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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 2003
COMMISSION FILE NUMBER: 0-15230
MICHAEL ANTHONY JEWELERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 13-2910285
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
115 SOUTH MACQUESTEN PARKWAY 10550
MOUNT VERNON, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 699-0000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK PAR VALUE $.001
AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non voting common equity
held by non-affiliates as of the last business day of the registrant's most
recently completed second fiscal quarter, based on the closing price of the
registrant's common stock as reported on the American Stock Exchange composite
tape on August 2, 2002, was approximately $7,955,000.
As of April 22, 2003, there were 6,245,000 shares outstanding of
Michael Anthony's common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III Portions, as specified herein, of registrant's Definitive
Proxy Statement for Annual Meeting of Stockholders for Fiscal 2003 (to be filed
within 120 days of end of fiscal year).
PART I
ITEM 1. BUSINESS.
GENERAL
Michael Anthony Jewelers, Inc. ("Michael Anthony") is a leading
designer, marketer and manufacturer of affordable branded fine jewelry in the
United States. We sell our jewelry directly to jewelry chain stores, discount
stores, department stores, television home shopping networks, and wholesalers.
Our jewelry is targeted towards the middle market, which generally retails
between $20 and $200 and between $300 and $2,500 for watches. Our products
include rope chain, bracelets, charms, pendants, earrings, rings and watches.
Our products are sold in over 20,000 retail locations nationwide.
Our home page on the Internet is www.michaelanthony.com. You can learn
about Michael Anthony and link to our periodic reports by visiting that site.
Michael Anthony was organized as a Delaware corporation in 1986 and is
the successor to Michael Anthony Jewelers, Inc., a New York corporation,
organized in 1977.
In July 2002, The Company decided to restructure certain aspects of its
business and operations whereby the Corporation formed three wholly owned
subsidiaries to take responsibility for different functions of the business of
the Corporation.
The Corporation established a limited liability company under the laws
of the State of New York named Michael Anthony Jewelers Manufacturing, LLC, of
which the Corporation and Mount Vernon Distributors, Inc., a wholly-owned
subsidiary of the Corporation, are the members, and its primary purpose is to
engage in manufacturing.
The Corporation established a limited liability company under the laws
of the State of New York named Michael Anthony Jewelers Sales and Distribution,
LLC, of which the Corporation and Mount Vernon Distributors, Inc., a
wholly-owned subsidiary of the Corporation, are the members, and its primary
purpose is sales and distribution functions.
The Corporation established a business corporation under the laws of
the State of New York named Michael Anthony Jewelers Real Estate, Inc., of which
the Corporation shall be the sole shareholder and the primary purpose of which
shall be owning, holding and managing real property used by the Corporation and
its affiliates.
2
FISCAL YEAR
On March 14, 2003, the Board of Directors of Michael Anthony Jewelers,
Inc. (the "Company") approved a change in the Company's fiscal year end from the
date that falls on the last Saturday that is closest to the end of January to
December, a 52/53 week year ending on the Saturday closest to December 31st,
effective February 2, 2003.
Fiscal years ended February 1, 2003, February 2, 2002, and January 27,
2001, were comprised of 52, 53 and 52 weeks, respectively.
As used throughout this document, (a) fiscal 2003 refers to the fiscal
year ended February 1, 2003 (b) fiscal 2002 refers to the fiscal year ended
February 2, 2002, and (c) fiscal 2001 refers to the fiscal year ended January
27, 2001.
PRODUCT LINES
Michael Anthony offers a broad selection of handcrafted gold and
gemstone jewelry. Many of our products carry the "Ma" trademark, which has
become widely recognized in the jewelry industry and with certain consumers.
Michael Anthony manufactures an extensive selection of casted gold charms and
pendants including religious symbols; popular sayings; sport themes and team
logos; animal motifs; nautical, seashore, western, musical, zodiac and other
thematic figures; initials; and abstract artistic creations. We manufacture gold
rope, mesh and other chains and gold locks, and gold tubing and bangle blanks
used in the production of bangle bracelets and earrings. We manufacture gold,
stamped and tubed earrings, pendants and certain jewelry components. We also
manufacture a line of men's and ladies' 14 karat gold watches under the "Michael
Anthony" brand name. In addition, Michael Anthony designs, manufactures and
distributes karat gold jewelry accented with colored gemstones and invisible set
diamond rings. We have begun the outsourcing of certain gold products to enhance
our product line.
The table below sets forth the approximate percentage of (a) sales and
(b) kilograms shipped in fiscal years 2003, 2002 and 2001, respectively,
attributable to each of Michael Anthony's product categories.
Fiscal Fiscal Fiscal
2003 2002 2001
------------------- ------------------- -------------------
% of % of % of
% of Kilograms % of Kilograms % of Kilograms
Sales Shipped Sales Shipped Sales Shipped
----- ------- ----- ------- ----- -------
Casted charms/rings 31 28 30 26 30 25
Chains 37 44 43 51 43 53
Stamped/tubed earrings 15 13 14 12 10 8
Watches and other items 17 15 13 11 17 14
Michael Anthony maintains an in-house design staff which utilizes
CAD/CAM (computer aided design/computer aided manufacturing) technology to
enhance our design, modeling and production capabilities. The equipment is
utilized for the design of Michael Anthony's new products and for modifying the
scale of existing designs whenever possible. Michael Anthony
3
obtains proprietary protection for its products and designs. Michael Anthony
updates its product offerings periodically by adding new designs and eliminating
less popular styles.
We believe that our future success will depend, in part, on our ability
to enhance existing product lines and develop new styles and products to meet an
expanding range of customer requirements. As of April 7, 2003, our product
development staff consisted of 14 full time employees. Product development
expenses for molds and models for fiscal 2003 were approximately $760,000. We
anticipate that we will continue to commit substantial resources to product
development.
MANUFACTURING PROCESS
Our manufacturing facilities are located in Mount Vernon, New York and
Santo Domingo, Dominican Republic.. We utilize manufacturing processes that
combine modern technology and mechanization with hand craftsmanship to produce
fashionable and affordable gold jewelry. Our manufacturing processes include:
1. the casting (or lost wax) method, which is a long-standing jewelry
manufacturing process;
2. a photo etching process, which has allowed Michael Anthony to enter the
lower priced segment of the market through production of ultra light
weight products; and
3. the diamond cut process, which produces a sparkling effect on a
finished piece of gold jewelry.
The machinery on which we manufacture our rope chain products can
operate 24 hours a day and requires minimal direct labor. This has enabled us to
become one of the lowest cost producers of rope chain in the world.
During fiscal 2003, Michael Anthony manufactured approximately 81% of
its products from gold bullion and other raw materials and purchased
approximately 19% of its product as semi-finished or finished goods. This
represents an increase of 8% in purchased products as compared to last year.
Michael Anthony 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 Michael Anthony are readily available.
OPEN ORDERS
As of April 7, 2003, the aggregate dollar value of open orders was
approximately $6,300,000. We expect that substantially all of the current orders
will be shipped in the next 90 days. We do not believe that open orders are
indicative of our future results of operations, as open orders as of any given
date are not necessarily indicative of sales trends.
4
MARKETING AND SALES
We market and sell our jewelry primarily through our in-house sales
force. Sales are made by our sales personnel primarily at our showroom in Mount
Vernon, New York and direct presentations at customers' locations. Products are
promoted through the use of catalogues, flyers, advertisements in trade
publications, trade show exhibitions and cooperative advertising allowances with
certain customers.
Our marketing strategy is to increase brand recognition of the "Michael
Anthony" name. This includes advertising in consumer magazines and other
publications of many of America's finest retailers. We believe 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 our products.
To better meet our customers' needs, we have a wide range of customer service
programs:
1. inventory management assistance through electronic data
interchange;
2. customized packaging and bar coding; and
3. computerized analysis of sales and marketing trends.
Our vertical integration and customer service programs enable us to be
responsive to our customers' needs. We manufacture and deliver most orders on a
timely and more cost-effective basis than many of our competitors.
Our jewelry is sold primarily to jewelry chain stores, discount stores,
department stores, television home shopping networks, and wholesalers. We assist
our customers in allocating their purchasing budget among the items in the
various product lines. We advise them of items having higher consumer demand as
determined by Michael Anthony's computerized market analysis. Prices vary on the
basis of service required by customers. We ship our products in bulk to
wholesale distributors. For certain retail jewelry chains, we prepackage and
price tag most items. We then ship an order of many different items to
distribution centers and stores in the chain. We provide additional services to
certain customers to meet their specific marketing needs, such as tagging,
boxing and point-of-sale displays.
We also ship our jewelry to a limited number of customers on a
consignment basis. Through these arrangements, we deliver our products on
consignment, and when sold to consumers, the retailer pays Michael Anthony for
the consigned merchandise. Consigned merchandise is subject to our own
consignment arrangements with our 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."
5
During fiscal 2003, sales to the five largest of Michael Anthony's
customers totaled approximately 57% of total net sales. Our four largest
customers were Wal-Mart, J.C. Penney, Home Shopping Network and Sterling, Inc.,
accounting for 16.2%, 13.5%, 11.5% and 10.8%, respectively, of net sales. None
of Michael Anthony's customers are prohibited from purchasing products from our
competitors.
We reduce gross sales by the amount of returns and discounts to
determine net sales each month. Each month we establish a reserve for returns
based on our 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 13.8%, 11.5% and 12.2% of gross sales in each of
fiscal 2003, fiscal 2002 and fiscal 2001, respectively. For further information
regarding the reserve for returns, see Note 1 - Notes to Consolidated Financial
Statements.
If we lose one or more of our top customers or if any of them reduce,
delay or cancel orders, return significant amounts of product or experience
financial difficulties that result in their inability to pay, it could have a
material adverse effect on our business, operating results and financial
condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We use Italian-made machinery, together with acquired proprietary
knowledge, to manufacture our rope chain products. Michael Anthony maintains
certain trademarks and generally applies for copyrights covering the design of
certain of our products. The level of protection available for our proprietary
designs and products varies depending on a number of factors, including the
distinctiveness of the product and originality of design. Our patents,
trademarks and copyrights may not prevent competitors from producing products
that are substantially similar to those of Michael Anthony. See Item 1.
"Business - Product Lines."
Michael Anthony seeks to avoid disclosure of its trade secrets, and
requires those people with access to our proprietary information to sign
confidentiality agreements. Access to our systems is also restricted.
