.B. Robinson Jewelers), Wal*Mart, J.C. Penney, Zales, Service Merchandise and Kmart, the Company prepackages and price tags most items, and then ships an order of many different items to distribution centers and stores in the chain. The Company provides additional services to certain of its customers to meet their specific marketing needs, such as tagging, boxing and point-of-sale displays.
The Company also ships its jewelry to a limited number of customers on a consignment basis. Under these arrangements, the Company delivers its products under consignment, and upon sale, the customer pays the Company for the consigned merchandise. Consigned
merchandise is subject to the Company's own consignment arrangements with its gold lenders (the "Gold Lenders"). See ITEM 1. "BUSINESS - SUPPLY; RELATED FINANCING ARRANGEMENTS" AND ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
During the fiscal year ended January 31, 1998, sales to the five largest of the Company's customers aggregated approximately 51% of total net sales. The Company's two largest customers were J.C. Penney and Sterling, Inc., each accounting for approximately 12.5% of net sales. Except for certain retail customers, generally the Company has no long-term contractual commitments with any of its customers, nor are any of the Company's customers subject to any contractual provisions or other restrictions which preclude them from purchasing products from the Company's competitors.
The Company reduces gross sales by the amount of returns and discounts to determine net sales each month. The Company establishes each month a reserve for returns based on its historical experience, the amount of gross sales and the customer base. The total of actual returns and the provision for the returns reserve amounted to approximately 12% of gross sales in fiscal 1998, 13% of gross sales in fiscal 1997 and 14% of gross sales in fiscal 1996. For further information regarding the reserve for returns, see Note 1 - Notes to Consolidated Financial Statements.
The reduction, delay or cancellation of orders or the return of a significant amount of product from one or more of the Company's top customers, the loss of one or more of the Company's top customers, or any financial difficulties of any such customers resulting in their inability to pay amounts owing to the Company, could have a material adverse effect on the Company's business, operating results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company manufactures its rope chain using machinery that is designed in accordance with patented processes. The Company also maintains certain trademarks and generally applies for copyrights covering the design of certain of its products. The level of protection available under the law for the Company's proprietary designs and products varies depending upon a number of factors, including the distinctiveness of the product and originality of design. There can be no assurance that the Company's patents, trademarks and copyrights will prevent competitors from producing products that are substantially similar to those of the Company. See ITEM 1. "BUSINESS - PRODUCT LINES."
In addition, the Company seeks to avoid disclosure of its trade secrets, including requiring those persons with access to the Company's proprietary information to sign confidentiality agreements with the Company and restricting access to the Company's systems.
Despite the Company's efforts to protect its trademarks, copyrights and other proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company considers confidential. Policing unauthorized use of the Company's intellectual property rights is difficult, and while the Company takes appropriate action whenever it discovers unauthorized use of its trademarks or that of any of its copywritten designs have been copied, knockoffs and counterfeit product are a persistent problem in the jewelry industry. In addition, the laws of many countries do not protect the Company's intellectual property rights to as great an extent as do the laws of the United States. There can be no assurance that the Company's means of protecting its intellectual property and other proprietary rights will be adequate or that the Company's competitors will not independently develop similar products.
Management does not believe that the Company's products or processes infringe the proprietary rights of any third parties, but there can be no assurance that third parties will not claim infringement with respect to existing or future products or processes. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect on the Company's business, operating results and financial condition.
COMPETITION
The jewelry industry is highly competitive, both in the United States and on a global basis. The Company encounters competition primarily from manufacturers with national and international distribution capabilities and, to a lesser extent, from small regional suppliers of jewelry. Management believes that the Company is well positioned in the industry and has a reputation for responsive customer service, high quality and well designed jewelry with broad consumer appeal.
The principal competitive factors in the industry are price, quality, design and customer service. The Company's specialized customer service programs are important competitive factors in sales to nontraditional jewelry retailers, including television shopping networks and discount merchandisers. However, the recent trend towards consolidation at the retail level in the jewelry industry and low labor costs outside of the United States may increase the level of competition facing the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition.
SEASONAL NATURE OF BUSINESS
The Company's business is seasonal in nature. Presented below are the Company's net sales for each quarter of fiscal 1998, fiscal 1997 and fiscal 1996:
The Company has experienced a seasonal pattern in its operating results with the third and fourth quarters typically having the highest sales.
This fluctuation is mitigated to a degree by the early placement of orders by many of the Company's customers, particularly for the Christmas holiday season. In addition, the Company markets holiday and seasonal products year round for such occasions as Mother's Day, Valentine's Day, Father's Day, religious holidays and school graduations.
SUPPLY; RELATED FINANCING ARRANGEMENTS
Gold acquired as part of the manufacturing process is at least .995 fine and is then combined with other metals to produce 14 karat and 10 karat gold. The term "karat" refers to the gold content of alloyed gold, measured from a maximum of 24 karats (100% fine gold). Varying quantities of metals such as silver, copper, nickel and zinc are combined with fine gold to produce 14 karat gold of different colors. These alloys are in abundant supply and are readily available to the Company.
The Company utilizes gold consignment arrangements with the Gold Lenders to supply substantially all of its gold needs. Under the terms of those arrangements, the Company is entitled to lease the lesser of (i) an aggregate of 250,000 ounces of fine gold or (ii)
consigned gold with an aggregate value equal to $106,695,000. The consigned gold is secured by certain property of the Company including inventory and machinery and equipment. The Company pays the Gold Lenders a consignment fee based on the dollar value of ounces of gold outstanding under their respective agreements, which value is based on the daily Second London Gold Fix. The Company believes that its financing rate under the consignment arrangements is substantially similar to the financing rates charged to gold consignees similarly situated to the Company. At January 31, 1998, the Company held 108,900 ounces of gold on consignment with a market value of $33,208,000.
The consignment agreements contain certain restrictive covenants relating to maximum usage, net worth, working capital and other financial ratios and each of the agreements requires the Company to own a specific amount of gold at all times. At January 31, 1998, the Company was in compliance with the covenants in its consignment agreements and the Company's owned gold inventory was valued at approximately $3,996,000. Management believes that the supply of gold available through the Company's gold consignment arrangements, in conjunction with the Company's owned gold, is sufficient to meet the Company's requirements.
