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1
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
JANUARY 31, 1998
COMMISSION FILE NUMBER
015230
MICHAEL ANTHONY JEWELERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
DELAWARE 132910285
(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: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001
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. [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of April 10, 1998.
COMMON STOCK, PAR VALUE $.001 7,284,793
(TITLE OF EACH CLASS) ----------------
(NUMBER OF SHARES)
Aggregate market value of common stock held by nonaffiliates at April 10, 1998:
$11,947,523*
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DOCUMENTS INCORPORATED BY REFERENCE:
Part III Portions of registrant's Definitive Proxy Statement for Annual Meeting
of Stockholders for Fiscal 1998 (to be filed within 120 days of end of Fiscal
Year).
Part IV Certain exhibits to (i) registrant's Registration Statement on Form S-1
(File No. 338289), (ii) registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1993, (iii) registrant's Registration Statement on Form S-3
(File No. 3371308), (iv) registrant's Annual Report on Form 10-K for the fiscal
year ended June 30, 1994, (v) registrant's Transition Report on Form 10-K for
the transition period from July 1, 1994 to January 28, 1995, (vi) registrant's
Annual Report on Form 10-K for the fiscal year ended January 27, 1996, (vii)
registrant's Quarterly Report on Form 10-Q for the quarter ended July 27, 1996,
(viii) registrant's Quarterly Report on Form 10-Q for the quarter ended October
26, 1996, (ix) registrant's Annual Report on Form 10-K for the fiscal year ended
February 1, 1997, (x) registrant's Quarterly Report on Form 10-Q for the quarter
ended May 3, 1997, (xi) registrant's Quarterly Report on Form 1-Q for the
quarter ended August 2, 1997 and (xii) registrant's Quarterly Report on Form
10-Q for the quarter ended November 1, 1997.
* Excludes holdings, among others, of Allan Corn, Frances Durden, Mark Hanna,
David Harris, Donald R. Miller, Michael Anthony Paolercio, Greg Torski and
Michael Wager who should not be deemed affiliates for any other purpose.
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PART I
ITEM 1. BUSINESS.
GENERAL
Michael Anthony Jewelers, Inc. (the "Company") is a leading designer,
marketer and manufacturer of affordable fine jewelry in the United States. The
Company sells its jewelry directly to jewelry chain stores, discount stores,
department stores, television home shopping networks, catalogue retailers, and
wholesalers. The Company manufactures jewelry targeted towards the middle
market, which generally retails between $20 and $200 and between $300 and $1,200
for watches. The Company's products include rope chain, bracelets, charms,
pendants, earrings, rings and watches, which is sold in over 20,000 retail
locations nationwide.
Most of the Company's products are manufactured at its Mount Vernon,
New York facility. The Company utilizes manufacturing processes that combine
modern technology and mechanization with handcraftsmanship. In order to better
meet its customers' needs, the Company has developed a wide range of customer
service programs, such as inventory management assistance through electronic
data interchange, customized packaging, barcoding and computerized analysis of
sales and marketing trends. As a result of its vertical integration and customer
service programs, the Company is able to be responsive to its customers' needs
and manufacture and deliver most orders on a timely and more cost-effective
basis than many of its competitors.
The Company was organized as a Delaware corporation in 1986 and is the
successor to Michael Anthony Jewelers, Inc., a New York corporation, organized
in 1977.
CHANGE IN FISCAL YEAR
On November 3, 1994, the Company's Board of Directors approved a change
in the fiscal year end of the Company from June 30th to a fiscal year ending on
the last Saturday in January, effective for the seven month period ended January
28, 1995. During fiscal 1997, the Company changed its fiscal year end from the
last Saturday in January to the Saturday closest to the end of January,
effective with the fiscal year ended February 1, 1997. Fiscal years ended
January 31, 1998, February 1, 1997 and January 27, 1996 were comprised of 52, 53
and 52 weeks, respectively.
As used below, (a) fiscal 1998 refers to the fiscal year ended January
31, 1998, (b) fiscal 1997 refers to the fiscal year ended February 1, 1997 and
(c) fiscal 1996 refers to the fiscal year ended January 27, 1996.