Despite Michael Anthony's efforts to protect our trademarks, copyrights
and other proprietary rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that Michael Anthony considers
confidential. Policing unauthorized use of Michael Anthony's intellectual
property rights is difficult. We take appropriate action whenever we discover
unauthorized use of our trademarks or if any of our copyrighted designs have
been copied. Knockoffs and counterfeit products are a persistent problem in the
jewelry industry. The laws of many countries do not protect our intellectual
property rights to the same extent as the laws of the United States. There can
be no assurance, that even if Michael Anthony's means of protecting our
intellectual property and other proprietary rights were successful, our
competitors may not independently develop similar products.
We do not believe that our products or processes infringe on the
proprietary rights of any third parties. 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 Michael
6
Anthony to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to Michael
Anthony or at all, which could have a material adverse effect on Michael
Anthony's business, operating results and financial condition.
COMPETITION
The jewelry industry is highly competitive, both in the United States
and on a global basis. Michael Anthony encounters competition primarily from
manufacturers with national and international distribution capabilities and, to
a lesser extent, from small regional suppliers of jewelry. We believe that we
are well positioned in the industry and have 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. Our specialized customer service programs are
important competitive factors in sales to nontraditional jewelry retailers,
including television shopping networks. 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 Michael Anthony.
There can be no assurance that Michael Anthony will be able to compete
successfully against current and future competitors or that competitive
pressures faced by us will not have a material adverse effect on our business,
operating results and financial condition.
SEASONAL NATURE OF BUSINESS
Our business is seasonal in nature. Presented below are our net sales
for each quarter of fiscal 2003, fiscal 2002 and fiscal 2001:
NET % OF
SALES NET SALES
---------------- ---------
($ IN THOUSANDS)
Fiscal 2003 Ended February 1, 2003
First Quarter $30,134 26%
Second Quarter $20,296 17%
Third Quarter $39,593 33%
Fourth Quarter $28,557 24%
Fiscal 2002 Ended February 2, 2002
First Quarter $29,176 21%
Second Quarter $28,210 20%
Third Quarter $50,981 36%
Fourth Quarter $33,551 23%
Fiscal 2001 Ended January 27, 2001
First Quarter $25,700 21%
Second Quarter $24,821 20%
Third Quarter $41,045 33%
Fourth Quarter $33,152 26%
7
Michael Anthony 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
our customers, particularly for the Christmas holiday season. In addition, we
market birthday, anniversary, holiday and seasonal products year round for such
occasions as Mother's Day, Valentine's Day, Father's Day, religious holidays and
school graduations.
GOLD SUPPLY AND RELATED FINANCING ARRANGEMENTS
Gold used in 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 Michael Anthony.
Michael Anthony uses gold consignment arrangements with the gold
lenders to supply substantially all of its gold needs. See Item 7. "Management's
Discussion And Analysis And Financial Condition And Results Of
Operations-Liquidity and Capital Resources."
INSURANCE
We maintain primary all-risk insurance, with coverage in excess of our
current inventory levels (including consigned gold), to cover thefts and damage
to inventory located on our premises and insurance on Michael Anthony goods in
transit. We also maintain insurance covering theft and damage to inventory at
our suppliers' locations. 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 Michael Anthony's suppliers. We also maintain fidelity
insurance, which is insurance providing coverage against theft or embezzlement
by our employees.
EMPLOYEES
As of February 1, 2003, we employed 712 persons, 232 of which were
directly engaged in manufacturing and distribution operations, 119 of which were
engaged in administration and sales and 361 of which were employed at our
manufacturing and assembly facility in the Dominican Republic. None of our
employees are represented by a union and we have not experienced any
labor-related work stoppage. We place a heavy emphasis on employee relations
through educational and training programs and employee teams. We consider our
relations with our employees to be good. We believe there is an adequate pool of
labor available to satisfy our foreseeable hiring needs for our sales,
manufacturing and distribution operations.
8
Based upon a petition filed by a local union, the National Labor Relations Board
scheduled an election among certain employees of the Company to decide whether
or not they desire union representation. The election was held on October 2,
2002. The majority of employees voted against union representation. However, the
union has appealed the results to the National Labor Relations Board. The
National Labor Relations Board is investigating, and no determination has been
made by the Labor Board at this time. Relating to this matter, the Company has
incurred approximately $159,000 in legal fees for the year ended February 1,
2003.
ENVIRONMENTAL MATTERS
Extensive environmental laws and regulations and various other federal,
state and local laws and regulations regarding health and safety matters affect
our operations. Since our manufacturing operations routinely use materials
regulated by the environmental laws we may incur material liabilities if any
claims are brought against us in connection with these operations. We have taken
steps to reduce the environmental risks associated with our operations and
believe that we are currently in substantial compliance with all environmental
laws.
AGREEMENTS
Although we intend to continue to aggressively market our gold jewelry
product lines to our existing customer base, we believe there are opportunities
to increase sales by expanding our customer base and exploring product lines
that may utilize diamonds or colored stones, which are precious, semiprecious or
synthetic. Our strategy is to increase sales to new and existing customers as
well as raise our average price points and gross margins.
On December 22, 2000, Michael Anthony entered into a distribution
agreement with the Almond Jewelry Group. Under the arrangement, Michael Anthony
has acquired the exclusive rights to market and distribute gold jewelry products
manufactured by Almond to retailers in the United States. Almond will no longer
directly market its gold jewelry products to retailers in the United States.
Michael Anthony has also entered into a supply agreement with Almond, which will
assure its customer base the continuity of a supply of high quality and
innovative merchandise. In connection with the distribution agreement, Almond
was issued warrants to purchase 300,000 shares of common stock at a price of
$1.62 per share. The warrant term is for a period not to exceed four years from
the date of grant. On December 30, 2002, Michael Anthony renewed this agreement
for a one-year term under similar terms and conditions.
As a result of this agreement, we have increased our market share with
an existing customer and added new customers. We plan to pursue our long term
growth strategy, that may include the acquisition of one or more additional
companies that manufacture and distribute jewelry products.
On July 30, 2002, the Company acquired the gold jewelry division of A&A
Jewelers, Inc. ("A&A"). Under the terms of the agreement, the Company will
acquire the molds and inventory of A&A, and at the same time, sell its family
jewelry and special order division of A&A. As a result of this acquisition, the
Company expects to increase sales to its existing customers. The acquisition was
accounted for under the purchase method of accounting. No goodwill was
recognized as a result of this transaction. The aggregate purchase price was
$1,180,000. Part of the purchase was offset by the sale of other assets.
9
ITEM 2. PROPERTIES.
Our manufacturing and distribution facilities are all owned and they
are located in four buildings in Mount Vernon, New York having a total of
approximately 150,000 square feet and one building in Santo Domingo, Dominican
Republic, which has 40,000 square feet.
The Company is consolidating its manufacturing and distribution operations. As
part of this process, the Company will sell two of its buildings located in Mt.
Vernon, totalling approximately 50,000 square feet. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long Lived Assets", as of February 3, 2002.
In April 2003, the Company accepted an offer for the sale of one of its
buildings. The Company expects to complete this transaction in the fourth
quarter of Fiscal 2004.
See Item 7. "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" and Item 13. "Certain Relationships And
Related Transactions."
Our offices and facilities are protected by state-of-the-art security
systems, procedures and a security staff. The Company believes our current
manufacturing, distribution and administrative facilities are adequate for our
current needs.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings to which Michael Anthony is a party are routine
litigation incidental to our business which are not material to Michael
Anthony's business or financial condition.
Michael Anthony has been named a defendant in an action alleging patent
infringement. We believe the allegations are without merit and we are prepared
to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the American Stock Exchange under the
symbol MAJ. Our common stock began its listing on AMEX on October 25, 1991.
Prior to its listing on AMEX, our 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 2003 and 2002.
HIGH LOW
---- ---
FISCAL YEAR ENDED FEBRUARY 1, 2003
First Quarter 3 1/2 2 3/4
Second Quarter 3 3/16 2 3/16
Third Quarter 2 6/16 1 15/16
Fourth Quarter 2 1/4 1 1/2
FISCAL YEAR ENDED FEBRUARY 2, 2002
First Quarter 2 1 1/2
Second Quarter 2 13/16 1 11/16
Third Quarter 2 3/4 2 1/8
Fourth Quarter 2 15/16 2 13/16
As of April 7, 2003, there were 177 holders of record of Michael
Anthony's common stock.
We have never paid a cash dividend. We anticipate that all of our
earnings will be retained for use in our business and we do not intend to pay
cash dividends in the foreseeable future. Future dividend policy will depend
upon, among other factors, our earnings and 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
Statements.
In December 1995, we announced a common stock repurchase program under
which Michael Anthony 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 we may repurchase under the stock repurchase
plan. On May 26, 1998, the board authorized a further increase of up to an
additional 1,000,000 shares of common stock that we may repurchase under the
stock repurchase plan. The combined total of the stock repurchase programs
amount to 2,250,000 shares.
As of April 7, 2003, Michael Anthony had purchased a total of 2,141,000
shares on the open market for an aggregate of approximately $6,429,000, at an
average price of $3.00.
11
EQUITY COMPENSATION PLAN INFORMATION
AS OF FEBRUARY 1, 2003
Number of securities
remaining available for
Number of Securities future issuance under
to be issued on Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan Category warrants or rights warrants or rights the first column
- ---------------------------- -------------------- -------------------- -----------------------
Equity compensation plans 246,120 $2.92 -0-
approved by security holders
(1)
Equity compensation plan not 300,000 $1.62 -0-
approved by security holders
(2)
Total 546,120 $2.21 -0-
(1) Shareholder Approved Plans
In April 1993, the Company adopted the 1993 Long-Term Incentive Plan (the "1993
Incentive Plan"), which provided for the granting of stock options, stock bonus,
restricted stock and performance plan awards to officers and other key employees
of the Company. The 1993 Incentive Plan was approved by the shareholders of the
Company in 1993. The aggregate number of shares of common stock of the Company
for which awards could be granted under the 1993 Incentive Plan was 1,000,000
shares, subsequently amended to 2,000,000. The 1993 Incentive Plan expired by
its terms on April 22, 2003 and no further grants will be made under the 1993
Incentive Plan
In April 1993, the Company also adopted the 1993 Non-Employee Directors' Stock
Option Plan (the "1993 Directors' Plan") which provided for the granting of
stock options to non-employee directors. The 1993 Directors' Plan was approved
by the shareholders of the Company in 1993. The aggregate number of shares of
common stock of the Company that could be granted under options was 250,000. The
1993 Directors' Plan expired by its terms on April 22, 2003 and no further
grants will be made under the 1993 Directors' Plan.
(2) Warrants
On December 22, 2000 in connection with the distribution agreement with Almond
Jewelry Group, Almond was issued warrants to purchase 300,000 shares of common
stock at a price of $1.62 per share. The warrant term is for a period not to
exceed four years from date of grant.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of Michael Anthony should be read
in conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K.
