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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter ended November 1, 2003
Commission file number: 015230
MICHAEL ANTHONY JEWELERS, INC.
(Exact name of registrant as specified in its charter)
Delaware No. 13-2910285
(State of Incorporation) (I.R.S. Employer Identification No.)
115 South MacQuesten Parkway
Mount Vernon, New York 10550-1724
(Address of principal executive offices)
Registrant's telephone number, including area
code:
(914) 699-0000
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
CLASS
----- Number of Shares
Common Stock, Par Value $.001 Outstanding as of
December 2, 2003
----------------
6,256,326
-1-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets,
November 1, 2003 (Unaudited) and
February 1, 2003............................................................................... 3
Consolidated Condensed Statements of Operations,
Three-Month and Nine-Month Periods Ended
November 1, 2003 (Unaudited) and November 2, 2002 (Unaudited) ................................. 4
Consolidated Condensed Statement of Changes in
Stockholders' Equity, Nine-Month Period Ended
November 1, 2003 (Unaudited)................................................................... 5
Consolidated Condensed Statements of Cash Flows,
Nine-Month Period Ended
November 1, 2003 (Unaudited) and November 2, 2002 (Unaudited).................................. 6
Notes to Consolidated Condensed Financial
Statements....................................................................................... 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................................................... 15-20
PART II OTHER INFORMATION:
Item 1 Through Item 6 ............................................................................. 21-22
Signature Page.................................................................................... 23
-2-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS November 1, February 1,
- ------ 2003 2003
-------- --------
(Unaudited)
CURRENT ASSETS:
Cash and equivalents $ 244 $ 1,124
Accounts receivable:
Trade (less allowances of $3,217 and $3,400, respectively) 23,116 14,173
Other 1,290 649
Inventories 23,477 25,952
Prepaid expenses and other current assets 2,503 3,095
Assets held for sale 1,289 2,579
Deferred taxes 578 578
-------- --------
Total current assets 52,497 48,150
PROPERTY, PLANT AND EQUIPMENT - net 12,248 13,100
INTANGIBLES - net 282 419
OTHER ASSETS 88 356
DEFERRED TAXES 140 140
-------- --------
$ 65,255 $ 62,165
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 3,664 $ 2,912
Line of credit 12,387 7,000
Current portion of long-term debt 1,791 1,697
Debt on assets held for sale - 183
Taxes payable 100 100
Accrued expenses 3,363 3,373
-------- --------
Total current liabilities 21,305 15,265
-------- --------
LONG-TERM DEBT 5,870 7,305
-------- --------
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;
8,397,175 and 8,385,747 shares issued and outstanding as of
November 1, 2003 and February 1, 2003, respectively 8 8
Additional paid-in capital 32,411 32,391
Retained earnings 12,024 13,579
Accumulated comprehensive gain 66 46
Treasury stock, 2,140,849 shares as of
November 1, 2003 and February 1, 2003, respectively (6,429) (6,429)
-------- --------
Total stockholders' equity 38,080 39,595
-------- --------
$ 65,255 $ 62,165
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended Nine Months Ended
------------------ -----------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
-------- -------- -------- --------
NET SALES $ 29,160 $ 39,593 $ 70,216 $ 90,023
COST OF GOODS SOLD 23,707 32,009 57,059 73,414
-------- -------- -------- --------
GROSS PROFIT ON SALES 5,453 7,584 13,157 16,609
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,639 7,894 14,743 19,196
-------- -------- -------- --------
OPERATING LOSS (186) (310) (1,586) (2,587)
OTHER INCOME/(EXPENSE):
Gold consignment fee (368) (313) (945) (892)
Interest expense (264) (320) (715) (788)
Interest income 4 7 10 18
Other income 565 (1) 728 18
-------- -------- -------- --------
Total Other Expense (63) (627) (922) (1,644)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (249) (937) (2,508) (4,231)
INCOME TAX BENEFIT (95) (357) (953) (1,609)
-------- -------- -------- --------
NET LOSS $ (154) $ (580) $ (1,555) $ (2,622)
======== ======== ======== ========
LOSS PER SHARE
- BASIC AND DILUTED $ (.02) $ (.09) $ (.25) $ (.42)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER
OF SHARES - BASIC AND DILUTED 6,256 6,245 6,251 6,241
======== ======== ======== ========
See accompanying notes to the consolidated condensed financial statements.