The consignment arrangements are terminable by the Company or the respective Gold Lenders upon 30 days notice. If any Gold Lender were to terminate its existing gold consignment arrangement, the Company does not believe it would experience an interruption of its gold supply that would materially adversely affect its business. The Company believes that other consignors would be willing to enter into similar arrangements if any Gold Lender terminates its relationship with the Company. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Consigned gold is not included in the Company's inventory, and there is no related liability recorded. As a result of these consignment arrangements, the Company is able to shift a substantial portion of the risk of market fluctuations in the price of gold to the Gold Lenders, since the Company does not purchase gold from the Gold Lenders until receipt of a purchase order from, or shipment of jewelry to, its customers. The Company then either locks in the selling price of the jewelry to its customers concurrently with the required purchase of gold from the Gold Lenders or hedges against changes in the price of gold by entering into forward contracts or purchasing futures or options on futures that are listed on the Commodity Exchange, Inc. ("COMEX").
While the Company believes its supply of gold is relatively secure, significant increases or rapid fluctuations in the cost of gold may impact the demand for the Company's products. From July 1, 1995 until January 31, 1998, the closing price of gold according to the Second London Gold Fix ranged from a low of $278.70 per ounce to a high of $414.80 per ounce. During fiscal 1998, the closing price of gold dropped from a high of $362.15 per ounce to a low of $278.70 per ounce. There can be no assurance that fluctuations in the credit and precious metals markets would not result in an interruption of the Company's gold supply or the credit arrangements necessary to allow the Company to support its accounts receivable and continue the use of consigned gold. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
INSURANCE
The Company maintains primary all-risk insurance, with limits in excess of the Company's current inventory levels (including consigned gold), to cover thefts and damage to inventory located on the Company's premises and insurance on its goods in transit. The Company also maintains insurance covering thefts and damage to inventory located at the premises of its suppliers. The amount of coverage available under such policies is limited and may vary by location, but generally is in excess of the value of the gold held by a particular supplier. Additional insurance coverage is provided by some of the Company's suppliers. The Company also maintains fidelity insurance (insurance providing coverage against theft or embezzlement by employees of the Company).
EMPLOYEES
As of January 31, 1998, the Company employed 554 persons, 437 of which were directly engaged in manufacturing and distribution operations, with the remaining 117 employees who were engaged in administration and sales. None of the Company's employees are represented
by a union and the Company has not experienced any labor-related work stoppage. The Company places a heavy emphasis on employee relations through educational and training programs and employee teams. The Company considers its relations with its employees to be good. The Company believes there is an adequate pool of labor available to satisfy its foreseeable hiring needs for its sales, manufacturing and distribution operations.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to a wide range of federal, state and local laws and regulations, including those governing the use, storage and handling, generation, treatment, emission, release, discharge and disposal of certain materials and hazardous wastes, the remediation of contaminated soil and groundwater and the health and safety of employees (collectively, "Environmental Laws"). Since the Company's manufacturing operations routinely involve the use of certain regulated materials thereby exposing the Company to the risk of claims with respect to such matters, there can be no assurance that material liabilities could not be incurred in connection with any such claims. The Company has taken steps to reduce the environmental risks associated with its operations and believes that it is currently in substantial compliance with all Environmental Laws.
ACQUISITIONS
While the Company intends to continue to aggressively market its gold jewelry product lines to its existing customer base, management of the Company believes opportunities exist to increase sales by expanding its customer base and exploring product lines that may utilize diamonds or colored stones (precious, semiprecious or synthetic). As part of the Company's strategy to increase sales to new and existing customers, in 1994 and 1995 the Company acquired two small jewelry manufacturers. As a result of these transactions, the Company increased its market share with an existing customer and added certain new customers.
During fiscal 1998, the Company was engaged in merger discussions with one of its major competitors; however, on July 18, 1997, both companies jointly announced that negotiations were terminated due to an inability to agree on the composition of the Board of Directors for the combined company. The Company plans to pursue its long term growth strategy, that may include the acquisition of one or more additional companies that manufacture and distribute jewelry products.
ITEM 2.
ITEM 2. PROPERTIES.
The manufacturing and distribution facilities of the Company are located in three adjacent buildings in Mount Vernon, New York having a total of approximately 74,000 square feet. Pursuant to lease agreements entered into in May 1991 and May 1995, respectively, with Michael Anthony Company, now known as MacQuesten Realty Company ("MRC"), a New York general partnership, the general partners of which are Michael Paolercio ("MP") and Anthony Paolercio ("AP"), during fiscal 1998 the Company paid rent of approximately $498,000, for the adjacent buildings housing its manufacturing facilities located at 50, 60 and 70 South MacQuesten Parkway in Mount Vernon, plus real estate taxes and other occupancy costs. The Company believes that the terms of these lease arrangements with MRC are no less favorable than those that could have been obtained from an unaffiliated party. Subject to the Company's option to acquire the properties located at 60 and 70 South MacQuesten Parkway, Mt. Vernon, discussed in more detail below, the Company will pay an average annual rent of approximately $536,000 over the remaining term of the leases for the buildings at 60 and 70 South MacQuesten Parkway, plus real estate taxes and other occupancy costs.
As part of its long-term strategic plan, on May 16, 1997, the Company acquired one of the buildings housing its manufacturing facilities (the "50 Building") from MRC for a purchase price of $1,150,000. The 50 Building has approximately 22,000 square feet.
The Special Real Estate Committee of the Board of Directors, comprised of the Company's independent, outside directors, obtained an appraisal of the 50 Building, and after reviewing the appraisal and negotiation with MRC as to the terms of purchase, recommended the acquisition to the Company's Board of Directors. On April 4, 1997,
the Board of Directors voted unanimously, with Michael and Anthony Paolercio abstaining, to authorize the acquisition of the 50 Building, subject to (1) receipt of an updated, satisfactory appraisal and (2) the Company obtaining an exclusive, two-year option to acquire from MRC the remaining manufacturing facilities housed in the buildings located at 60 and 70 South MacQuesten Parkway, Mt. Vernon at an aggregate purchase price of $2,350,000 and on terms and conditions substantially the same as those agreed to for the purchase of the 50 Building.
In the event the Company exercises its option to acquire the properties located at 60 and 70 South MacQuesten, the Company may incur additional long-term indebtedness in order to finance the purchase.
The Company also owns the building housing its sales and administrative offices located at 115 South MacQuesten Parkway, in Mount Vernon, New York, and an adjacent parking area. The headquarters building has approximately 71,000 square feet.