Feb. 1, Feb. 2, Jan. 27, Jan. 29 Jan. 30
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
Statement of Operations
Net sales $ 118,580 $ 141,918 $ 124,718 $ 144,937 $ 137,567
Cost of goods sold 98,005 113,263 99,983 110,096 105,870
--------- --------- --------- --------- ---------
Gross profit 20,575 28,655 24,735 34,841 31,697
Selling, general and
administrative expenses 25,048 24,435 24,940 28,257 25,942
--------- --------- --------- --------- ---------
Operating (loss)/income (4,473) 4,220 (205) 6,584 5,755
Other(expense)/income:
Interest expense/
Gold consignment fee (2,305) (2,806) (2,261) (2,699) (2,290)
Other income/(expense), net 44 119 140 342 326
--------- --------- --------- --------- ---------
(Loss)/income before extraordinary
item and income taxes (6,734) 1,533 (2,326) 4,227 3,791
Income tax (benefit)/provision (2,560) 582 (886) 1,607 1,441
--------- --------- --------- --------- ---------
(Loss)/income before
extraordinary item (4,174) 951 (1,440) 2,620 2,350
--------- --------- --------- --------- ---------
Extraordinary item (net of income
taxes of $130,000) -- -- -- -- 212
Net (loss)/income $ (4,174) $ 951 $ (1,440) $ 2,620 $ 2,138
========= ========= ========= ========= =========
(Loss)/earnings per share before
extraordinary item - basic $ (.67) $ .15 $ (0.23) $ 0.40 $ 0.30
========= ========= ========= ========= =========
(Loss)/earnings per share before
extraordinary item - diluted $ (.67) $ .15 $ (0.23) $ 0.39 $ 0.30
========= ========= ========= ========= =========
Extraordinary item $ -- $ -- $ -- $ -- $ (.03)
========= ========= ========= ========= =========
Weighted average number
of shares - basic 6,242 6,203 6,319 6,592 7,111
Weighted average number
of shares - diluted 6,242 6,314 6,319 6,702 7,111
Balance Sheet Data:
Working capital $ 32,885 $ 34,724 $ 33,231 $ 35,960 $ 39,171
Total assets(1) 62,165 65,360 63,335 67,914 65,037
Long-term debt and capital
lease liability 7,305 9,166 10,987 12,684 12,509
Stockholders' equity 39,595 43,492 42,681 44,044 43,298
(1) The fiscal years ended February 1, 2003, February 2, 2002, January 27,
2001, January 29, 2000, and January 30, 1999, do not include consigned
inventory, which had approximate value of $49,901,000, $40,635,000,
$30,718,000, $38,076,000, and $35,096,000, respectively.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Management's Estimates
The preparation of consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate estimates, including those
related to sales allowance provisions, as described below, bad debt reserves,
allowances for co-op advertising, income taxes, inventory and contingencies. We
base our estimates on historical data, when available, experience, industry and
market trends, and on various other assumptions that are believed to be
reasonable under the circumstances, the combined results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates.
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.
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.
14
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.
Adjustments to the Company's reserve have not been material.
Derivative Financial Instruments
On January 28, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments
and Hedging Activities", as amended, and interpreted, which requires that all
derivative instruments be recorded on the balance sheet at their fair value.
SFAS 133 requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and to measure those instruments at fair
value. Additionally, the fair value adjustments will affect either
stockholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the nature
of the hedging activity. The impact of adopting FAS 133 on the Company's
Consolidated Statement of Operations and Consolidated Balance Sheet was not
material.
The Company uses 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 enter such contracts for speculative
purposes.
For derivative instruments that are designated and qualify as a fair
value hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as the
offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in earnings in the current period. For derivative instruments that
are designated and qualify as a cash flow hedge (i.e., hedging the exposure of
variability in expected future cash flows that would be attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of Accumulated comprehensive gain/(loss)
(a component of stockholders' equity) and reclassified into earnings in the
period or periods during which the hedged transaction affects earnings. The
remaining gain or loss on the derivative instrument, if any (i.e., the
ineffective portion and any portion of the derivative instrument excluded from
the assessment of effectiveness) is recognized in earnings in the current
period.
15
Results of Operations
The following table sets forth, as a percentage of net sales, certain items
appearing in our Statements of Operations for the indicated fiscal years.
YEAR ENDED
--------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 2, JANUARY 27, JANUARY 29,
2003 2002 2001 2000
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.7 79.8 80.2 76.0
Selling, general and
administrative expenses 21.1 17.2 20.0 19.5
Interest and gold consignment
fee expense 1.9 2.0 1.8 1.9
Other income - (.1) (.1) (.2)
Income tax (benefit)/provision (2.2) .4 (.7) 1.1
Net (loss)/income (3.5) .7 (1.2) 1.8
FISCAL 2003 VS. FISCAL 2002
Net sales for fiscal 2003 were approximately $118,580,000, a decrease of
16.4% from net sales of approximately $141,918,000 for the comparable period in
fiscal 2002. The decrease in sales was primarily due to decreased shipments to
the retail segment of our customer base, which was offset in part by increases
in the sales prices due to an increase in the average market price of gold.
More specifically the sales shortfall was the result of the loss of three
customers, namely Service Merchandise, Kmart and Ames Department Stores. In
addition, certain product promotions from the previous year were not repeated,
there was a higher percentage of customer returns, and lastly, significant sales
of religious and patriotic jewelry, which were made in the months following
September 11, 2001 did not reoccur.
Gross profit on sales for fiscal 2003 were approximately $20,575,000, a
decrease of $8,080,000 from approximately $28,655,000 for the comparable period
in fiscal 2002. As a percentage of net sales, gross profit decreased to 17.4% in
fiscal 2003 compared to 20.2% in fiscal 2002. Excluding the effect of the
increase in the average market price of gold, the gross profit margin would have
been 18.4% for the fiscal year 2003. The decrease in gross margin was
attributable to higher sales of closeout merchandise as well as a change in the
customer and product mix.
Selling, general and administrative expenses for fiscal 2003 were
approximately $25,048,000, an increase of $613,000 or 2.5% from approximately
$24,435,000 for the comparable period in fiscal 2002. The increase is primarily
attributable to increases in (a) advertising expenses, (b) payroll and payroll
related expenses, and (c) legal fees related to the
16
labor dispute, which were offset in part by decreases in product and packaging
supplies and royalty and licensing expenses.
Interest expense and gold consignment fees for fiscal 2003, were
approximately $2,305,000, a decrease of $501,000 or 17.9% compared to
approximately $2,806,000 for the comparable period in fiscal 2002. The decrease
was primarily due to the Company's decreased borrowing rate under the Company's
line of credit, lower average level of consigned inventory and lower consignment
rates.
For the year ended February 1, 2003, an income tax benefit of
$2,560,000 was recorded compared to an income tax provision of $582,000 for the
prior year. The effective tax rates for fiscal 2003 and fiscal 2002 were 38%.
As a result of the above factors our net loss for fiscal 2003 was
approximately $4,174,000 compared to net income of $951,000 for fiscal 2002.
FISCAL 2002 VS. FISCAL 2001
Net sales for fiscal 2002 were approximately $141,918,000, an increase
of 13.8% from net sales of approximately $124,718,000 for the comparable period
in fiscal 2001. The increase in sales was primarily due to increased shipments
to the retail segment of our customer base, primarily from the introduction of
new products.
Gross profit on sales for fiscal 2002 were approximately $28,655,000,
an increase of $3,920,000 from approximately $24,735,000 for the comparable
period in fiscal 2001. As a percentage of net sales, gross profit increased to
20.2% in fiscal 2002 compared to 19.8% in fiscal 2001. The increase in gross
margin was attributable to a change in the customer and product mix and a
reduction of costs primarily from the Company's manufacturing facility located
in the Dominican Republic.
Selling, general and administrative expenses for fiscal 2002 were
approximately $24,435,000, a decrease of $505,000 or 2.0% from approximately
$24,940,000 for the comparable period in fiscal 2001. The decrease is primarily
attributable to decreases in (a) advertising expenses, (b) payroll and payroll
related expenses, and (c) product and packaging supplies.
Interest expense and gold consignment fees for fiscal 2002, were
approximately $2,806,000, an increase of $545,000 or 24.1% compared to
approximately $2,261,000 for the comparable period in fiscal 2001. The increase
was primarily due to the Company's higher average level of consigned inventory,
higher consignment rates and increased borrowings under the Company's line of
credit.
For the year ended February 2, 2002, an income tax provision of
$582,000 was recorded compared to an income tax benefit of $886,000 for the
prior year. The effective tax rates for fiscal 2002 and fiscal 2001 were 38%.
17
As a result of the above factors our net income for fiscal 2002 was
approximately $951,000 compared to a net loss of $1,440,000 for fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
We rely on a gold consignment program, short-term borrowings and
internally generated funds to finance our working capital requirements. We fill
most of our gold supply needs through gold consignment arrangements with gold
lenders. On March 31, 2003, the Company entered into new consignment agreements
with a majority of its existing lenders. Under the terms of those arrangements,
we are entitled to lease the lesser of (a) an aggregate of 175,000 ounces of
fine gold or (b) consigned gold with an aggregate value equal to $62,200,000.
The consigned gold is secured by certain property of Michael Anthony, including
inventory and accounts receivable. Michael Anthony 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. We believe that our financing rate under the consignment arrangements
is substantially similar to the financing rates charged to gold consignees
similarly situated to Michael Anthony. As of February 1, 2003, Michael Anthony
held approximately 136,000 ounces of gold on consignment with a market value of
$49,901,000.
The consignment agreements contain restrictive covenants relating to
maximum usage, net worth, working capital and other financial ratios and the
agreements requires Michael Anthony to own a specific amount of gold at all
times. At February 1, 2003, Michael Anthony's owned gold inventory was valued at
approximately $6,632,000. We believe that the supply of gold available through
our gold consignment arrangements, together with the gold we own, is sufficient
to meet our requirements.
The consignment agreements are for a period of one year ending March
30, 2004. Management believes that the consignment agreements will be renewed.
Consigned gold is not included in our inventory, and there is no
related liability recorded. As a result of these consignment arrangements,
Michael Anthony is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the gold lenders, since Michael Anthony
does not purchase gold from the gold lenders until receipt of a purchase order
from, or shipment of jewelry to, our customers. Michael Anthony then either
locks in the selling price of the jewelry to our customers at the same time as
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. At February 1, 2003 there were
16,600 ounces on forward contracts and no options on futures outstanding.