-4-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Common Stock Additional Accumulated Treasury Stock
------------------ Paid-In Retained Comprehensive -------------------
Shares Dollars Capital Earnings Gain Shares Dollars Total
----- -------- -------- -------- -------- ------ -------- --------
Balance - February 1, 2003 8,386 $ 8 $ 32,391 $ 13,579 $ 46 (2,141) $ (6,429) $ 39,595
Issuance of Stock 11 - 20 - - - - 20
Comprehensive gain/(loss):
Change in fair value of
Cash flow hedges - - - - 20 - - 20
Net loss - - - (1,555) - - - (1,555)
----- -------- -------- -------- -------- ------ -------- --------
Total comprehensive
(loss)/gain - - - (1,555) 20 - - (1,535)
----- -------- -------- -------- -------- ------ -------- --------
Balance - November 1, 2003 8,397 $ 8 $ 32,411 $ 12,024 $ 66 (2,141) $ (6,429) $ 38,080
===== ======== ======== ======== ======== ====== ======== ========
See accompanying notes to the consolidated condensed financial statements.
-5-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Nine Months Ended
-----------------
November 1, November 2,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,555) $ (2,622)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 1,643 2,359
Provision for doubtful accounts (190) 213
Credit for sales returns - (1,451)
Issuance of stock 20 170
Gain on sale of property, machinery and equipment (546) 8
(Increase)/decrease in operating assets:
Accounts receivable (9,244) (14,560)
Inventories 2,475 (2,495)
Prepaid expenses and other current assets 2,278 (1,149)
Other assets 268 -
Increase/(decrease) in operating liabilities:
Accounts payable 752 5,825
Taxes payable - (1,181)
Accrued expenses 10 261
-------- --------
Net cash used in operating activities (4,089) (14,622)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (654) (910)
Acquisition - 519
-------- --------
Net cash used in investing activities (654) (1,429)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt
and capital lease liabilities (1,524) (1,354)
Proceeds from line of credit 5,387 15,900
-------- --------
Net cash provided by financing activities 3,863 14,546
-------- --------
DECREASE IN CASH EQUIVALENTS (880) (1,505)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 1,124 2,129
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 244 $ 624
======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for:
Interest and gold consignment fees $ 1,814 $ 1,610
SUPPLEMENTAL DISCLOSURE OF
NON-CASH INVESTING ACTIVITY:
Change in fair value of cash flow hedges $ 20 $ 54
See accompanying notes to the consolidated condensed financial statements.
-6-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
The unaudited condensed consolidated financial statements as of November 1,
2003 and related notes have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations. The
accompanying unaudited interim consolidated condensed financial statements
and related notes should be read in conjunction with the financial
statements and related notes included in the 2003 Annual Report to
Stockholders of Michael Anthony Jewelers, Inc. (the "Company").
The information furnished reflects, in the opinion of the management of the
Company, all adjustments, consisting of normal recurring accruals, which
are necessary to present a fair statement of the results for the interim
periods presented.
The interim figures are not necessarily indicative of the results to be
expected for the fiscal year due to the seasonal nature of the business.
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.
-7-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
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 3). 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
life of the asset.
Intangibles
-----------
Intangible assets (acquired in Fiscal 2003, in connection with an
immaterial acquisition), 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.
-8-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
(Continued)
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.
Credit Risk
-----------
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of temporary cash
investments that are with well established financial institutions, 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. The reserve is adjusted periodically to reflect
the Company's actual return experience.