PRODUCT LINES
The Company offers a broad selection of handcrafted gold and silver
jewelry. Many of the Company's products carry the "Ma" trademark, which has
become widely recognized in the jewelry industry and with certain consumers. One
of the Company's largest product lines is an extensive selection of casted gold
charms and pendants. The charms and pendants manufactured by the Company include
religious symbols; popular sayings ("talking charms"); sport themes and team
logos; animal motifs; nautical, seashore, western, musical, zodiac and other
thematic figures; initials; and abstract artistic creations.
The M.A.J. manufacturing division manufactures gold rope chain, gold
locks used in the production of rope chain, and designs gold tubing and bangle
blanks used in the production of bangle bracelets. The M.A.E. manufacturing
division manufactures gold earrings and certain findings used to assemble
jewelry.
The Company also manufactures a line of men's and ladies' 18 and 14
karat gold watches under the "Michael Anthony" and "Marc Anton" brand names.
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The tables below set forth the approximate percentage of (i) sales and
(ii) kilos shipped in fiscal years 1998, 1997 and 1996, respectively,
attributable to each of the Company's product categories.
APPROXIMATE
FISCAL 1998 APPROXIMATE % OF KILOS
PRODUCT CATEGORY % OF SALES SHIPPED
- ---------------- ---------- -------
Casted 42 34
Chains 42 51
Earrings 6 5
Other items 10 10
--- ---
Total 100% 100%
=== ===
APPROXIMATE
FISCAL 1997 APPROXIMATE % OF KILOS
PRODUCT CATEGORY % OF SALES SHIPPED
- ---------------- ---------- -------
Casted 44 37
Chains 43 50
Earrings 5 4
Other items 8 9
--- ---
Total 100% 100%
=== ===
APPROXIMATE
FISCAL 1996 APPROXIMATE % OF KILOS
PRODUCT CATEGORY % OF SALES SHIPPED
- ---------------- ---------- -------
Casted 45 34
Chains 42 51
Earrings 6 4
Other items 7 11
--- ---
Total 100% 100%
=== ===
The Company's jewelry line includes licensed products manufactured
pursuant to arrangements with such licensors as Warner Bros., Inc. (licensors of
Looney Tunes(R) characters), National Football League Properties, Inc., Major
League Baseball Properties, Inc., NBA Properties, Inc., NHL Enterprises, Inc.,
United Features Syndicate (Peanuts(R)), Playboy Enterprises, Inc., Cathy(R) and
many nationally recognized colleges, including Notre Dame and the University of
Florida. The Company manufactures jewelry products, particularly charms,
pendants and pins, depicting the popular logos and symbols associated with these
licensors. The Company pays each of these licensors a royalty ranging from 6% to
12% on sales of the licensed products. During the fiscal year ended January 31,
1998, the Company's licensed products represented approximately 11% of the
Company's net sales.
The Company maintains an inhouse design staff which utilizes CAD/CAM
(computer aided design/computer aided manufacturing) technology to enhance its
design, modeling and production capabilities. The equipment is utilized for the
design of the Company's new products and for modifying the scale of existing
Company designs. The Company's policy is to obtain proprietary protection for
its products and designs whenever possible.
The Company updates its product catalogue each year by adding new
designs and eliminating less popular styles. Items removed from the Company's
current catalogue generally remain available on a special order basis.
Management believes that the Company's future success will depend, in
part, on its ability to enhance its existing product lines and develop new
styles and products to meet an expanding range of customer requirements. As of
April 10, 1998, the Company's product development staff consisted of 16 full
time employees. The Company's product development expenses for fiscal 1998 were
approximately $1,004,000. The Company anticipates that it will continue to
commit substantial resources to product development in the future. The Company's
policy is to capitalize 50% of its product development costs. These costs are
amortized over two years.