While we believe our supply of gold is relatively secure, significant
increases or rapid fluctuations in the cost of gold may impact the demand for
our products. From January 30, 2000 until February 1, 2003, the closing price of
gold according to the Second London Gold Fix ranged from a low of $256 per ounce
to a high of nearly $370 per ounce. Fluctuations in the precious metals markets
and credit may result in an interruption of our gold supply or the credit
arrangements necessary to allow us to support our accounts receivable and
continue the use of consigned gold.
18
In January 1999, Michael Anthony entered into a Loan and Security
Agreement with General Electric Capital Business Asset Funding Corporation in
the principal amount of $10,444,444. This loan is secured by our machinery and
equipment. The loan agreement contains a cross collateral/cross default clause
in connection with Michael Anthony's line of credit agreement. The loan
agreement does not contain any restrictive financial covenants. The loan bears
interest at 6.85% per annum and payments of interest only are due for the first
year of the loan. The loan matures in January 2007. As of February 1, 2003,
$6,570,000 of principal remained outstanding under the notes.
On October 6, 1995, Michael Anthony obtained a loan from a bank in the
amount of $2,500,000. As collateral for the loan, we granted the bank a first
mortgage on our corporate headquarters. The mortgage has a ten-year term and
interest on the mortgage will accrue at 8% per annum. There is a balloon on
payment of $1,149,000 due on October 10, 2005. In addition, the mortgage
contains restrictive financial covenants. At February 1, 2003, we were not in
compliance with one of the covenants in the loan agreement, but received a
waiver. We expect to be in compliance by the end of Fiscal 2004. As of February
1, 2003, $1,633,000 of principal remained outstanding under the mortgage.
On February 10, 1999, Michael Anthony obtained a loan in the amount of
$937,500. As collateral for the loan, we granted the lender a first mortgage on
one of our manufacturing facilities. The mortgage has a fifteen-year term and
accrues interest at an annual rate of 7.05%. At February 1, 2003, approximately
$778,000 of principal remained outstanding under the loan.
On September 16, 1999, Michael Anthony acquired two buildings which
house two manufacturing facilities, located at 70 and 60 South MacQuesten
Parkway, Mount Vernon, NY from MacQuesten Realty Company for a price of
$2,450,000. Michael Anthony incurred $929,000 of long-term debt, which has a
four-year term and accrues interest at an annual rate of 7.50%, and paid the
balance with cash from its operations. At February 1, 2003, approximately
$183,000 of principal remained outstanding under the loan.
In April 2003, the Company accepted an offer for the sale of one of its
buildings. The Company expects to complete this transaction in the fourth
quarter of Fiscal 2004.
At March 31, 2003, the Company entered into a new credit arrangement
with a commercial bank which varies seasonally from $10,000,000 to $20,000,000
(the "line of credit"). The line of credit is secured by a lien on certain
assets of the Company, including accounts receivable and inventory. The Company
believes that the interest rate under the line of credit is substantially
similar to the interest rates of other companies similarly situated to Michael
Anthony. The line of credit expires on March 30, 2004 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. At February 1,
2003, there was $7,000,000 outstanding under the line of credit. As of April 7,
2003, there was $3,500,000 outstanding under the line of credit.
During fiscal 2003, cash used from operating activities was $1,295,000.
This was primarily the result of the Company's loss plus increases in prepaid
expenses and decreases in
19
accrued expenses which were offset by depreciation and amortization, and a
decrease in accounts receivable.
Cash of $1,609,000 was utilized for investing purposes during fiscal
2003, primarily for the purchase of machinery and equipment and the acquisition
of A & A Jewelry.
During fiscal 2003, cash provided by financing activities totaled
$1,899,000. This was primarily attributed to the net proceeds from the line of
credit which were offset by payments of long-term debt.
For fiscal 2004, Michael Anthony projects capital expenditures of
approximately $1,500,000, which includes machinery and equipment expenses and
certain improvements on its owned properties. See Item 2. "Properties" and Item
13. "Certain Relationships And Related Transactions."
Contractual Obligations and Contingent Liabilities and commitments
The following is a summary of our significant contractual cash obligations for
the periods indicated that existed as of February 1, 2003, and, except for
purchase obligations and other long-term liabilities, is based on information
appearing in the Notes to Consolidated Financial Statements (amounts in
millions.)
Less than 1 More than 5
Total Year 1-3 years 3-5 Years years
------ ------ ------ ------ ------
Long-term debt $9,002 $1,697 $4,867 $1,938 $500.0
Minimum royalty payments 123 97.0 26.0 - -
------ ------ ------ ------ ------
$9,125 $1,794 $4,893 $1,938 $500.0
====== ====== ====== ====== ======
Total contractual cash obligations
20
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 Michael Anthony's reasonable
expectations and are subject to a number of factors and risks, many of which are
beyond Michael Anthony'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 these
factors:
(a) general economic conditions and their impact on the retail
sales environment;
(b) fluctuations in the price of gold and other metals used to
manufacture our jewelry;
(c) risks related to the concentration of our customers,
particularly the operations of any of our top customers;
(d) increased competition from outside the United States where
labor costs are substantially lower;
(e) variability of customer requirements and the nature of
customers' commitments on projections and orders; and
(f) the extent to which we are 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 as required in periodic filings
under the Securities Exchange Act of 1934, Michael Anthony undertakes no
obligations to release publicly any revisions to these forward-looking
statements that may reflect events or circumstances after the date of this
annual report on Form 10-K or to reflect the occurrence of unanticipated events.
NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which changes the accounting for
costs such as lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing, or
other exit or disposal activity initiated after December 31, 2002. The standard
requires companies to recognize the fair value of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The adoption of this standard did not
have a material effect on our results of operations.
On December 31, 2002, the FASB amended the transition and disclosure
requirements of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", ("FAS 123"), through the issuance of FASB Statement No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure", ("FAS
148"). FAS 148 amends the existing disclosures that a
21
company should make in its annual financial statements and requires, for the
first time, disclosures in interim financial reports. Those disclosures are
required regardless of the method being used to account for stock-based employee
compensation. The amended and new disclosure requirements are effective for the
Company for the fiscal year ending December 27, 2003. The adoption of the
disclosure requirements of FAS 148 will not have a material affect on the
Company's financial statements. As permitted under FAS 123, management applies
and expects to continue to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", ("APB 25"), and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
In November 2002, the FASB issued FASB Interpretation No. 45, ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 addresses the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees. The disclosure requirements
in this Interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company does not expect this
Interpretation to have an effect on the consolidated financial statements.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCOUNT ABOUT MARKET RISK.
The Company utilizes financial instruments, including commodity
futures, forwards and options on futures, to limit its exposure to fluctuations
in the price of gold. As a result of these transactions, 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. 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.
The Company has 16,000 ounces in gold futures that it has projected
towards future sales. As a result of the transactions the Company does not
expect any material changes to its financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 and pages F-1 through F-26, S-1 and S-2.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING
DISCLOSURE.
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the headings "Election of Directors"
and "Compliance with Section 16 of the Exchange Act" of Michael Anthony's Proxy
Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" of
Michael Anthony's Proxy Statement for the 2003 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of
Common Stock" of Michael Anthony's Proxy Statement for the 2003 Annual Meeting
of Stockholders is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of
Michael Anthony's Proxy Statement for the 2003 Annual Meeting of Stockholders is
incorporated herein by reference. See also Item 2. "Properties."
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer, President and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures and our internal controls and procedures for financial reporting
pursuant to Exchange Act Rule 13a-14.
The purpose of disclosure controls is to ensure that information required to be
disclosed in our reports filed with the SEC is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management to allow timely
decisions regarding required disclosure. The purpose of internal controls is to
provide reasonable assurance that our transactions are properly authorized, our
assets are safeguarded against unauthorized or improper use and our transactions
are properly recorded and reported to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
23
Our management does not expect that our disclosure controls or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable rather than absolute
assurance that the objectives of the control system are met.
Based upon this evaluation, our Chief Executive Officer, President and our Chief
Financial Officer concluded that, subject to the limitations noted above, both
our disclosure controls and procedures and our internal controls and procedures
are effective in timely alerting them to material information required to be
included in our periodic SEC filings and that information required to be
disclosed by us in these periodic filings is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and that
our internal controls are effective to provide reasonable assurance that our
financial statements are fairly presented in conformity with generally accepted
accounting principles.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
PAGE
----
(1) Financial Statements:
Report of Independent Certified Public Accountants' F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Changes in Stockholders'
Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
(2) Financial Statement Schedule:
Report of Independent Certified Public Accountants' S-1
Schedule II-Valuation and Qualifying Accounts S-2
All other schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial statements or related
notes.
(3) Exhibits:
Exhibit
No. Description Page No.
- ------- ----------- --------
3.1 Certificate of Incorporation of Registrant, as Incorporated by reference to Exhibit 3.1 to
amended Amendment No. 2 to the Company's Registration
Statement on Form S-3 (File No. 3371308) (the
"1993 Registration Statement")
3.1.1 Certificate of Merger of Michael Anthony Jewelers, Incorporated by reference to Exhibit 3.1.1 of the
Inc. (New York) and Michael Anthony Jewelers, Inc. Company's Annual Report on Form 10-K for the
(Delaware) fiscal year ended June 30, 1993 (the "1993 Form
10-K")
25
3.2 Amended and Restated ByLaws of Registrant Incorporated by reference to Exhibit 3.2 to the
Company's Quarterly Report on Form 10-Q for the
quarter ended July 29, 1995
4.1 Form of Common Stock Certificate Incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1
(File No. 338289) (the "1986 Registration
Statement")
4.2 Common Stock Purchase Warrant issued to Almond Filed as Exhibit 4.2 to the 2002 Form 10-K.
International Inc.