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.
Advertising Expense
-------------------
Advertising costs are expensed as incurred. Advertising costs associated
with cooperative advertising programs are accrued as the related
revenues are recognized.
-9-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
(Continued)
Packaging Materials
-------------------
Packaging materials are capitalized and expensed based on usage.
Cash Equivalents
----------------
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents.
Derivative Financial Instruments
--------------------------------
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 other comprehensive loss.
-10-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
(Continued)
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".
Three Months Ended Nine Months Ended
------------------ -----------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
---- ---- ---- ----
Net loss:
As reported $154 $580 $1,555 $2,622
Deduct: Total stock-based
employee compensation expense
determined under fair value
based methods for all awards,
net of related tax effects 19 24 58 72
---- -------- -------- -------
Proforma Net Loss $173 $604 $1,613 $2,694
==== ==== ====== ======
Basic and diluted net loss per share:
As reported $.02 $.09 $.25 $.42
Proforma SFAS 123 $.03 $.10 $.26 $.43
-11-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
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:
Nine Months Ended
-----------------
November 1, November 2,
2003 2002
---- ----
Average risk free interest rates 6.5% 6.5%
Average expected life (in years) 3.0% 3.0%
Volatility 60.0% 60.0%
Effect of Recently Issued Accounting Standards
----------------------------------------------
In April 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). FASB
Statements No. 133 "Accounting for Derivative Instruments and Hedging
Activities" and No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities", establish accounting and reporting
standards for derivative instruments including derivatives embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS No. 149 amends Statement 133 for certain
decisions made by the Board as part of the Derivatives Implementation
Group process. This Statement contains amendments relating to FASB
Concepts Statement No. 7, "Using Cash Flow Information and Present Value
in Accounting Measurements", and FASB Statements No. 65, "Accounting for
Certain Mortgage Banking Activities", No. 91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases", No. 95, "Statement of
-12-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------
(Continued)
Effect of Recently Issued Accounting Standards (Continued)
----------------------------------------------
Cash Flows", and No. 126, "Exemption from Certain Required Disclosures
about Financial Instruments for Certain Nonpublic Entities".
The provisions of SFAS No. 149 are effective for contracts entered into
or modified after June 30, 2003. The adoption of SFAS No. 149 did not
have any impact on the Company's financial statements or results of
operations.
2. PRODUCT PRICING
---------------
The Company's products, the principal component of which is gold, are
generally sold at prices which are based on the market price of gold on the
date merchandise is ordered or shipped to the customer, therefore, the
Company's sales volume is significantly influenced by the market price of
gold. The selling prices for certain customers may be fixed for a specific
period of time. In such cases, the Company is able to shift a substantial
portion of the risks of gold price fluctuation by hedging against changes
in the price of gold by entering into forward contracts or purchasing
futures or options on futures.
The Company has recorded a $20,000 gain as a component of accumulated other
comprehensive (loss)/income for the nine months ended November 1, 2003
related to the gold price hedge.
The Company's consigned gold inventory is hedged against the effects of
price fluctuations. The Company has entered into arrangements with certain
gold lenders (the "Gold Lenders") pursuant to which the Company does not
purchase gold from the Gold Lenders until receipt of a purchase order from,
or shipment of jewelry to, its customers. These arrangements permit the
Company to match the sales price of the product with the price the Company
pays for the gold.
-13-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
FORM 10-Q FOR QUARTER ENDED NOVEMBER 1, 2003
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
3. INVENTORIES
-----------
Inventories consist of:
November 1, February 1,
2003 2003
---------- --------
(Unaudited)
(In thousands)
Finished goods $48,190 $47,236
Work in process 23,575 19,027
Raw materials 6,312 9,590
-------- --------
78,077 75,853
Less:
Consigned gold 54,600 49,901
-------- -------
$23,477 $25,952
======= =======
Inventories as of November 1, 2003 and February 1, 2003 excluded
approximately 141,000 and 136,000 ounces of gold on consignment,
respectively.