See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The offices and facilities of the Company are protected by state-of-the-art security systems, procedures and a security staff.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On October 29, 1997, a decision was entered in the case of M.L. Logo v. Michael Anthony Jewelers, New York State Supreme Court, County of New York, Index No.: 106327/93 (the "Case"), pursuant to which the Company was ordered to pay M.L. Logo according to the terms of an agreement entered into on May 16, 1986 (the "Agreement"). On April 20, 1998, the Company settled the Case and any future payments that would have been due M.L. Logo under the Agreement for a one-time payment of $600,000.
Other legal proceedings to which the Company is a party are routine litigation incidental to Michael Anthony's business which is not material to the Company's business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol MAJ. The Company's Common Stock began its listing on AMEX on October 25, 1991. Prior to its listing on AMEX, the Company's Common Stock was traded in NASDAQ National Market System. The following table sets forth the high and low sale prices per share on AMEX for the fiscal years 1998 and 1997.
FISCAL YEAR ENDED JANUARY 31, 1998 HIGH LOW - ---------------------------------- ---- --- First Quarter 3-3/8 2-3/4 Second Quarter 4-1/4 3-1/16 Third Quarter 3-5/8 2-13/16 Fourth Quarter 2-15/16 2
FISCAL YEAR ENDED FEBRUARY 1, 1997 HIGH LOW - ---------------------------------- ---- ---
First Quarter 3-7/16 2-3/4 Second Quarter 3-5/8 2-3/4 Third Quarter 3-5/8 2-3/4 Fourth Quarter 3-7/16 2-15/16
As of April 10, 1998, there were 224 holders of record of the Company's Common Stock (including brokers holding in street name).
The Company has never paid a cash dividend. The Company anticipates that all of its earnings will be retained for use in its business and does not intend to pay cash dividends in the foreseeable future. In addition, the Company's senior secured note agreements contain covenants which limit the payment of dividends. Future dividend policy will depend upon, among other factors, the Company's earnings and its financial condition. See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and Note 6 "Long Term Debt" - Notes to the Consolidated Financial Statement.
In December 1995, the Company announced a Common Stock Repurchase Program (the "Stock Repurchase Program") pursuant to which the Company may repurchase up to 750,000 shares of Common Stock. On April 4, 1997, the Board of Directors authorized an increase of an additional 500,000 shares of Common Stock that the Company may repurchase under the Stock Repurchase Plan. As of April 10, 1998, the Company had repurchased a total of 1,058,000 shares of Common Stock under the Stock Repurchase Program for a total of approximately $2,983,000.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K.
(1) The year ended January 31, 1998, February 1, 1997, January 27, 1996, the seven months ended January 28, 1995 and the years ending June 30, 1994 and 1993 do not include consigned inventory, which had approximate value of $33,208,000, $40,282,000, $60,700,000, $72,936,000, $70,818,000 and $61,796,000, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Introduction
On November 3, 1994, the Company's Board of Directors approved a change in the fiscal year end of the Company from June 30th to a fiscal year ending on the last Saturday in January, effective for the seven month period ended January 28, 1995. During fiscal 1997, the Company changed its fiscal year end from the last Saturday in January to the Saturday closest to the end of January, effective with the fiscal year ended February 1, 1997. Fiscal years ended January 31, 1998, February 1, 1997 and January 26, 1996 were comprised of 52, 53 and 52 weeks, respectively.
As used below, (a) "fiscal 1998" refers to the fiscal year ended January 31, 1998, (b) "fiscal 1997" refers to the fiscal year ended February 1, 1997, and (c) "fiscal 1996" refers to the fiscal year ended January 27, 1996.
Results of Operations
The following table sets forth, as a percentage of net sales, certain items appearing in the Company's Statements of Operations for the indicated fiscal years.
FISCAL 1998 VS. FISCAL 1997
Net sales for fiscal 1998 were approximately $129,949,000, a decrease of 14% from net sales of approximately $150,629,000 for the comparable period in fiscal 1997. The decrease in sales was primarily due to the lower average gold price in fiscal 1998, $335 an ounce versus last year's average of $391 an ounce. Of the $20,680,000 decrease in sales, $12,827,000 was due to lower gold prices, $4,653,000 was due to fewer units sold and $3,200,000 due to one less week compared to the 53 weeks in fiscal 1997.
Gross profit for fiscal 1998 decreased by approximately $3,821,000 from fiscal 1997. As a percentage of net sales, gross profit remained approximately the same at 17.5% in fiscal 1998 compared to 17.7% in fiscal 1997. In the fourth quarter of fiscal 1998, management of the Company reassessed its marketing and production strategy and determined to implement a significantly different strategy. This is a direct result of the changing order patterns of some of the Company's major customers. As such, management made the determination to write down certain inventory, by approximately $3,309,000, that was related to the implementation of a SKU reduction program and the markdown of discontinued styles. If it were not for this unusual charge, the Company's gross profit margin would have been 20.1% for fiscal 1998, primarily due to the lower average gold price as well as changes in product mix.
Selling, general and administrative expenses for fiscal 1998 were approximately $25,155,000, an increase of $3,783,000 or 17.7% from approximately $21,372,000 for the comparable period in fiscal 1997. Included in selling, general and administrative expenses for fiscal 1998 was a charge of approximately $1,191,000 that was due to a write down of certain company assets and other expenses. As a percentage of net sales, adjusted
for the gold price difference of $12,827,000 discussed above and excluding the $1,191,000 charge, selling, general and administrative expenses increased to 16.8% in fiscal 1998, from 14.2% in fiscal 1997. The increase is primarily attributable to increases in (i) software implementation costs, (ii) payroll and payroll related expenses, (iii) advertising expenses, and (iv) legal costs associated with a litigation settlement. See ITEM 3. "LEGAL PROCEEDINGS."
Other income for fiscal 1998, was approximately $705,000, an increase of $631,000 from approximately $74,000 for the comparable period in fiscal 1997. The increase was primarily due a gain of $625,000 from the Company's sale of an asset.
Interest expense and gold consignment fees for fiscal 1998, were approximately $2,827,000, a decrease of $328,000 or 10% compared to approximately $3,155,000, for the comparable period in fiscal 1997. The decrease was primarily due to (i) the Company's lower average level of consigned inventory, (ii) lower average gold prices and (iii) lower interest expense due to principal payments in February and May 1997, and January 1998 on the Company's long term debt.
For the year ended January 31, 1998, an income tax benefit of $1,601,000 was recorded compared to a provision of $778,000 for the prior year. The effective tax rates for fiscal 1998 and fiscal 1997 were 38% and 30%, respectively. The lower effective tax rate in fiscal 1997 was due to a reversal in fiscal 1997 of prior year accruals for taxes.