10.1 First Amendment to 1993 Long-Term Incentive Plan Filed as Exhibit 10.48 to the 1993 Form 10-K
of the Registrant dated as of September 21, 1993
10.2 Loan Agreement dated October 6, 1995 between First Filed as Exhibit 10.1 to the October 1995 Form
Fidelity Bank, National Association ("First 10-Q
Fidelity") and Registrant
10.3 Mortgage Note in principal amount of $2,500,000 Filed as Exhibit 10.2 to the October 1995 Form
dated October 6, 1995 issued by Registrant in 10-Q
favor of First Fidelity
10.4 Mortgage and Security Agreement dated October Filed as Exhibit 10.3 to the October 1995 Form
6,1995 by Registrant for the benefit of First 10-Q
Fidelity
10.5 Deferred Compensation Plan dated as of March 4, Filed as Exhibit 10.59 to the 1996 Form 10-K
1996
10.6 Amendment to the 1993 Long Term Incentive Plan Filed as Exhibit 10.1 to the Company's October
1996 Form 10-Q.
10.7 Amendment to the Non-Employees Directors' Plan Filed as Exhibit 10.2 to the Company's October
1996 Form 10-Q
10.8 1993 Long-term Incentive Plan of the Registrant Filed as Exhibit 10.54 to the 1998 Form 10-K
10.9 1993 Non-Employee Directors' Stock Option Plan of Filed as Exhibit 10.55 to the 1998 Form 10-K
the Registrant
10.10 Loan and Security Agreement, dated Filed as Exhibit 10.33 to the 1999 Form
26
January 29, 1999, by and between the Registrant 10-K; Exhibit 10.34 to the 1999 Form 10-K
and General Electric Capital Business Asset
Funding Corporation, as amended
10.11 Term Promissory Note, dated January 29, 1999, of Filed as Exhibit 10.35 to the 1999 Form 10-K
the Registrant in favor of General Electric
Capital Business Asset Funding Corporation
10.12 Mortgage, Security Agreement and Assignment of Filed as Exhibit 10.37 to the 1999 Form 10-K
Leases and Rents dated February 10, 1999, by and
between Registrant and General Electric Capital
Business Asset Funding Corporation
10.13 Promissory Note dated February 10, 1999 by and Filed as Exhibit 10.38 to the 1999 Form 10-K
between the Registrant and General Electric
Capital Business Asset Funding Corporation
10.14 1999 Employee Change of Control Plan of the Filed as Exhibit 10.46 to the 2000 Form 10-K
Registrant
10.15 1999 Non-Employee Director Change of Control Plan Filed as Exhibit 10.47 to the 2000 Form 10-K
of the Registrant
10.16 Assumption Agreement dated September 16, 1999 among Filed as Exhibit 10.50 to the 2000 Form 10-K
Registrant, MacQuesten Realty Company, and First
Union National Bank, successor in interest to
First Fidelity
10.17 Employment Agreement between the Company and Filed as Exhibit 10.33 to the 2002 Form 10-K
Claudia Hollingsworth dated February 2, 2002
27
10.18 Intercreditor Agreement dated March 31, 2003, Filed as Exhibit 10.18 to this 2003 Form 10-K
among Registrant, [BRANDS] Registrant's Gold
Lenders, JPMorgan Chase Bank and General Electric
Capital Business Asset Funding Corporation
10.19 Consignment Agreement dated as of March 31, 2003, Filed as Exhibit 10.19 to this 2003 Form 10-K
between Registrant and Sovereign Precious Metals,
LLC, ABN AMRO Bank, N.V., and Commerzbank
International, S.A
10.20 Security Agreement dated as of March 31, 2003 Filed as Exhibit 10.20 to this 2003 Form 10-K
between Registrant and Sovereign Precious Metals,
LLC
21 Subsidiaries of the Registrant Filed as an Exhibit to this Form 10-K
23 Consent of BDO Seidman, LLP Filed as an Exhibit to this Form 10-K
99 Certifications Filed as an Exhibit to this Form 10-K
REPORT ON FORM 8-K
(A) A Report on Form 8-K was filed by Michael Anthony on March 28, 2003
with respect to Item 8, change of fiscal year.
(B) A Report on Form 8-K was filed by Michael Anthony on April 11, 2003
with respect to Item 5 therein, new credit facilities.
28
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.
Date: May 1, 2003 MICHAEL ANTHONY JEWELERS, INC.
By: /s/ Michael Paolercio
----------------------------------------
Michael W. Paolercio, Co-Chairman of the
Board and Chief Executive Officer
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Michael Paolercio Co-Chairman of the Board May 1, 2003
- ----------------------------------- and Chief Executive Officer
(Michael W. Paolercio) (Principal Executive Officer)
/s/ Anthony Paolercio Co-Chairman of the Board May 1, 2003
- ----------------------------------- and Chief Operating Officer
(Anthony Paolercio, Jr.)
/s/ Claudia Hollingsworth President and Director May 1, 2003
- -----------------------------------
(Claudia Hollingsworth)
/s/ Allan Corn Chief Financial Officer, May 1, 2003
- ----------------------------------- Senior Vice President
(Allan Corn) and Director (Principal
Accounting Officer)
/s/ Michael A. Paolercio Senior Vice President, May 1, 2003
- ----------------------------------- Treasurer and Director
(Michael Anthony Paolercio)
/s/ Michael Wager Director May 1, 2003
- -----------------------------------
(Michael Wager)
/s/ David Harris Director May 1, 2003
- -----------------------------------
(David Harris)
/s/ Nathan Light Director May 1, 2003
- -----------------------------------
(Nathan Light)
/s/ Barry Scheckner Director May 1, 2003
- -----------------------------------
(Barry Scheckner)
29
CERTIFICATIONS
I, Michael W. Paolercio, certify that:
1. I have reviewed this annual report on Form 10-K of Michael
Anthony Jewelers, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
30
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 30, 2003 /s/: Michael W. Paolercio
Chief Executive Officer
31
CERTIFICATIONS
I, Allan Corn, certify that:
1. I have reviewed this annual report on Form 10-K of Michael
Anthony Jewelers, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions);
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
32
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: April 30, 2003 /s/ Allan Corn
Chief Financial Officer
33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
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 February 1, 2003 and February 2, 2002 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended February 1, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Michael Anthony
Jewelers, Inc. and subsidiaries at February 1, 2003, and February 2, 2002 and
the result of their operations and their cash flows for each of the three years
in the period ended February 1, 2003, in conformity with accounting principles
generally accepted in the United States.
BDO Seidman, LLP
New York, New York
April 7, 2003
F-1
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS February 1, February 2,
2003 2002
-------- --------
CURRENT ASSETS:
Cash and equivalents $ 1,124 $ 2,129
Accounts receivable:
Trade (less allowances of $3,400 and $4,255, respectively) 14,173 17,067
Other 649 153
Inventories 25,952 25,826
Prepaid expenses and other current assets 3,095 1,544
Assets held for sale 2,579 --
Deferred taxes 578 672
-------- --------
Total current assets 48,150 47,391
PROPERTY, PLANT AND EQUIPMENT - net 13,100 17,605
INTANGIBLES - net 419 --
OTHER ASSETS 356 364
DEFERRED TAXES 140 --
-------- --------
$ 62,165 $ 65,360
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 2,912 $ 2,321
Line of credit 7,000 3,300
Current portion of long-term debt 1,697 1,820
Debt on buildings held for sale 183 --
Taxes payable 100 1,274
Accrued expenses 3,373 3,952
-------- --------
Total current liabilities 15,265 12,667
-------- --------
LONG-TERM DEBT 7,305 9,166
-------- --------
DEFERRED TAXES -- 35
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - par value $1.00 per share;
1,000,000 shares authorized; none issued -- --
Common stock - par value $.001 per share;
20,000,000 shares authorized; 8,385,747 and
8,329,079 shares issued and outstanding as of
February 1, 2003, and February 2, 2002, respectively 8 8
Additional paid-in capital 32,391 32,221
Retained earnings 13,579 17,753
Accumulated comprehensive gain/(loss) 46 (61)
Treasury stock, 2,140,849 shares as of
February 1, 2003 and February 2, 2002, respectively (6,429) (6,429)
-------- --------
Total stockholders' equity 39,595 43,492
-------- --------
$ 62,165 $ 65,360
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended
-----------------------------------------------
February 1, February 2, January 27,
2003 2002 2001
----------- ----------- -----------
NET SALES $ 118,580 $ 141,918 $ 124,718
COST OF GOODS SOLD 98,005 113,263 99,983
--------- --------- ---------
GROSS PROFIT ON SALES 20,575 28,655 24,735
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 25,048 24,435 24,940
--------- --------- ---------
OPERATING (LOSS)/INCOME (4,473) 4,220 (205)
--------- --------- ---------
OTHER INCOME (EXPENSES):
Gold consignment fee (1,171) (1,379) (1,039)
Interest expense (1,134) (1,427) (1,222)
Interest income 21 68 139
Other income 23 51 1
--------- --------- ---------
TOTAL OTHER EXPENSES (2,261) (2,687) (2,121)
--------- --------- ---------
(LOSS)/INCOME BEFORE INCOME TAXES (6,734) 1,533 (2,326)
INCOME TAX (BENEFIT)/PROVISION (2,560) 582 (886)
--------- --------- ---------
NET (LOSS)/INCOME $ (4,174) $ 951 $ (1,440)
========= ========= =========
(LOSS)/EARNINGS PER SHARE - Basic $ (.67) $ .15 $ (.23)
========= ========= =========
EARNINGS/(LOSS) PER SHARE - Diluted $ (.67) $ .15 $ (.23)
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES - Basic 6,242 6,203 6,319
========= ========= =========
WEIGHTED AVERAGE NUMBER OF SHARES - Diluted 6,242 6,314 6,319
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Additional Accumulated Treasury Stock
------------------- Paid-In Retained Comprehensive --------------------
Shares Dollars Capital Earnings Gain/(Loss) Shares Dollars Total
-------- -------- ---------- -------- ------------- -------- -------- --------
Balance - January 29, 2000 8,308 $ 8 $ 31,826 $ 18,242 -- (1,949) $ (6,032) $ 44,044
Purchase of treasury stock -- -- -- -- -- (144) (293) (293)
Issuance of stock 9 -- 25 -- -- -- -- 25
Issuance of warrants -- -- 345 -- -- -- -- 345
Net loss -- -- -- (1,440) -- -- -- (1,440)
-------- -------- ---------- -------- ------------ -------- -------- --------
Balance - January 27, 2001 8,317 8 32,196 16,802 -- (2,093) (6,325) 42,681
Purchase of treasury stock -- -- -- -- -- (48) (104) (104)
Issuance of stock 12 -- 25 -- -- -- -- 25
Comprehensive Income:
Change in fair value of
cash flow hedges -- -- -- -- (61) -- -- (61)
Net income -- -- -- 951 -- -- -- 951
-------- -------- ---------- -------- ------------ -------- -------- --------
Total comprehensive
Income -- -- -- 951 (61) -- -- 890
-------- -------- ---------- -------- ------------ -------- -------- --------
Balance - February 2, 2002 8,329 8 32,221 17,753 (61) (2,141) (6,429) 43,492
Issuance of stock 57 -- 170 -- -- -- -- 170
Comprehensive Income:
Change in fair value of
Cash flow hedges -- -- -- -- 107 -- -- 107
Net loss -- -- -- (4,174) -- -- -- (4,174)
-------- -------- ---------- -------- ------------ -------- -------- --------
Total comprehensive
Loss -- -- -- (4,174) 107 -- -- (4,067)
-------- -------- ---------- -------- ------------ -------- -------- --------
Balance - February 1, 2003 8,386 $ 8 $ 32,391 $ 13,579 $ 46 (2,141) $ (6,429) $ 39,595
======== ======== ========== ======== ============ ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
---------------------------------------------
February 3, February 2, January 27,
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $ (4,174) $ 951 $ (1,440)
Adjustments to reconcile net (loss)/income to net cash
from operating activities:
Depreciation and amortization 3,114 3,501 3,547
Provision for doubtful accounts 117 (54) 79
(Credit)/provision for sales returns (699) 1,773 1,450
Deferred tax (benefit)/provision (81) 200 (572)
Gain/(loss) on disposal of property, plant
and equipment 8 (6) 45
Provision for stock compensation 170 25 25
(Increase)/decrease in operating assets:
Accounts receivable 2,980 (3,610) 8,950
Inventories (126) (5,330) (4,226)
Prepaid expenses and other current assets (1,551) (120) 137
Other assets 2 679 (474)
Increase/(decrease) in operating liabilities:
Accounts payable 591 (981) 1,104
Taxes payable (472) 745 (1,445)
Accrued expenses (1,174) 100 (1,150)
-------- -------- --------
Net cash (used in)/provided by
operating activities (1,295) (2,127) 6,030
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,090) (1,365) (2,553)
Proceeds from sale of equipment -- 8 7
Acquisition (519) -- --
-------- -------- --------
Net cash used in investing activities (1,609) (1,357) (2,546)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt
and capital lease liabilities (1,801) (1,697) (1,657)
Proceeds from line of credit 19,900 24,000 17,100
Payments to line of credit (16,200) (20,700) (17,100)
Purchase of treasury stock -- (104) (293)
-------- -------- --------
Net cash provided by/(used in)
financing activities 1,899 1,499 (1,950)
-------- -------- --------
NET (DECREASE)/INCREASE IN CASH (1,005) (1,985) 1,534
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 2,129 4,114 2,580
-------- -------- --------
CASH AND EQUIVALENTS AT END OF YEAR $ 1,124 $ 2,129 $ 4,114
-------- ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
---------------------------------------
February 1, February, January 27,
2003 2002 2001
----------- --------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Investing:
Issuance of warrants $ -- $ -- $ 345
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest and gold consignment fees $2,288 $2,747 $2,399
Income taxes $ 500 $ 428 $1,441
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Michael Anthony Jewelers, Inc. ("Michael Anthony" or "the Company"), is a
leading designer, marketer and manufacturer of affordable branded fine
jewelry whose customers include jewelry chain stores, discount stores,
department stores, television home shopping networks, 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. Building improvements are amortized over the lesser of the
estimated life of the asset Certain assets are held for sale. See Note 3.