4. SALE OF BUILDING
----------------
On October 30, 2003, the Company sold one of its manufacturing facilities,
located at 70 South MacQuesten Parkway, Mount Vernon, New York for a price
of $2,300,000. The Company recognized a gain of approximately $400,000 from
this transaction, which was reflected in other income.
5. RELATED PARTY
-------------
In October 2003, the bank that held the mortgage for the Company's
corporate headquarters assigned the mortgage to Paolercio Palace Holdings,
Inc., a company consisting of certain stockholders of the Company, at the
same principal, interest rate and term.
6. COVENANT COMPLIANCE
-------------------
At November 1, 2003 the Company was not in compliance with certain of the
financial covenants in its Gold Lender consignment agreements. The
agreements require the Company to maintain specific levels of minimum
tangible net worth, EBIT (Earnings Before Interest and Taxes) and owned
gold minimums of which the Company did not meet. The gold lenders issued a
forbearance letter, which included a reset of the financial covenants for
the quarter ending November 1, 2003.
-14-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
- ------------------------------------------------
NOVEMBER 1, 2003 AND NOVEMBER 2, 2002
- -------------------------------------
Net sales for the three months ended November 1, 2003 were approximately
$29,160,000, a decrease of 26.4% from net sales of approximately $39,593,000 for
the comparable period last year. 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.
Gross profit margin decreased to 18.7% of net sales for the three months ended
November 1, 2003 compared to 19.2% for the comparable period last year. The
average selling price of gold in the current quarter was $361 per ounce compared
to $314 per ounce for the quarter ended November 2, 2002. Excluding the effect
of the increase in the average market price of gold, the gross profit margin
would have been 20.3% for the three months ended November 1, 2003. The increase
in the gross margin is primarily due to the Company's increased utilization of
its offshore manufacturing facility as well as the Company's reduced
manufacturing costs in New York.
Selling, general and administrative expenses for the three months ended November
1, 2003 were approximately $5,639,000, a decrease of $2,255,000 or 28.6% from
approximately $7,894,000 for the comparable period last year. The decrease is
primarily attributable to a decrease in advertising and packaging related
expenses of $1,068,000, a decrease in payroll and payroll related expenses of
$984,000, and a decrease in the provision for bad debts of $72,000. Theses
decreases were offset in part by increases in legal and accounting fees of
$112,000.
Interest expense and gold consignment fees for the three months ended November
1, 2003, were approximately $632,000, compared to approximately $633,000 for the
comparable period last year.
Other income and interest income for the three months ended November 1, 2003
were approximately $569,000 compared to $6,000 for the comparable period last
year. The increase was primarily due to a $400,000 gain on the Company's sale of
one of its manufacturing facilities and a $165,000 recovery of a previously
written off bad debt.
The effective income tax rate was approximately 38.1% for the three months ended
November 1, 2003 and November 2, 2002.
As a result of the above factors, the Company had a net loss for the three
months ended November 1, 2003 of $154,000 compared to a net loss of $580,000 for
the comparable period last year.
Basic and diluted loss per share for the three months ended November 1, 2003 was
$.02 compared to $.09 for the comparable period last year.
-15-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
- -----------------------------------------------
NOVEMBER 1, 2003 AND NOVEMBER 2, 2002
- -------------------------------------
Net sales for the nine months ended November 1, 2003 were approximately
$70,216,000, a decrease of 22.0% from net sales of approximately $90,023,000 for
the comparable period last year. The decrease in sales was primarily due to
decreased shipments to the retail segment of our customer base and a higher
reserve for returns which was offset in part by increases in the sales prices
due to an increase in the average market price of gold.