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MANUFACTURING PROCESS
At the Company's manufacturing facility in Mount Vernon, New York,
manufacturing processes combine modern technology and mechanization with
handcraftsmanship to produce fashionable and affordable gold jewelry. The
manufacturing processes utilized by the Company include the casting (or lost
wax) method, a photoetching process which has allowed the Company to enter the
lower priced segment of the market through production of ultralight products and
the diamond cut process, a technique which produces a sparkling effect on a
finished piece of gold jewelry.
The Company's rope chain product is manufactured by machinery designed
in accordance with a patented process. The equipment is capable of operating 24
hours a day and requires minimal direct labor costs, which has enabled the
Company to become one of the lowest cost producers of rope chain in the United
States.
During fiscal 1998, the Company manufactured approximately 95% of its
products from gold bullion and other raw materials and purchased approximately
5% of its product as semi-finished or finished goods. The Company does not
believe the loss of any supplier would have a material adverse effect on its
business. Alternative sources of supply for the goods purchased by the Company
are readily available.
OPEN ORDERS
Orders from the Company's retail customers typically have shipment
dates that range from 24 hours to 60 days. Substantially all of the Company's
wholesale customers' orders are for immediate shipment and generally are shipped
within 7 days of receipt. As of April 10, 1998, the aggregate dollar value of
the Company's orders was approximately $9,700,000. The Company expects that
substantially all of the current orders will be shipped in the next 45 days.
Management of the Company does not believe that open orders are indicative of
the Company's future results of operations, as open orders as of any given date
are not necessarily indicative of sales trends.
MARKETING AND SALES
The Company markets and sells its jewelry primarily through its inhouse
sales force. Sales are made by the Company's sales personnel primarily at the
Company's showroom in Mount Vernon, New York and direct presentations at
customers' locations. Products are promoted through the use of catalogues,
advertisements in trade publications, trade show exhibitions and cooperative
advertising allowances with certain customers.
The Company's marketing strategy includes a campaign to increase brand
recognition for the "Michael Anthony" name. This campaign includes advertising
in consumer magazines and a specially selected and packaged line of karat gold
jewelry, including watches, sold by the Company to certain retailers under the
"Michael Anthony" name. The Company believes that there is growing brand
recognition of the "Michael Anthony" name and the "Ma" trademark with consumers
and that this recognition has enhanced sales of its products.
The Company's jewelry is sold primarily to jewelry chain stores,
discount stores, department stores, television home shopping networks, catalogue
retailers and wholesalers. The Company assists its customers in allocating their
purchasing budget among the items in the various product lines by advising them
of items having higher consumer demand as determined by the Company's
computerized market analysis. Prices vary on the basis of service required by
customers. The Company ships its products in bulk to wholesale distributors. For
certain retail chains, such as Sterling, Inc. (a division of Signet Group PLC
and the owner of Kay Jewelers and J.B. Robinson Jewelers), Wal*Mart, J.C.
Penney, Zales, Service Merchandise and Kmart, the Company prepackages and price
tags most items, and then ships an order of many different items to distribution
centers and stores in the chain. The Company provides additional services to
certain of its customers to meet their specific marketing needs, such as
tagging, boxing and point-of-sale displays.
The Company also ships its jewelry to a limited number of customers on
a consignment basis. Under these arrangements, the Company delivers its products
under consignment, and upon sale, the customer pays the Company for the
consigned merchandise. Consigned
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merchandise is subject to the Company's own consignment arrangements with its
gold lenders (the "Gold Lenders"). See ITEM 1. "BUSINESS - SUPPLY; RELATED
FINANCING ARRANGEMENTS" AND ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL
RESOURCES."
During the fiscal year ended January 31, 1998, sales to the five
largest of the Company's customers aggregated approximately 51% of total net
sales. The Company's two largest customers were J.C. Penney and Sterling, Inc.,
each accounting for approximately 12.5% of net sales. Except for certain retail
customers, generally the Company has no long-term contractual commitments with
any of its customers, nor are any of the Company's customers subject to any
contractual provisions or other restrictions which preclude them from purchasing
products from the Company's competitors.