As a result of the above factors the Company's net loss for fiscal 1998 was approximately $(2,612,000) compared to net income of $1,790,000 for the comparable period in fiscal 1997.
FISCAL 1997 VS. FISCAL 1996
Net sales for fiscal 1997 were approximately $150,629,000, an increase of 4% from net sales of approximately $145,257,000 for the comparable period in fiscal 1996. The increase in net sales resulted primarily from the 53rd week, which amounted to approximately $3,200,000 and increased shipments to the retail segment of the Company's customer base, which increase was offset in part by decreased shipments to the wholesale segment of the Company's customer base.
Gross profit margin increased to approximately 17.7% of net sales for fiscal 1997 compared to approximately 16.6% for the comparable period in fiscal 1996. The increase in gross margin was attributable to a change in the Company's product mix and increased sales of the Company's licensed products, which have higher gross margins.
Selling, general and administrative expenses for fiscal 1997 were approximately $21,372,000, compared to $19,455,000 for the comparable period in fiscal 1996. As a percentage of net sales, these expenses increased to 14.2% in fiscal 1997 from 13.4% in fiscal 1996. The increased percentage is primarily attributed to (i) increased product and packaging supplies, (ii) increased royalty and licensing expenses, (iii) increased payroll and payroll related expenses and (iv) the terminated acquisition negotiations with a company. These increases were offset in part by a decrease in advertising related expenses.
Other expenses-net for fiscal 1997 were approximately $2,648,000, a decrease of $745,000 or 22% compared to approximately $3,393,000 for the comparable period in fiscal 1996. Interest expense (including gold consignment fees) was approximately $3,155,000 a decrease of $680,000, or 18%, from $3,835,000 for the comparable period in fiscal 1996. This decrease was primarily due to (i) a lower average level of consignment inventory, (ii) lower consignment rates and (iii) lower debt levels.
The effective tax rates for fiscal 1997 and fiscal 1996 were 30% and 40%, respectively. The decrease in the effective tax rate is due to the reversal of prior year accruals.
As a result of the above factors, the Company's net income for fiscal 1997 was approximately $1,790,000 compared to $728,000 for the comparable period in fiscal 1996.
1996 VS. TWELVE MONTHS ENDED JANUARY 28, 1995 (UNAUDITED)
Net sales for fiscal 1996 were approximately $145,257,000, a decrease of 3% from net sales of approximately $149,583,000 for the comparable period in the prior year. The decrease in sales was primarily related to a significant reduction in volume of sales to the wholesale segment of the Company's customer base. This decrease was partly offset by an increase in volume of sales to the retail segment of the Company's customer base.
Gross profit margin decreased to 16.6% of net sales in fiscal 1996 compared to 18.0% for the comparable period in the prior year. The decrease in the gross margin was due to the sale of discontinued and excess inventory, which represented approximately 5% of net sales, at margins substantially below the Company's normal gross margin and an increased percentage of sales of the Company's rope chain which carries a lower gross margin than the Company's other products.
Selling, general and administrative expenses for fiscal 1996 were approximately $19,455,000, compared to $19,454,000 for the comparable period in the prior year. As a percentage of net sales, these expenses increased to 13.4% in fiscal 1996 from 13.0% in the prior year. The increased percentage of selling expenses is primarily attributed to advertising expenses that came from additional support required by the Company's retail customers and the Company's effort to increase its brand name recognition through advertising placed directly in a consumer magazine.
Other income and expenses for fiscal 1996 were approximately $3,393,000, an increase of $604,000 or 22% from $2,789,000 for the comparable period in the prior year. Interest expense (including gold consignment fees) was approximately $3,835,000, an increase of $579,000, or 18%, from $3,256,000 for the comparable period in the prior year. This increase was primarily due to (i) higher consignment rates, (ii) a higher average level of consigned inventory, and (iii) loans placed in February and October 1995. The higher consignment rates had a negative impact later in the fiscal year. The higher average level of consigned inventory had a more significant impact in the beginning of the fiscal year. The increase in gold consignment fees was partially offset by lower interest expense due to principal payments in February and May 1995 on the Company's other long-term debt and lower interest expense on the Company's short-term borrowings.
The effective tax rates for fiscal 1996 and the comparable period in fiscal 1995 were 40% and 36.6%, respectively.
As a result of the above factors, the Company's net income for fiscal 1996 was approximately $728,000 compared to $2,978,000 for the comparable period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on a gold consignment program, short-term and long-term borrowings and internally generated funds to finance its inventories and accounts receivable. The Company fills most of its gold supply needs through gold consignment arrangements with the Gold Lenders. Under the terms of those arrangements, the Company is entitled to lease the lesser of (i) an aggregate of 250,000 ounces of fine gold or (ii) consigned gold with an aggregate value equal to $106,695,000. The consigned gold is secured by certain property of the Company including inventory and machinery and equipment. The Company pays the Gold Lenders a consignment fee based on the dollar value of ounces of gold outstanding under their respective agreements, which value is based on the daily Second London Gold Fix. The Company believes that its financing rate under the consignment arrangements is substantially similar to the financing rates charged to gold consignees similarly situated to the Company. As of January 31, 1998, the Company held 108,900 ounces of gold on consignment with a market value of $33,208,000.
The consignment agreements contain certain restrictive covenants relating to maximum usage, net worth, working capital and other financial ratios and each of the agreements requires the Company to own a specific amount of gold at all times. At January 31, 1998, the Company was in compliance with the covenants in its consignment agreements and the Company's owned gold inventory was valued at approximately $3,996,000. Management believes that the supply of gold available through the Company's gold consignment arrangements, in
conjunction with the Company's owned gold, is sufficient to meet the Company's requirements.
The consignment agreements are terminable by the Company or the respective Gold Lenders upon 30 days notice. If any Gold Lender were to terminate its existing gold consignment arrangement, the Company does not believe it would experience an interruption of its gold supply that would materially adversely affect its business. The Company believes that other consignors would be willing to enter into similar arrangements if any Gold Lender terminates its relationship with the Company.