F-7
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Molds and Models
For molds and models with a life greater than one year, the Company
capitalizes and amortizes the costs over a three-year period. In fiscal
2003, 2002 and 2001 the Company capitalized approximately $402,000,
$475,000, and $538,000, respectively.
Intangibles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", ("FAS
141"), and No. 142, "Goodwill and Other Intangible Assets", ("FAS 142"),
effective for fiscal years beginning after December 15, 2001. Under the new
standards, goodwill and intangible assets deemed to have indefinite lives
are no longer amortized but are subject to annual impairment tests in
accordance with FAS 142. Other intangibles with determinable lives will
continue to amortized for the duration of their useful lives.
The adoption of this statement in Fiscal 2003 had no material effect on the
Company. Intangible assets (acquired in Fiscal 2003, in connection with an
immaterial acquisition) as of February 1, 2003, consisted of a
covenant-not-to-compete which is being amortized over the life of the
related revenue not to exceed five years.
Long-lived Assets
The Company reviews certain long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may
not be recoverable. In that regard, the Company assesses the recoverability
of such assets based upon estimated non-discounted cash flow forecasts. If
asset impairment is identified, the asset is written down to fair value
based on discounted cash flow or other fair value measures. For the years
ended February 1, 2003 and February 2, 2002, and January 27, 2001, there
were no impairment losses.
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
F-8
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition (Continued)
products are sold by the consignee. In certain cases, the Company accepts
payment for merchandise in gold.
Credit Risk
Financial instruments, which potentially subject us to concentration of
credit risk, consist principally of temporary cash investments and accounts
receivable. The Company performs ongoing credit evaluations of its
customers' financial condition and, generally, require no collateral from
our customers. The allowance for non-collections of accounts receivable is
based upon the expected collectibility of all accounts receivable
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 February 1, 2003,
February 2, 2002, and January 27, 2001, in connection with three
significant catalog revisions, approximately $-0-, $-0-, and $36,000,
respectively, had been capitalized. Included in the statements of
operations for the years ended February 1, 2003, February 2, 2002, and
January 27, 2001, is amortization expense of $-0-, $36,000, and $110,000,
respectively.
Shipping and Handling Costs
Shipping and handling costs billed to customers are recorded as revenue.
The costs associated with shipping goods to customers are recorded as a
selling expense. Shipping and handling expenses for the years ended
February 1, 2003, February 2, 2002, and January 27, 2001 were $1,041,000,
$1,078,000, and $1,051,000, respectively.
F-9
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Advertising Expense
Advertising costs are expensed as incurred. Advertising costs associated
with cooperative advertising programs are accrued as the related revenues
are recognized. Total advertising expenses were $5,473,000, $4,464,000, and
$5,038,000 for the years ended February 1, 2003, February 2, 2002, and
January 27, 2001, respectively.
Cash Equivalents
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
Derivative Financial Instruments
On January 28, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and
Hedging Activities", as amended, and interpreted, which requires that all
derivative instruments be recorded on the balance sheet at their fair
value. SFAS 133 requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and to measure those instruments
at fair value. Additionally, the fair value adjustments will affect either
stockholders' equity or net income depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the
nature of the hedging activity. The impact of adopting FAS 133 on the
Company's Statement of Income and Balance Sheet was not material.
The Company uses 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 enter such contracts for
speculative purposes.
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset
or a liability or an identified portion thereof that is attributable to a
particular risk), the gain or loss on the derivative instrument as well as
the offsetting gain or loss on the hedged item attributable to the hedged
risk are recognized in earnings in the current period. For derivative
instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure of variability in expected future cash flows that
would be attributable to a particular risk), the effective portion of the
gain or loss on the derivative instrument is reported as a component of
F-10
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Derivative Financial Instruments (Continued)
Accumulated comprehensive gain/(loss) (a component of stockholders' equity)
and reclassified into earnings in the period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument, if any (i.e., the ineffective portion and any
portion of the derivative instrument excluded from the assessment of
effectiveness) is recognized in earnings in the current period.
Stock Options
The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company based on the
price of its stock in accordance with the provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees."
No stock-based employee compensation cost is reflected in net loss, as all
options granted under the plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following
table illustrates the effect on net loss and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123
"Accounting for Stock-Based Compensation".
Year Ended December 31,
---------------------------------
2003 2002 2001
------- ------- -------
Net (loss)/income:
As reported $(4,174) $ 951 $(1,440)
Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of related tax effects (183) (78) (40)
------- ------- -------
Proforma Net (Loss)/Gain $(4,357) $ 873 $(1,480)
======= ======= =======
Basic and diluted net (loss)/gain per share:
As reported $ (.67) $ .15 $ (.23)
Proforma SFAS 123 $ (.70) $ .14 $ (.23)
F-11
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Stock Options
The fair value for each option granted was estimated at the date of grant
using the Black-Scholes option-pricing model, one of the allowable
valuation methods under SFAS 123, with the following assumptions:
Year Ended December 31,
---------------------------
2003 2002 2001
---- ---- ----
Average risk free interest rates 6.5% 6.5% 6.5%
Average expected life (in years) 3.00 3.00 3.00
Volatility 60.0% 60.0% 60.0%
The weighted-average fair value of the options granted during the years
2003, 2002 and 2001 was estimated to be $1.31, $.39 and $.67,
respectively, for options granted a fair market value.
Earnings (Loss) Per Share
Basic EPS is computed by dividing net income (loss) by the weighted
average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
The following table sets forth the computation of diluted earnings per
share (in thousands):
Feb. 1, Feb. 2, Jan. 27,
2003 2002 2001
------- ------- -------
Numerator:
Net (loss)/income available to
common shareholders $(4,174) $ 951 $(1,440)
Denominator (shares in thousands):
Weighted-average shares
Outstanding 6,242 6,203 6,319
Effect of dilutive securities:
Stock options and warrants -- 111 --
------- ------- -------
Adjusted weighted-average
shares and assumed conversions 6,242 6,314 6,319
======= ======= =======
F-12
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Earnings (Loss) Per Share
The following options to purchase shares of common stock were
outstanding during a portion of each year but were not included in the
computation of diluted earnings per share because the exercise prices of
the options were greater than the average market price of the common
shares and, therefore, would be antidilutive.
Feb. 1, Feb. 2, Jan. 27,
2003 2002 2001
----------- ----------- -----------
Number of options 983,000 966,000 760,000
Weighted-average exercise price $ 2.54 $ 2.49 $ 2.79
New Accounting Pronouncements Not Yet Adopted
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which changes the
accounting for costs such as lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity initiated
after December 31, 2002. The standard requires companies to recognize the
fair value of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or
disposal plan. The adoption of this standard did not have a material
effect on our results of operations.
On December 31, 2002, the FASB amended the transition and disclosure
requirements of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", ("FAS 123"), through the issuance of FASB Statement No.
148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure", ("FAS 148"). FAS 148 amends the existing disclosures that a
company should make in its annual financial statements and requires, for
the first time, disclosures in interim financial reports. Those
disclosures are required regardless of the method being used to account
for stock-based employee compensation. The amended and new disclosure
requirements are effective for the Company for the fiscal year ending
December 27, 2003. The adoption of the disclosure requirements of FAS 148
will not have a material affect on the Company's financial statements. As
permitted under FAS 123, management applies and expects to continue to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", ("APB 25"), and related interpretations in
accounting for its employee stock options. Under APB 25,
F-13
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In November 2002, the FASB issued FASB Interpretation No. 45, ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45
addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. The
disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December
15, 2002. The Company does not expect this Interpretation to have an
effect on the consolidated financial statements.
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
On March 14, 2003, the Board of Directors of the Company approved a
change in the Company's fiscal year end from the date that falls on the
last Saturday that is closest to the end of January to December, a 52/53
week year ending on the Saturday closest to December 31st, effective
February 2, 2003.