Gross profit margin increased to 18.7% of net sales for the nine months ended
November 1, 2003 compared to 18.4% for the comparable period last year. The
average selling price of gold in the current nine months was $355 per ounce
compared to $307 per ounce for the nine months ended November 2, 2002. Excluding
the effect of the increase in the average market price of gold, the gross profit
margin would have been 20.4% for the nine months ended November 1, 2003. The
increase in the gross margin as a percent of sales is primarily due to the
Company's increased utilization of its offshore manufacturing facility as well
as the Company's reduced manufacturing costs in New York.
Selling, general and administrative expenses for the nine months ended November
1, 2003 were approximately $14,743,000, a decrease of $4,453,000 or 23.2% from
approximately $19,196,000 for the comparable period last year. The decrease is
primarily attributable to decreases in payroll and payroll related expenses of
$2,582,000, a decrease in advertising and packaging related expenses of
$1,075,000, a decrease in the provision for bad debts of $403,000, a decrease in
freight expenses of $166,000, and a decrease in occupancy expenses of $149,000.
These decreases were offset in part by increase in legal and accounting fees of
$280,000.
Interest expense and gold consignment fees for the nine months ended November 1,
2003, were approximately $1,660,000 a decrease of $20,000 or 1.2% compared to
approximately $1,680,000 for the comparable period last year. The decrease was
primarily due to a decrease in the Company's interest payments on its lower
long-term debt balances, which were offset in part due the Company's increased
borrowings under its line of credit.
Other income and interest income for the nine months ended November 1, 2003 were
approximately $738,000 compared to $36,000 for the comparable period last year.
The increase was primarly due to a $400,000 gain on the Company's sale of one of
its manufacturing facilities, a $165,000 recovery of previously written off bad
debt, and a $150,000 gain on the Company's sale of excess machinery and
equipment.
The effective income tax rate was approximately 38.0% for the nine months ended
November 1, 2003 and November 2, 2002.
As a result of the above factors, the Company had a net loss for the nine months
ended November 1, 2003 of $1,555,000 compared to a net loss of $2,622,000 for
the comparable period last year.
Basic and diluted loss per share for the nine months ended November 1, 2003 was
$.25 compared to $.42 for the comparable period last year.
-16-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
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. 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 November 1,
2003, Michael Anthony held approximately 139,000 ounces of gold on consignment
with a market value of $54,600,000.
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
November 1, 2003, Michael Anthony's owned gold inventory was valued at
approximately $3,580,000. 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.
At November 1, 2003 the Company was not in compliance with certain financial
covenants which were its owned gold requirement, its minimum tangible net worth,
and its earnings before income and taxes. The gold lenders issued a forebearance
letter which included a reset of the financial covenants and revised the maximum
gold usage to 125,000 ounces of gold on consignment with a market value of
$50,000,000 to be effective December 1, 2003. The Company was in full compliance
with the revised covenants as of November 29, 2003.
The consignment agreements are for a period of one year ending March 30, 2004.
Management believes that the gold consignment agreements will be renewed,
however, if the current lenders decide not to renew the line, the Company
believes that other lenders would be willing to enter into a similar
arrangement; there is no assurance that the Company will succeed in obtaining
replacement financing or that it will be on similar terms.
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
-17-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
Liquidity and Capital Resources (continued)
- -------------------------------
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 November 1, 2003 there were 19,400 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 February 2, 2003 until November 1, 2003, the closing price of
gold according to the Second London Gold Fix ranged from a low of $320 per ounce
to a high of nearly $391 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.
The Company has a 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, inventory and certain real estate holdings. 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. At
November 1, 2003, there was $12,387,000 outstanding under the line of credit.
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; there is no
assurance that the Company will succeed in obtaining replacement financing or
that it will be on similar terms.
During the nine months ended November 1, 2003, cash used in operating activities
was $4,089,000. During the comparable period of the prior year, the Company used
$14,622,000 of cash in operating activities.
Cash of $654,000 was used in investing activities during the nine-month period
as compared to $1,429,000 used during the comparable nine-month period last
year.