Consigned gold is not included in the Company's inventory, and there is no related liability recorded. As a result of these consignment arrangements, the Company is able to shift a substantial portion of the risk of market fluctuations in the price of gold to the Gold Lenders, since the Company does not purchase gold from the Gold Lenders until receipt of a purchase order from, or shipment of jewelry to its customers. The Company then either locks in the selling price of the jewelry to its customers concurrently with the required purchase of gold from the Gold Lenders or hedges against changes in the price of gold by entering into forward contracts or purchasing futures or options on futures that are listed on the COMEX.
While the Company believes its supply of gold is relatively secure, significant increases or rapid fluctuations in the cost of gold may impact the demand for the Company's products. From July 1, 1995 until January 31, 1998, the closing price of gold according to the Second London Gold Fix ranged from a low of $278.70 per ounce to a high of nearly $414.80 per ounce. There can be no assurances that fluctuations in the precious metals markets and credit would not result in an interruption of the Company's gold supply or the credit arrangements necessary to allow the Company to support its accounts receivable and continue the use of consigned gold.
In 1992, the Company issued $10,000,000 principal amount of senior secured notes with various insurance companies, which accrue interest at 8.61% per annum. In February 1995, the Company issued an additional $6,000,000 principal amount of senior secured notes with various insurance companies, with interest as of January 31, 1998 at 7.38% per annum. These notes are secured by the Company's accounts receivable, machinery and equipment, inventory (secondary lien to the Gold Lenders) and proceeds. In addition, the note purchase agreements contain certain restrictive financial covenants and restrict the payment of dividends. At January 31, 1998, $11,555,000 of principal remained outstanding under the notes issued in 1992 and 1995.
In the fourth quarter of fiscal 1998, management of the Company reassessed its marketing and production strategy and determined to implement a significantly different strategy. This was a direct result of the changing order patterns of some of the Company's major customers. As such, management made the determination to write down certain inventory, by approximately $3,309,000, that was related to the implementation of a SKU reduction program and the markdown of discontinued styles. Included in selling, general and administrative expenses for the year ended January 31, 1998, was a charge of approximately $1,191,000 that was due to the write down of certain Company assets. Due to these unusual charges in fiscal 1998 totalling $4,500,000, the Company was in default with a financial covenant under the note agreements and mortgage payable. The Company obtained waivers of this covenant noncompliance from both the insurance companies and mortgage lender. In addition, the insurance companies reset the financial covenant for fiscal 1999. Management expects the Company will be in compliance with the amended covenant in fiscal 1999.
On October 6, 1995, the Company obtained a loan from a bank in the amount of $2,500,000. As collateral for the loan, the Company granted the bank a first mortgage on the Company's corporate headquarters. The mortgage has a ten-year term and interest on the mortgage will accrue at 8% per annum. In addition, the mortgage contains certain restrictive financial covenants. At January 31, 1998, the Company was in compliance with the covenants after obtaining a waiver as discussed above. As of January 31, 1998, $2,283,000 of principal remained outstanding under the mortgage.
The Company has a line of credit arrangement with a commercial bank (the "Line of Credit"), under which the Company may borrow up to $15,000,000. The Line of Credit is secured by certain assets of the Company, including accounts receivable and inventory. As of January 31, 1998, there was no amount outstanding under the Line of Credit. The Line of Credit has been renewed and currently expires on July 31, 1998, subject to annual renewal. Management believes that the Line of Credit will be renewed; however, if the current lender decides not to renew the Line of Credit, the Company believes that other lenders would be willing to enter into a similar arrangement.
During fiscal 1998, cash provided from operating activities was $4,863,000. This was primarily attributable to a decrease in inventory of $5,990,000.
Cash of $3,976,000 was utilized for investing purposes during fiscal 1998, primarily for purchases of land, building and leasehold improvements of $2,266,000 and machinery and equipment of approximately $1,744,000.
During fiscal 1998, cash utilized in financing activities totaled $4,570,000. This was primarily attributed to payments of long term debt of $3,514,000 and the purchase of treasury stock of $1,056,000.
As part of its long-term strategic planning, the Company may expand its manufacturing and distribution facilities and acquire certain properties it is currently leasing from MRC (the "Leased Properties"). If the Company acquires such properties, the Company may incur or assume additional long-term indebtedness in order to finance their purchase.
For fiscal 1999, the Company projects capital expenditures of approximately $1,800,000, which includes machinery and equipment expenses and certain improvements on its leased and owned properties. See ITEM 2. PROPERTIES" and ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Except with respect to financing for the possible acquisition of its Leased Properties as discussed above, the Company believes that its long-term debt and existing lines of credit provide sufficient funding for the Company's operations. In the event that the Company requires additional financing during fiscal 1999, it will be necessary to fund this requirement through expanded credit facilities with its existing or other lenders. The Company believes that such additional financing can be arranged.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date sensitive software may recognize a date of 00 as the year 1900 rather than 2000. This could result in a system failure or miscalculations causing disruptions of operation, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company has developed a plan to address the Year 2000 issue. The Company anticipates maintaining its hardware platform but replacing or upgrading all affected software. Management expects that the Company will be fully Year 2000 compliant on or before June 1, 1999. The cost of the Year 2000 project is not expected to have a material adverse affect on the Company's results of operations.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include the words "believe," "expect," "plans" or similar words and are based in part on the Company's reasonable expectations and are subject to a number of factors and risks, many of which are beyond the Company's control. Actual results could differ materially from those discussed under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", as a result of any of the following factors:
(i) general economic conditions and their impact on the retail sales environment;
(ii) fluctuations in the price of gold and other metals used to manufacture the Company's jewelry;
(iii) risks related to the concentration of the Company's customers, particularly the operations of any of its top customers;
(iv) increased competition from outside the United States where labor costs are substantially lower;
(v) variability of customer requirements and the nature of customers' commitments on projections and orders; and
(vi) the extent to which the Company is able to retain and attract key personnel.
In light of these uncertainties and risks, there can be no assurance that the forward-looking statements in this Annual Report on Form 10-K will occur or continue in the future. Except for its required, periodic filings under the Securities Exchange Act of 1934, the Company undertakes no obligations to release publicly any revisions to these forward looking statements that may reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
NEW ACCOUNTING STANDARDS
During fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"), which requires presentation of basic earnings per share which includes no dilution. Earnings per share for all periods presented were computed on a basic basis using the weighted average number of common shares outstanding. Options and warrants outstanding were not materially dilutive.
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which will be effective for financial statements beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating statements. The Company anticipates that the adoption of SFAS No. 131 will not have a material impact on current disclosures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 and pages through and S1.