The financial statements for the fiscal years ended February 1, 2003,
February 2, 2002, and January 27, 2001 were comprised of 52, 53 and 52
weeks, respectively.
Reclassifications
Certain reclassifications were made to the prior year's financial
statements to conform to the current year's presentation.
F-14
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVENTORIES
Inventories consist of:
February 1, February 2,
2003 2002
------- -------
(In thousands)
Finished goods $47,236 $42,151
Work in process 19,027 18,494
Raw materials 9,590 5,816
------- -------
75,853 66,461
Less:
Consigned gold 49,901 40,635
------- -------
$25,952 $25,826
======= =======
At February 1, 2003 and February 2, 2002, inventories excluded
approximately 136,000 and 143,000 ounces of gold on consignment,
respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
February 1, February 2,
2003 2002
------- -------
(In thousands)
Machinery and equipment $42,153 $41,198
Building and building improvements 7,664 12,677
Land 1,658 2,341
------- -------
51,475 56,216
Less: Accumulated depreciation
and amortization 38,375 38,611
------- -------
$13,100 $17,605
======= =======
Assets Held For Sale
The Company is consolidating its manufacturing and distribution
operations. As part of this process, the Company will sell two of its
buildings located in Mt. Vernon. The Company expects to complete the
sale of the buildings during 2003. The Company has adopted the
provisions of Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets", as of
February 3, 2002.
F-15
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY, PLANT AND EQUIPMENT Continued)
Assets Held for Sale (Continued)
The Company expects to sell the properties within the next fiscal year
to independent buyers. In April 2003, the Company accepted an offer for
the sale of one of its buildings. The Company expects to complete the
transaction in the fourth quarter of Fiscal 2004.
As of February 1, 2003, the net book value of the assets held for sale
was $2,579,000. No loss is expected from the sale of the properties. The
amount was reclassified to current assets in fiscal 2003.
4. GOLD CONSIGNMENT AGREEMENTS
The Company has gold consignment agreements with gold lenders. On March
31, 2003, the Company entered into new consignment agreements with a
majority of its existing lenders. Under the terms of the agreements, the
Company is entitled to lease the lesser of an aggregate amount of
175,000 ounces, or an aggregate consigned gold value not to exceed
$62,200,000. 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.
F-16
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
February 1, February 2,
2003 2002
------ ------
(In thousands)
Accrued advertising $1,488 $2,259
Accrued payroll expenses 960 655
Customer deposits payable 319 222
Accrued interest 256 239
Other accrued expenses 350 577
------ ------
$3,373 $3,952
====== ======
6. LONG-TERM DEBT
Long-term debt consists of the following:
February 1, February 2,
2003 2002
--------- ---------
(In thousands)
Note payable - interest at 6.85%, interest and principal of $157,000
payable monthly over a seven-year term through January 2007. (a) $ 6,570 $ 7,951
Mortgage payable - interest at 8%, interest and principal of $24,000
payable monthly over a ten-year term through October 2005. (b) 1,633 1,785
Note payable - interest at 7.05%, interest and principal of $8,500
payable monthly over a fifteen year term through March 2014. (c) 778 823
Mortgage payable - interest at 7.5%, interest and principal of $22,000
payable monthly over a four-year term through September 2003. (d) -- 427
Other 21 --
--------- ---------
9,002 10,986
Less: current portion 1,697 1,820
--------- ---------
$ 7,305 $ 9,166
========= =========
F-17
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. LONG-TERM DEBT (Continued)
(a) On January 27, 1999, the Company repaid its existing long-term debt
with the insurance companies. The Company obtained a loan from a new
lender in the amount of $10,444,000. As collateral for the loan, the
Company granted the lender a lien on the Company's machinery and
equipment. The loan does not contain any restrictive financial
covenants. The loan agreement contains a cross collateral/cross default
clause in connection with the Company's Line of Credit Agreement (see
Note. 7).
(b) The 8.0% mortgage is secured by a lien on the Company's corporate
headquarters. There is a balloon payment of $1,149,000 due on October
10, 2005 Additionally, the mortgage agreement contains certain
restrictive financial covenants. The Company was not in compliance with
one of the restrictive financial covenants as of February 1, 2003, but
received a waiver.
(c) On February 10, 1999, the Company obtained a loan in the amount of
$937,500. As collateral for the loan, the Company granted the lender a
first mortgage on one of its manufacturing facilities.
(d) On September 16, 1999 the Company exercised the option to purchase
the remaining manufacturing and distribution facilities housed in the
buildings located at 60 and 70 South MacQuesten Parkway, Mt. Vernon at
an aggregate purchase price of $2,450,000.
Maturities of long-term debt as of February 1, 2003 are as follows (in
thousands):
Year Ending January
-------------------
2004 1,697
2005 1,819
2006 3,048
2007 1,874
2008 64
Thereafter 500
------
$9,002
======
F-18
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LINE OF CREDIT
At March 31, 2003, the Company entered into a new credit arrangement
with a commercial bank which varies seasonally from $10,000,000 to
$20,000,000 (the "line of credit"). The line of credit is secured by a
lien on certain assets of the Company, including accounts receivable and
inventory. The Company believes that the interest rate under the Line of
Credit is substantially similar to the interest rates of other companies
similarly situated to Michael Anthony. The line of credit expires on
March 30, 2004 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.
At February 1, 2003, there was $7,000,000 outstanding under the line of
credit. As of April 7, 2003, there was $3,500,000 outstanding under the
line of credit.
8. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS
(A) Notes and mortgage payable
The carrying amounts and fair values of the Company's financial
instruments are as follow:
February 1, 2003 February 2, 2002
---------------- ----------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Notes with lenders:
6.85% note payable $6,570 $6,969 $7,951 $8,044
8.0% mortgage payable 1,633 1,810 1,785 1,915
7.05% note payable 778 885 823 839
7.5% mortgage payable 183 177 427 453
Other 21 23 -- --
The Company believes the carrying amount of the following financial
instruments are 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.
F-19
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued)
(B) Forward Contracts
To reduce its exposure to fluctuations in the price of gold, the Company
is party to commodity futures, forwards and options on futures, which are
hedged 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.
As of February 1, 2003, there were 16,600 ounces on forward contracts
which were all related to the sale of merchandise to customers. The
contracts hedge against fluctuations of gold prices. As of February 1,
2003, the fair value of these contracts, which are determined by quoted
market prices and expire through June 26, 2003 was $46,000 which was
recorded as accumulated comprehensive income and will be reclassed to
cost of goods sold during fiscal 2004. For the year ended February 2,
2002, the Company recognized an immaterial loss relating to its future
contracts.
While the Company is exposed to credit loss in the event of
nonperformance by the counter parties of these contracts, the Company
does not anticipate nonperformance by the counter parties. The risk of
credit loss is not considered to be significant.
(C) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist
primarily of trade receivables and short-term cash investments. The
Company places its short-term cash investments with high credit quality
financial institutions and, by policy, limits the amount of credit
exposure to any one financial institution. Concentrations of credit risk
with respect to trade receivables are limited due to a large customer
base and its dispersion across geographic areas. The Company maintains an
allowance for losses based on the expected collectibility of all
receivables.
F-20
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial purposes and for income tax purposes.
Income tax provision/(benefit) consists of the following:
Year Ended
---------------------------------
February 1, February 2, January 27,
2003 2002 2001
------- ------- -------
(In thousands)
Current:
Federal $(2,504) $ 342 $ (268)
State and local (137) 40 (46)
------- ------- -------
(2,641) 382 (314)
Deferred income tax 81 200 (572)
------- ------- -------
Total $(2,560) $ 582 $ (886)
======= ======= =======
The following is a reconciliation of the federal statutory rate to the
effective tax rate:
Year Ended
--------------------------------
February 1, February 2, January 27,
2003 2002 2001
------ ------ ------
Statutory tax (benefit) rate (34.0)% 34.0% (34.0)%
State and local taxes (benefit),
net of federal benefit (3.0) 3.0 (3.0)
Other (1.0) 1.0 (1.0)
------ ------ ------
Statutory tax (benefit) rate (38.0)% 38.0% (38.0)%
====== ====== ======
F-21
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (Continued)
The tax effects of significant items comprising the Company's deferred
tax (liabilities) and assets are as follows (in thousands):
February 1, February 2,
2003 2002
--------- ---------
Non-current deferred tax items:
Difference between book and tax
depreciation methods $ -- $ (35)
New York State NOL 278 --
--------- ---------
$ 278 $ (35)
Allowance (138) --
--------- ---------
140 (35)
--------- ---------
Current deferred tax assets:
Difference between book and tax
depreciation methods $ 39 $ --
Reserves for sales returns and
doubtful accounts 400 473
Other 139 199
--------- ---------
578 672
--------- ---------
Net deferred tax asset $ 718 $ 637
========= =========
The Company has an NOL for New York State taxes that begin to expire in 2022.
The Company has placed a 50% reserve on the state NOL due to the uncertainty of
its realizability.
10. RELATED PARTY TRANSACTIONS
On February 29, 2000, the Company loaned $123,000 to an officer. On
December 31, 2000, the Company extended the term of the note until
December 31, 2002 and increased the principal to $131,000. Interest on
the unpaid principal of $131,000 accrued at the rate of 8% per annum
until the maturity date of December 31, 2002. The amount was paid in
full on September 10, 2002.
F-22
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS
The Company's product line includes licensed goods manufactured pursuant
to two or three year agreements with licensors. Royalty fees range from
2% 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 February 1, 2003, the future guaranteed royalty commitments are
$97,000 and $26,000 for the fiscal years ending January 31, 2004 and
2005.
On December 22, 2000 the Company entered into a distribution agreement
with the Almond Jewelry Group. Under the arrangement, the Company
acquired the exclusive rights to market and distribute gold jewelry
products manufactured by Almond to retailers in the United States.
Almond will no longer directly market its gold jewelry products to
retailers in the United States. The Company has also entered into a
supply agreement with Almond, which will assure its customer base the
continuity of a supply of high quality and innovative merchandise. In
connection with the distribution agreement, Almond was issued warrants
to purchase 300,000 shares of common stock at a price of $1.62 per
share. The warrants were ascribed a value of $345,000 using the
Black-Scholes option pricing model. The warrants are being amortized
into expense as the related income is earned. As of February 1, 2003 the
unamortized balance was $115,000 and is recorded in prepaid expenses.
12. STOCK PLANS
Incentive Stock Option Plans
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.