Cash of $3,863,000 was provided by financing activities during the nine-month
period, compared to $14,546,000 provided in the comparable period of the prior
year.
For the balance of fiscal 2004, the Company projects capital expenditures of
approximately $100,000.
-18-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
Forward Looking Statements
- --------------------------
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include the words "believe," "expect," "plans" or
similar words and are based in part on the Company's reasonable expectations and
are subject to a number of factors and risks, many of which are beyond the
Company's control. Actual results could differ materially from those discussed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" as a result of any of the following factors:
a) general economic conditions and their impact on the retail environment;
b) fluctuations in the price of gold and other metals used to manufacture
the Company's jewelry;
c) risks related to the concentration of the Company's customers,
particularly the operations of any of its 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 the Company is able to attract and retain key
personnel.
In light of these uncertainties and risks, there can be no assurance that the
forward-looking statements in this Quarterly Report on Form 10-Q will occur or
continue in the future. Except for its required, periodic filings under the
Securities Exchange Act of 1934, the Company undertakes no obligations to
release publicly any revisions to these forward looking statements that may
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
-19-
ITEM 2 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(INFORMATION SUBSEQUENT TO FEBRUARY 1, 2003 IS UNAUDITED)
Effect of Recently Issued 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 implementation of this standard did
not have a material effect on our results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS No. 149"). FASB Statements No. 133
"Accounting for Derivative Instruments and Hedging Activities" and No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities",
establish accounting and reporting standards for derivative instruments
including derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 149 amends Statement 133 for
certain decisions made by the Board as part of the Derivatives Implementation
Group process. This Statement contains amendments relating to FASB Concepts
Statement No. 7, "Using Cash Flow Information and Present Value in Accounting
Measurements", and FASB Statements No. 65, "Accounting for Certain Mortgage
Banking Activities", No. 91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases", No. 95, "Statement of Cash Flows", and No. 126, "Exemption from Certain
Required Disclosures about Financial Instruments for Certain Nonpublic
Entities". The provisions of SFAS No. 149 are effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 is not
expected to have any impact on the Company's financial statements or results of
operations.
-20-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 and 2
Not applicable.
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
---------------------------------------------------------
The carrying amounts of financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities,
approximate fair value because of the current nature of these instruments.
The carrying amount reported for revolving credit and long-term debt
approximate fair value because of the interest rates on these instruments
approximate current market rates. Because the interest rates on our long
term debt is fixed and our revolving debt is utilized seasonally we do not
hedge against interest rate increases.
Consigned gold is not included in the Company's inventory, and there is no
related liability recorded. As a result of these consignment arrangements,
the Company is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the Gold Lenders, since the Company
does not purchase gold from the Gold Lenders until receipt of a purchase
order form, or shipment of jewelry to, its customers. The Company then
either locks in the selling price of the jewelry to its customers
concurrently with the required purchase of gold from the Gold Lenders or
hedges against changes in the price of gold by entering into forward
contracts or purchasing futures or options on futures that are listed on the
COMEX. While the Company believes its supply of gold is relatively secure,
significant increases or rapid fluctuations in the cost of gold may result
in reduced demand for the Company's products.
All of our revenues are realized in U.S. dollars and all of our revenues are
from customers in the United States. Therefore, we do not believe we face
significant direct foreign currency exchange rate risk. We do not hedge
against foreign currency exchange rate changes.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules13a-14(c) and 15d-14(c)
as of the end of the period covered by the filing date of this quarterly report
on Form 10-Q (the "Evaluation Date")), have concluded that as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Company's disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.
-21-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Changes in Internal Controls
- ----------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure controls and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions.
Item 5
Not applicable
Item 6.
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
Press Release - management change
Press Release - third quarter earnings
-22-
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAEL ANTHONY JEWELERS, INC.
Dated: December 8, 2003 By: /s/ Allan Corn
----------------------------------------
Allan Corn
Senior Vice President and
Chief Financial Officer
-23-