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 contained under the heading "Election of Directors" of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of Common Stock" of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is incorporated by reference herein.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is incorporated herein by reference. See also ITEM 2. "PROPERTIES".
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8K.
(a) The following documents are filed as a part of this Report:
PAGE ---- (1) Financial Statements: Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts S1
All other schedules are omitted as the required information is inapplicable or is presented in the consolidated financial statements or related notes.
The financial statement schedule should be read in conjunction with the financial statements in the 1998 Annual Report to Stockholders.
(3) Exhibits:
REPORT ON FORM 8K
(b) Not applicable
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Michael Anthony Jewelers, Inc. Mount Vernon, New York
We have audited the accompanying consolidated balance sheets of Michael Anthony Jewelers, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended January 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Michael Anthony Jewelers, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the results of their operations and their cash flows for each of the three years in the period ended January 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
April 20, 1998 Parsippany, New Jersey
MICHAEL ANTHONY JEWELERS, INC CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Michael Anthony Jewelers, Inc. ("the Company"), is a leading designer, marketer and manufacturer of affordable fine jewelry whose customers include jewelry chain stores, discount stores, department stores, television home shopping networks, catalogue retailers, and wholesalers.
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts of Michael Anthony Jewelers, Inc. and its subsidiaries, all of which are wholly-owned. All intercompany balances and transactions have been eliminated.
Inventories and Cost of Goods Sold
Inventories are valued at lower of cost (first in first-out method) or market.
The Company satisfies a majority of its gold supply needs through gold consignment agreements with financial institutions that lease gold to the Company ("gold lenders"), whereby the gold lenders have agreed to consign fine gold to the Company (see Note 4). In accordance with the terms of the agreements, the Company has the option of repaying the gold lenders in an equivalent number of ounces of fine gold or cash based upon the then quoted market price of gold.
The principal component of cost of goods sold is the cost of the gold bullion and other raw materials used in the production of the Company's jewelry. Other components of cost of goods sold include direct costs incurred by the Company in its manufacturing operations, depreciation, freight and insurance.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, five to fifteen years for machinery and equipment and thirty years for buildings. Leasehold improvements are amortized over the lesser of the estimated life of the asset or the lease.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Intangibles
Intangible assets (net of accumulated amortization of $1,416,000 and $1,209,000 as of January 31, 1998 and February 1, 1997, respectively), consist of patents which are amortized on a straight-line basis over the lives of the patents, approximately 14 years and a covenant-not-to- compete which is amortized on a straight-line basis over the life of the covenant of five years.
Revenue Recognition
Revenue from sales to customers (other than consignment) is recognized at the time the merchandise is shipped. Merchandise sold under consignment arrangements between the Company and certain customers is not recognized as revenue by the Company until the products are sold by the consignee. In certain cases, the Company accepts payment for merchandise in gold. Additionally, the Company enters into arrangements for certain customers of its rope chain and tubing products whereby the gold value of the finished product is transferred in the form of fine gold ounces from the customer to the Company. The value of the finished product that exceeds the gold content value is recovered as revenue and the related cost to manufacture is recorded as an expense ("tolling arrangements").
Allowance for Sales Returns
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.
Catalog Costs
Catalog costs are charged to expense as incurred, the only exception being major catalog revisions. Costs capitalized are amortized over the units of catalogs shipped, up to a maximum of two years. At January 31, 1998, February 1, 1997 and January 27, 1996, in connection with three significant catalog revisions, approximately $210,000, $124,000 and $250,000 respectively, had been capitalized. Included in the statement of operations for the years ended January 31, 1998, February 1, 1997 and January 27, 1996, is amortization expense of $229,000, $230,000 and $82,000, respectively.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash Equivalents
Highly liquid investments with maturities of three months or less at the date of acquisition are classified as cash equivalents.
Financial Instruments
The Company utilizes financial instruments, including commodity futures, forwards and options on futures, to limit its exposure to fluctuations in the price of gold. The Company does not hold or issue such instruments for trading purposes. The Company hedges its future contracts for gold against anticipated sales commitments with its customers. Gains or losses on the future contracts are deferred until settlement of the related anticipated sales to a customer. At January 31, 1998, there were forward contracts outstanding for the delivery of an aggregate of 5,000 ounces of gold at an average price of $302 or approximately $1.5 million. The Company's exposure to market risk related to the derivative financial instruments is limited to fluctuations in the price of gold. The Company is also exposed to credit loss in the event of nonperformance by the counterparties to the instruments; however, the risk of credit loss is not considered to be significant.
Earnings Per Share
During fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"), which requires presentation of basic and diluted earnings per share ("EPS") on the face of the consolidated statements of operations and requires a reconciliation of the numerators and denominators of the basic and diluted EPS calculations. Basic EPS is computed by dividing net income by the weighted average shares outstanding for the period. Earnings per share for all periods presented were computed on a basic basis using the weighted average number of common shares outstanding. Diluted EPS reflects the potential dilution that could occur if options to issue common stock were exercised and converted to common stock. Options and warrants outstanding were not materially dilutive. Earnings per share for prior periods have been computed in accordance with SFAS 128.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, which will be effective for fiscal years beginning after December 15, 1997. SFAS No. 131 redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating segments. The Company anticipates that the adoption of SFAS No. 131 will not have a material impact on current disclosures.
Use of 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 Year End
The Company's fiscal year end is the Saturday closest to the end of January, effective with the fiscal year ended February 1, 1997. The financial statements for the fiscal years ended January 31, 1998, February 1, 1997 and January 27, 1996 were comprised of 52, 53 and 52 weeks, respectively.
Reclassifications
Certain reclassifications were made to the prior year's financial statements to confirm to the current presentation.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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2. INVENTORIES
At January 31, 1998 and February 1, 1997, inventories excluded approximately 108,900 and 116,950 ounces of gold on consignment, respectively.
In the fourth quarter of fiscal 1998, management of the Company reassessed its marketing and production strategy and determined to implement a significantly different strategy. This was a direct result of the changing order patterns of some of the Company's major customers. As such, management made the determination to write down certain inventory, by approximately $3,309,000, as part of the implementation of a SKU reduction program and the markdown of discontinued styles.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
Included in selling, general and administrative expenses for the year ended January 31, 1998, was a charge of approximately $441,000 that was due to the write down of certain long-lived assets.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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4. GOLD CONSIGNMENT AGREEMENTS
The Company has gold consignment agreements with gold lenders. Under the terms of the agreements, the Company is entitled to lease the lesser of an aggregate amount of 250,000 ounces, or an aggregate consigned gold value not to exceed $106,695,000. The consigned gold is secured by certain property of the Company including its inventory and equipment. Title to such consigned gold remains with the gold lenders until the Company purchases the gold. However, during the period of consignment, the entire risk of physical loss, damage or destruction of the gold is borne by the Company. The purchase price per ounce is based on the daily Second London Gold Fix. The Company pays the gold consignors a consignment fee based on the dollar value of gold ounces outstanding, as defined in the agreements.