The Company reduces gross sales by the amount of returns and discounts
to determine net sales each month. The Company establishes each month a reserve
for returns based on its historical experience, the amount of gross sales and
the customer base. The total of actual returns and the provision for the returns
reserve amounted to approximately 12% of gross sales in fiscal 1998, 13% of
gross sales in fiscal 1997 and 14% of gross sales in fiscal 1996. For further
information regarding the reserve for returns, see Note 1 - Notes to
Consolidated Financial Statements.
The reduction, delay or cancellation of orders or the return of a
significant amount of product from one or more of the Company's top customers,
the loss of one or more of the Company's top customers, or any financial
difficulties of any such customers resulting in their inability to pay amounts
owing to the Company, could have a material adverse effect on the Company's
business, operating results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company manufactures its rope chain using machinery that is
designed in accordance with patented processes. The Company also maintains
certain trademarks and generally applies for copyrights covering the design of
certain of its products. The level of protection available under the law for the
Company's proprietary designs and products varies depending upon a number of
factors, including the distinctiveness of the product and originality of design.
There can be no assurance that the Company's patents, trademarks and copyrights
will prevent competitors from producing products that are substantially similar
to those of the Company. See ITEM 1. "BUSINESS - PRODUCT LINES."
In addition, the Company seeks to avoid disclosure of its trade
secrets, including requiring those persons with access to the Company's
proprietary information to sign confidentiality agreements with the Company and
restricting access to the Company's systems.
Despite the Company's efforts to protect its trademarks, copyrights and
other proprietary rights, unauthorized parties may attempt to copy aspects of
the Company's products or to obtain and use information that the Company
considers confidential. Policing unauthorized use of the Company's intellectual
property rights is difficult, and while the Company takes appropriate action
whenever it discovers unauthorized use of its trademarks or that of any of its
copywritten designs have been copied, knockoffs and counterfeit product are a
persistent problem in the jewelry industry. In addition, the laws of many
countries do not protect the Company's intellectual property rights to as great
an extent as do the laws of the United States. There can be no assurance that
the Company's means of protecting its intellectual property and other
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar products.
Management does not believe that the Company's products or processes
infringe the proprietary rights of any third parties, but there can be no
assurance that third parties will not claim infringement with respect to
existing or future products or processes. Any such claims, with or without
merit, could be time-consuming, result in costly litigation, cause product
shipment delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to the Company or at all, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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COMPETITION
The jewelry industry is highly competitive, both in the United States
and on a global basis. The Company encounters competition primarily from
manufacturers with national and international distribution capabilities and, to
a lesser extent, from small regional suppliers of jewelry. Management believes
that the Company is well positioned in the industry and has a reputation for
responsive customer service, high quality and well designed jewelry with broad
consumer appeal.
The principal competitive factors in the industry are price, quality,
design and customer service. The Company's specialized customer service programs
are important competitive factors in sales to nontraditional jewelry retailers,
including television shopping networks and discount merchandisers. However, the
recent trend towards consolidation at the retail level in the jewelry industry
and low labor costs outside of the United States may increase the level of
competition facing the Company. There can be no assurance that the Company will
be able to compete successfully against current and future competitors or that
competitive pressures faced by the Company will not have a material adverse
effect on its business, operating results and financial condition.
SEASONAL NATURE OF BUSINESS
The Company's business is seasonal in nature. Presented below are the
Company's net sales for each quarter of fiscal 1998, fiscal 1997 and fiscal
1996:
NET % OF
($ IN THOUSANDS) SALES NET SALES
---------------- ----- ---------
Fiscal 1998 Ended January 31, 1998
First Quarter $27,606 21%
Second Quarter $22,618 17%
Third Quarter $41,753 32%
Fourth Quarter $37,972 30%
Fiscal 1997 Ended February 1, 1997
First Quarter $29,203 19%
Second Quarter $27,706 18%
Third Quarter $48,772 33%
Fourth Quarter $44,948 30%
Fiscal 1996 Ended January 27, 1996
First Quarter $27,260 19%
Second Quarter $24,902 17%
Third Quarter $47,037 32%
Fourth Quarter $46,058 32%
The Company has experienced a seasonal pattern in its operating results
with the third and fourth quarters typically having the highest sales.