F-23
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK PLANS (Continued)
Long-term Incentive Plan
Weighted
Average Exercise
Shares Option Price Price
---------- ---------- ----------
Outstanding at January 29, 2000 835,500 $ 3.19 $2.13 - $3.63
----------
Lapsed (433,440) $ 3.15 $2.13 - $3.63
Granted --
----------
Outstanding at January 27, 2001 402,060 $ 3.01 $2.88 - $3.63
Lapsed (82,040) $ 3.26 $3.13 - $3.63
Granted 347,000 $ 2.19 $2.11 - $2.30
----------
Outstanding at February 2, 2002 667,020 $ 2.71 $2.11 - $3.63
----------
Lapsed (433,020) $ 2.86 $2.11 - $3.63
Exercised --
Granted 460,000 $ 2.95 $2.63 - $3.00
----------
Outstanding at February 1, 2003 694,000 $ 2.78 $2.11 - $3.63
==========
Options exercisable at February 1, 2003 were for 190,870 shares of
common stock at prices between $2.11 - $3.63 a share On April 22, 2003,
the Plan expired by its terms and no future awards may be made under the
plan.
F-24
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK PLANS (Continued)
Non-Employee Directors' Stock Option Plan
Weighted
Average Exercise
Shares Option Price Price
--------- --------- ---------
Outstanding at January 29, 2000 80,000 $ 3.03 $2.56 - $3.88
Lapsed (15,000) $ 3.02 $2.63 - $3.50
Granted 35,000 $ 2.49 $1.88 - $2.94
---------
Outstanding at January 27, 2001 100,000 $ 2.81 $1.88 - $3.06
---------
Lapsed (10,000) $ 3.00 $3.00
Granted 25,000 $ 2.33 $1.80 - $2.68
---------
Outstanding at February 2, 2002 115,000 $ 2.73 $1.80 - $3.88
---------
Lapsed (35,000) $ 2.81 $1.88 - $3.06
Granted 20,000 $ 2.64 $1.70 - $3.13
---------
Outstanding at February 1, 2003 100,000 $ 2.74 $1.70 - $3.88
=========
Options exercisable at February 1, 2003 for 55,250 shares of common
stock at prices between $1.80 - $3.88 a share. On April 22, 2003, the
Plan expired by its terms and no future awards may be made under the
plan.
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:
F-25
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. STOCK PLANS (Continued)
Weighted
Average Exercise
Shares Option Price Price
------ ------------ ---------
Outstanding and exercisable
at January 29, 2000 96,000 $3.00 $3.00
Issued - See Note 11 300,000 $1.62 $1.62
Lapsed (96,000) $3.00 $3.00
--------
Outstanding at January 27, 2001 300,000 $1.62 $1.62
--------
Issued -- $ -- $ --
Lapsed -- $ -- $ --
Outstanding and exercisable
at February 2, 2002 300,000 $1.62 $1.62
--------
Issued -- $ -- $ --
Lapsed -- $ -- $ --
Outstanding and exercisable
at February 1, 2003 300,000 $1.62 $1.62
--------
In connection with the distribution agreement with Almond, Almond was issued
300,000 shares of common stock purchase warrants. (See Note 11.) The warrant
term is for a period not to exceed four years from date of grant.
Options and warrants outstanding and exercisable at February 1, 2003 were as
follows:
OUTSTANDING EXERCISABLE
-------------------------------------- ------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Years of Average Number Average
Exercise of Contractual Exercise of Exercise
Prices Options Life Price Options Price
- ------------- --------- ------------ -------- ------- --------
$1.63 - $2.75 632,000 3.2 $1.98 401,000 $1.79
$2.81 - $3.00 325,000 4.0 $2.99 13,000 $2.92
$3.13 - $3.88 137,000 1.2 $3.26 132,120 $3.41
--------- ------------ -------- ------- --------
In Total 1,094,000 3.2 $2.44 546,120 $2.21
--------- ------------ -------- ------- --------
F-26
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 February 1, 2003,
February 2, 2002 and January 27, 2001 is $72,000, $72,000 and $70,000,
respectively of expense for the employer portion of the contribution.
14. SIGNIFICANT CUSTOMERS
Sales to the Company's four largest customers were approximately 16%,14%,
12% and 11%; 17%, 12%, 14% and 10%; and 11%, 13%, 15% and 10%, respectively,
of net sales for the years ended February 1, 2003, February 2, 2002 and
January 27, 2001. Two customers accounted for approximately 24% and 19% of
accounts receivable, respectively, at February 1, 2003.
15. STOCK REPURCHASE PROGRAM
In December 1995, the Company announced a Common Stock Repurchase Program,
(the "1995 Stock Repurchase Program as amended in 1997 and 1998"), pursuant
to which the Company may repurchase up to 2,250,000 shares of Common Stock.
During the years ended February 1, 2003, February 2, 2002 and January 27,
2001, the Company repurchased a total of - 0-, 48,000 and 144,000 shares,
respectively, on the open market under the 1995 Stock Repurchase Program for
an aggregate price of approximately $-0-, $104,000 and $293,000,
respectively.
16. LEGAL PROCEEDINGS
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.
The Company has been named a defendant in an action alleging patent
infringement. The Company believes the allegations are without merit and is
prepared to vigorously defend the action.
F-27
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. COMMITMENTS AND CONTINGENCIES
In early 1999, at the decision of the compensation committee the Company
adopted a Change of Control Plan for executive officers, other key
employees, and Non-Employee Directors. The Plan provides for severance
payments to executive officers and other key employees. The severance
payments will be an amount equal to one times the individual's most recent
salary and bonus. The Plan also provides for continuation of medical and
dental benefits for a period of one year and automatic vesting of stock
options, if permissible under the applicable stock option plan. The
Non-Employee Director Plan provides for a payment of the sum of the
Non-Employee Director's regular compensation at the rate in effect at the
time of the change of control. These benefits are triggered upon a change of
control, as defined in the plan. Individual Agreements under the Plan have
been entered into with each of the executive officers, other key employees
and Non-Employee Directors.
18. ACQUISITION
On July 30, 2002, the Company acquired the gold jewelry division of A&A
Jewelers, Inc. ("A&A"). Under the terms of the agreement, the Company
acquired the molds and inventory of A&A, and sold its family jewelry and
special order division of A&A. As a result of this acquisition, the Company
expects to increase sales to its existing customers. The acquisition was
accounted for under the purchase method of accounting. No goodwill was
recognized as a result of this transaction. The aggregate purchase price was
$1,180,000. Part of the purchase was offset by the sale of other assets.
The following table summarizes the estimated fair values for the assets
acquired, no liabilities were assumed at the date of acquisition.
Inventory $ 300
Molds and Models 360
Intangibles - covenant
not to compete 520
------
Total assets acquired $1,180
======
F-28
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. EMPLOYEE RELATIONS
Based upon a petition filed by a local union, the National Labor Relations
Board scheduled an election among certain employees of the Company to decide
whether or not they desire union representation. The election was held on
October 2, 2002. The majority of employees voted against union
representation However, the union has appealed the results to the National
Labor Relations Board. The National Labor Relations Board is investigating.
No determination has been made by the Labor Board at this time. Relating to
this matter, the Company incurred approximately $159,000 in legal fees for
the year ended February 1, 2003.
F-29
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Summary of Quarterly Results (Unaudited) (in thousands)
Year Ended February 1, 2003 Year Ended February 2, 2002
-------------------------------------------- --------------------------------------------
Quarter Ended Quarter Ended
-------------------------------------------- --------------------------------------------
May 4, Aug. 3, Nov. 2, Feb. 1, Apr. 28, Aug. 4, Nov. 3, Feb. 2,
2002 2002 2002 2003 2001 2001 2001 2002
-------- -------- -------- -------- -------- -------- -------- --------
Net sales (A) $ 30,134 $ 20,296 $ 39,593 $ 28,557 $ 29,176 $ 28,210 $ 50,981 $ 33,551
Cost of goods sold 24,270 17,135 32,009 24,591 23,920 22,633 40,027 26,683
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 5,864 3,161 7,584 3,966 5,256 5,577 10,954 6,868
Selling, general &
administrative expenses 5,835 5,467 7,894 5,852 5,119 5,531 7,631 6,154
-------- -------- -------- -------- -------- -------- -------- --------
Operating income/(loss) 29 (2,306) (310) (1,886) 137 46 3,323 714
Other income (expense):
Gold consignment fees (311) (268) (313) (279) (250) (407) (428) (291)
Interest expense (200) (268) (320) (346) (247) (275) (463) (445)
Interest income 6 5 7 3 34 9 1 24
Other - net 11 8 (1) 5 7 27 15 2
-------- -------- -------- -------- -------- -------- -------- --------
Total other income (expense) (494) (523) (627) (617) (456) (646) (875) (710)
(Loss)/income from operations
before income taxes (465) (2,829) (937) (2,503) (319) (600) 2,448 4
Income tax (benefit)/provision (177) (1,075) (357) (951) (116) (234) 930 2
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss)/income $ (288) $ (1,754) $ (580) $ (1,552) $ (203) $ (366) $ 1,518 $ 2
======== ======== ======== ======== ======== ======== ======== ========
(Loss)/earnings per share (B):
Net (loss)/earnings per share $ (.05) $ (.28) $ (.09) $ (.25) $ (.03) $ (.06) $ .25 $ .00
======== ======== ======== ======== ======== ======== ======== ========
(A) The Company's net sales 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.
F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Michael Anthony Jewelers, Inc.
Mount Vernon, New York
The audits referred to in our report dated April 7, 2003 relating to the
consolidated financial statements of Michael Anthony Jewelers, Inc. and
subsidiaries which is contained in Item 8 of this Form 10-K, included the audits
of the financial statement schedule listed in the accompanying index for the
years ended February 1, 2003, February 2, 2002 and January 27, 2001. The
financial statement schedule is the responsibility of management. Our
responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/: BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
April 7, 2003
S-1
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO COSTS END OF
DESCRIPTION PERIOD AND EXPENSES DEDUCTIONS(A) PERIOD
- ----------- ------------ ---------------- ------------- ----------
Allowance for doubtful
accounts:
- ----------- ------------ ---------------- ------------- ----------
Year ended February 1, 2003 $ 556 $ 117 $ (273) $ 400
Year ended February 2, 2002 610 205 (259) 556
Year ended January 27, 2001 530 60 20 610
Allowance for sales returns:
Year ended February 1, 2003 $3,699 $3,000 $(3,699) $3,000
Year ended February 2, 2002 1,926 3,699 (1,926) 3,699
Year ended January 27, 2001 477 1,926 (477) 1,926
(A) Allowances, returns and uncollectible accounts charged against the reserve,
(net of collections on previously written-off accounts).
S-2