The consignment agreements are terminable by the Company or the respective gold lenders upon 30 days notice. If any gold lender were to terminate its existing gold consignment agreement, the Company does not believe it would experience an interruption of its gold supply that would materially adversely affect its business. The Company believes that other consignors would be willing to enter into similar arrangements if any gold lender terminates its relationship with the Company.
The consignment agreements contain certain restrictive covenants relating to maximum usage, net worth, working capital, and other financial ratios and each of the agreements require the Company to own a specific amount of gold at all times. As of January 31, 1998, the Company was in compliance with these covenants and the Company's owned gold inventory was valued at approximately $3,996,000.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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6. LONG-TERM DEBT
Long-term debt consists of the following:
The notes payable are secured by the Company's accounts receivable, machinery and equipment, inventory (secondary lien to the gold lenders) and proceeds. The mortgage payable is secured by the Company's corporate headquarters building and land, having a net book value of approximately $4,778,000 at January 31, 1998, and certain equipment therein.
The note purchase agreements contain restrictive financial covenants and limit the payment of dividends. Although the Company does not expect to pay dividends in the near future, approximately $1,914,000 would have been available for payment at January 31, 1998. Additionally, the mortgage agreement contains certain restrictive financial covenants.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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6. LONG-TERM DEBT (Continued)
Due to the unusual charges (see Notes 2 and 3) in fiscal 1998 of approximately $3,750,000 and asset write-offs and other accruals of approximately $750,000, the Company was in default with a financial covenant under the note agreements and mortgage payable. The Company obtained waivers of this covenant noncompliance from both the insurance companies and mortgage lender. In addition, the insurance companies reset the financial covenant for fiscal 1999. Management expects the Company will be in compliance with the amended covenant in fiscal 1999.
Maturities of long-term debt as of January 31, 1998 are as follows (in thousands):
Year Ending January -------------------
1999 $1,221 2000 2,230 2001 2,240 2002 2,251 2003 2,262 Thereafter 3,634 ------- $13,838 =======
7. LINE OF CREDIT
At January 31, 1998, the Company had a $15,000,000 line of credit agreement with no borrowings outstanding. The line of credit is secured by certain assets of the Company, including accounts receivable and inventory. Borrowings under the facility bear interest at the Company's option of the bank's prime rate, the fixed rate loan (as defined in the agreement) or the adjusted Eurodollar rate plus 2.5%. The line of credit expires on July 31, 1998 subject to annual renewal. Management believes that the line of credit will be renewed; however, if the current lender decides not to renew the line, the Company believes that other lenders would be willing to enter into a similar arrangement.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments are as follow:
The fair values of the 10.5% and 8.61% notes payable and the mortgage payable were based on current rates available to the Company for debt with similar remaining maturities. The fair value of the 1995 notes payable was assumed to reasonably approximate its carrying amount since it contains a variable interest rate.
The Company believes the carrying amount of the following financial instruments is equal to their fair value due to their short period of maturity: cash, accounts receivable, accounts payable and accrued expenses. The Second London Gold Fix is used daily to value the ounces of gold and as such the carrying value of gold inventory approximates fair value.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carry amounts of assets and liabilities for financial purposes and for income tax purposes.
As of January 31 1998, the balance sheet includes refundable income taxes of $1,667,000 which management anticipates receiving. The Company plans, for federal tax purposes, to carry back the net operating loss generated during the year ended January 31, 1998.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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9. INCOME TAXES (Continued)
Income tax (benefit)/provision consists of the following:
The following is a reconciliation of the federal statutory rate to the effective tax rate:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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9. INCOME TAXES (Continued)
The tax effects of significant items comprising the Company's deferred tax liabilities and assets are as follows (in thousands):
10. OTHER INCOME
Other income for the year ended January 31, 1998, includes a gain of approximately $625,000 on the sale of an asset.
11. RELATED PARTY TRANSACTIONS
In May 1991, the Company entered into two lease agreements with MacQuesten Realty Company ("MRC"), a partnership consisting of certain stockholders of the Company. Pursuant to the agreements, the Company agreed to rent the manufacturing and distribution facilities from MRC for a period of ten years, at an average annual rental of $536,000, plus real estate taxes and other occupancy costs.
The Company had another lease agreement with MRC to rent a manufacturing facility from MRC. On May 16, 1997, the Company acquired the facility for a purchase price of $1,150,000. As part of the transaction, the Company obtained an exclusive, two-year option to acquire from MRC the two remaining manufacturing and distribution facilities that are currently being leased from MRC (the "Leased Properties").
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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12. LEASES AND COMMITMENTS
(a) Leases
The Company conducts certain operations from leased manufacturing and distribution facilities. In addition to rent, the Company pays property taxes, insurance and certain expenses relating to leased facilities and equipment. The Company also leases machinery and equipment.
The following is a schedule of net minimum lease payments owed under capital and operating leases as of January 31, 1998:
Year Ending Capital Operating January Leases Leases ------- ------ ------ (in thousands) 1999 $241 $504 2000 111 531 2001 8 540 2002 - 135 ---- ----
Minimum lease payments: 360 $1,710 ====== Less: Interest 19 ----
Present value of net minimum lease payments 341 Less: current portion 222 ---- $119 ====
The majority of the payments set forth above for operating leases are to MacQuesten Realty Company.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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12. LEASES AND COMMITMENTS (Continued)
The interest rates applicable to the capital leases range from 4.84% - 8.18%. Included in property plant and equipment as of January 31, 1998, are capitalized assets with a carrying value of $696,000. Total capitalized lease amortization expense was $242,000, $353,000 and $256,000 for the years ended January 31, 1998, February 1, 1997 and January 27, 1996.
Rent expense related to the MRC leases, for the years ended January 31, 1998, February 1, 1997 and January 27, 1996, amounted to $498,000, $624,000 and $563,000, respectively, principally for manufacturing and distribution facilities.