This fluctuation is mitigated to a degree by the early placement of
orders by many of the Company's customers, particularly for the Christmas
holiday season. In addition, the Company markets holiday and seasonal products
year round for such occasions as Mother's Day, Valentine's Day, Father's Day,
religious holidays and school graduations.
SUPPLY; RELATED FINANCING ARRANGEMENTS
Gold acquired as part of the manufacturing process is at least .995
fine and is then combined with other metals to produce 14 karat and 10 karat
gold. The term "karat" refers to the gold content of alloyed gold, measured from
a maximum of 24 karats (100% fine gold). Varying quantities of metals such as
silver, copper, nickel and zinc are combined with fine gold to produce 14 karat
gold of different colors. These alloys are in abundant supply and are readily
available to the Company.
The Company utilizes gold consignment arrangements with the Gold
Lenders to supply substantially all of its gold needs. Under the terms of those
arrangements, the Company is entitled to lease the lesser of (i) an aggregate of
250,000 ounces of fine gold or (ii)
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consigned gold with an aggregate value equal to $106,695,000. The consigned gold
is secured by certain property of the Company including inventory and machinery
and equipment. The Company pays the Gold Lenders a consignment fee based on the
dollar value of ounces of gold outstanding under their respective agreements,
which value is based on the daily Second London Gold Fix. The Company believes
that its financing rate under the consignment arrangements is substantially
similar to the financing rates charged to gold consignees similarly situated to
the Company. At January 31, 1998, the Company held 108,900 ounces of gold on
consignment with a market value of $33,208,000.
The consignment agreements contain certain restrictive covenants
relating to maximum usage, net worth, working capital and other financial ratios
and each of the agreements requires the Company to own a specific amount of gold
at all times. At January 31, 1998, the Company was in compliance with the
covenants in its consignment agreements and the Company's owned gold inventory
was valued at approximately $3,996,000. Management believes that the supply of
gold available through the Company's gold consignment arrangements, in
conjunction with the Company's owned gold, is sufficient to meet the Company's
requirements.
The consignment arrangements are terminable by the Company or the
respective Gold Lenders upon 30 days notice. If any Gold Lender were to
terminate its existing gold consignment arrangement, the Company does not
believe it would experience an interruption of its gold supply that would
materially adversely affect its business. The Company believes that other
consignors would be willing to enter into similar arrangements if any Gold
Lender terminates its relationship with the Company. See ITEM 7. "MANAGEMENT'S
DISCUSSION AND ANALYSIS AND FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Consigned gold is not included in the Company's inventory, and there is
no related liability recorded. As a result of these consignment arrangements,
the Company is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the Gold Lenders, since the Company does
not purchase gold from the Gold Lenders until receipt of a purchase order from,
or shipment of jewelry to, its customers. The Company then either locks in the
selling price of the jewelry to its customers concurrently with the required
purchase of gold from the Gold Lenders or hedges against changes in the price of
gold by entering into forward contracts or purchasing futures or options on
futures that are listed on the Commodity Exchange, Inc. ("COMEX").
While the Company believes its supply of gold is relatively secure,
significant increases or rapid fluctuations in the cost of gold may impact the
demand for the Company's products. From July 1, 1995 until January 31, 1998, the
closing price of gold according to the Second London Gold Fix ranged from a low
of $278.70 per ounce to a high of $414.80 per ounce. During fiscal 1998, the
closing price of gold dropped from a high of $362.15 per ounce to a low of
$278.70 per ounce. There can be no assurance that fluctuations in the credit and
precious metals markets would not result in an interruption of the Company's
gold supply or the credit arrangements necessary to allow the Company to support
its accounts receivable and continue the use of consigned gold. See ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS AND FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
INSURANCE
The Company maintains primary all-risk insurance, with limits in excess
of the Company's current inventory levels (including consigned gold), to cover
thefts and damage to inventory located on the Company's premises and insurance
on its goods in transit. The Company also maintains insurance covering thefts
and damage to inventory located at the premises of its suppliers. The amount of
coverage available under such policies is limited and may vary by location, but
generally is in excess of the value of the gold held by a particular supplier.