(b) The Company's product line includes licensed goods manufactured pursuant to two or three year agreements with licensors. Royalty fees range from 6% to 12% of net sales of these products, or a minimum guarantee, whichever is greater. The Company records the related expense over the units sold.
As of January 31, 1998, the future guaranteed royalty commitments are as follows:
Guaranteed Year Ending Royalty January Commitments ------- ----------- (in thousands)
1999 $239 2000 45 ---- $284
13. STOCK PLANS
The Company has elected to continue to account for employees stock-based transactions under Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees". Since the exercise price of all stock options granted under the stock plans were equal to the price of the stock at the date of grant, no compensation has been recognized by the Company.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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13. STOCK PLANS (Continued)
Under the Company's stock option agreements, had the compensation expense been determined based upon the fair value at the grant date consistent with the methodology prescribed under SFAS No. 123, "Accounting for Stock Based Compensation," the Company's pro forma, net (loss)/income and (loss)/earnings per share would have been net (loss)/income of $(2,691,000), $1,712,000 and $692,000, and $(.35), $.21 and $.08, (loss)/earnings per share for the years ended January 31, 1998, February 1, 1997 and January 27, 1996, respectively. The weighted average per share fair value of the option granted during the year ended January 31, 1998 was estimated at $.74 on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
January 31, ----------- Expected life (years) 2 Risk-free interest rates 5.6% Expected volatility 36.9% Expected dividend yield -
The pro forma effect on net loss and loss per share for the year ended January 31, 1998 may not be representative of the pro forma effect in future years because it includes compensation cost on a straight line basis over the vesting periods of the grants and does not take into consideration the pro forma compensation costs for grants made prior to 1996.
INCENTIVE STOCK OPTION PLANS
(1) During July 1986, the Company adopted the 1986 Incentive Stock Option Plan. The Plan, as amended, permits the granting of incentive stock options and non-qualified stock options to employees for the purchase of up to an aggregate of 500,000 shares of common stock. The option term is for a period not to exceed ten years from the date of grant. At January 31, 1998, all shares reserved under the plan had been granted.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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13. STOCK PLANS (Continued)
The changes in the number of shares under option, the weighted average option price per share and the exercisable price per share are as follows:
1986 Incentive Stock Option Plan
(2) During the year ended June 30, 1994, the Company adopted the 1993 Long-Term Incentive Plan and the 1993 Non-Employee Directors' Stock Option Plan. The Plans permit the granting of incentive stock options and non-qualified stock options to employees and non-employee directors for the purchase of up to an aggregate of 2,000,000 and 250,000 shares of common stock, respectively. The option term is for a period not to exceed five years from the date of grant.
Long-term Incentive Plan
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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13. STOCK PLANS (Continued)
Long-term Incentive Plan (Continued)
Options exercisable at January 31, 1998 were for 454,933 shares of common stock at a price between $2.63 - $7.75 a share. At January 31, 1998, shares for future option grants totaling 1,296,500 were available under the plan.
Non-Employee Directors' Stock Option Plan
Options exercisable at January 31, 1998 were for 25,065 shares of common stock at a price between $2.63 - $5.00 a share. At January 31, 1998, shares for future option grants totaling 195,000 were available under this plan.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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13. STOCK PLANS (Continued)
WARRANTS AND NON-QUALIFIED OPTIONS
The Company has granted common stock purchase warrants and non-qualified options.
The changes in the number of shares under the stock purchase warrants and non-qualified options and the weighted average option price per share are as follows:
14. RETIREMENT PLAN
The Company established a 401(k) Retirement Plan and Trust for all eligible employees. Under the terms of the plan the employee may contribute 1% to 20% of compensation. There is a partial employer matching contribution. Included in the statement of operations for the years ended January 31, 1998 and February 1, 1997 is $96,000 and $34,000 of expense for the employer portion of the contribution. There were no employer contributions for the year ended January 27, 1996.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF JANUARY 31, 1998
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15. SIGNIFICANT CUSTOMERS
Sales to the Company's two largest customers aggregated approximately 25%, 25% and 29%, respectively, of net sales for the years ended January 31, 1998, February 1, 1997 and January 27, 1996.
16. STOCK REPURCHASE PROGRAM
In December 1995, the Company announced a Common Stock Repurchase Program, (the "1995 Stock Repurchase Program"), pursuant to which the Company may repurchase up to 750,000 share of Common Stock. On April 4, 1997, the Board of Directors authorized an increase of an additional 500,000 shares of common stock that the Company may repurchase under the stock repurchase plan. During the years ended January 31, 1998, February 1, 1997, and January 27, 1996, the Company repurchased a total of 328,000, 250,000 and 60,000 shares, respectively, on the open market under the 1995 Stock Repurchase Program for an aggregate price of approximately $1,056,000, $811,000 and $159,000, respectively. Effective May 24, 1996, the Board of Directors authorized the Company to retire 965,200 shares of common stock, previously held as treasury stock. As of April 10, 1998, the Company had purchased an additional 420,000 shares on the open market for an aggregate of approximately $957,000.
During the year ended January 27, 1996, the Company had repurchased 327,500 shares on the open market under their 1994 stock repurchase program for $966,000. The Company will not re-issue these shares to the public. In November 1995, the Company discontinued this program.
17. LEGAL PROCEEDINGS
In October 1997, a decision was entered in a case whereby the Company was ordered to pay the plaintiff according to the terms of an agreement entered into on May 16, 1986. On April 20, 1998, the Company settled the case and any future payments that would have been payable under the agreement for a one-time payment of $600,000. The settlement expense is included in selling, general and administrative expenses for the year ended January 31, 1998.
The Company is involved in various legal claims and disputes, none of which is considered material and all of which, for the most part, are normal to the Company's business. In the opinion of management, the amount of losses that might be sustained, if any, from such claims and disputes would not have a material effect on the Company's financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Summary of Quarterly Results (Unaudited) in thousands
(A) The Company's net sales for the second quarter are subject to seasonal fluctuation. This fluctuation is mitigated to a degree by the early placement of orders for the holiday season.
(B) Per share amounts do not always add to the annual per share amount because the figures are required to be independently calculated.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(A) Allowances, returns and uncollectible accounts charged against the reserve, (net of collections on previously written-off accounts).
S-1 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.
MICHAEL ANTHONY JEWELERS, INC.
By: /s/ MICHAEL PAOLERCIO ------------------------------------- Michael W. Paolercio, Co-Chairman of the Board and Chief Executive Officer
Date: April 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
EXHIBIT INDEX