Additional insurance coverage is provided by some of the Company's suppliers.
The Company also maintains fidelity insurance (insurance providing coverage
against theft or embezzlement by employees of the Company).
EMPLOYEES
As of January 31, 1998, the Company employed 554 persons, 437 of which
were directly engaged in manufacturing and distribution operations, with the
remaining 117 employees who were engaged in administration and sales. None of
the Company's employees are represented
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by a union and the Company has not experienced any labor-related work stoppage.
The Company places a heavy emphasis on employee relations through educational
and training programs and employee teams. The Company considers its relations
with its employees to be good. The Company believes there is an adequate pool of
labor available to satisfy its foreseeable hiring needs for its sales,
manufacturing and distribution operations.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to a wide range of
federal, state and local laws and regulations, including those governing the
use, storage and handling, generation, treatment, emission, release, discharge
and disposal of certain materials and hazardous wastes, the remediation of
contaminated soil and groundwater and the health and safety of employees
(collectively, "Environmental Laws"). Since the Company's manufacturing
operations routinely involve the use of certain regulated materials thereby
exposing the Company to the risk of claims with respect to such matters, there
can be no assurance that material liabilities could not be incurred in
connection with any such claims. The Company has taken steps to reduce the
environmental risks associated with its operations and believes that it is
currently in substantial compliance with all Environmental Laws.
ACQUISITIONS
While the Company intends to continue to aggressively market its gold
jewelry product lines to its existing customer base, management of the Company
believes opportunities exist to increase sales by expanding its customer base
and exploring product lines that may utilize diamonds or colored stones
(precious, semiprecious or synthetic). As part of the Company's strategy to
increase sales to new and existing customers, in 1994 and 1995 the Company
acquired two small jewelry manufacturers. As a result of these transactions, the
Company increased its market share with an existing customer and added certain
new customers.
During fiscal 1998, the Company was engaged in merger discussions with
one of its major competitors; however, on July 18, 1997, both companies jointly
announced that negotiations were terminated due to an inability to agree on the
composition of the Board of Directors for the combined company. The Company
plans to pursue its long term growth strategy, that may include the acquisition
of one or more additional companies that manufacture and distribute jewelry
products.
ITEM 2. PROPERTIES.
The manufacturing and distribution facilities of the Company are
located in three adjacent buildings in Mount Vernon, New York having a total of
approximately 74,000 square feet. Pursuant to lease agreements entered into in
May 1991 and May 1995, respectively, with Michael Anthony Company, now known as
MacQuesten Realty Company ("MRC"), a New York general partnership, the general
partners of which are Michael Paolercio ("MP") and Anthony Paolercio ("AP"),
during fiscal 1998 the Company paid rent of approximately $498,000, for the
adjacent buildings housing its manufacturing facilities located at 50, 60 and 70
South MacQuesten Parkway in Mount Vernon, plus real estate taxes and other
occupancy costs. The Company believes that the terms of these lease arrangements
with MRC are no less favorable than those that could have been obtained from an
unaffiliated party. Subject to the Company's option to acquire the properties
located at 60 and 70 South MacQuesten Parkway, Mt. Vernon, discussed in more
detail below, the Company will pay an average annual rent of approximately
$536,000 over the remaining term of the leases for the buildings at 60 and 70
South MacQuesten Parkway, plus real estate taxes and other occupancy costs.
As part of its long-term strategic plan, on May 16, 1997, the Company
acquired one of the buildings housing its manufacturing facilities (the "50
Building") from MRC for a purchase price of $1,150,000. The 50 Building has
approximately 22,000 square feet.
The Special Real Estate Committee of the Board of Directors, comprised
of the Company's independent, outside directors, obtained an appraisal of the 50
Building, and after reviewing the appraisal and negotiation with MRC as to the
terms of purchase, recommended the acquisition to the Company's Board of
Directors. On April 4, 1997,
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the Board of Directors voted unanimously, with Michael and Anthony Paolercio
abstaining, to authorize the acquisition of the 50 Building, subject to (1)
receipt of an updated, satisfactory appraisal and (2) the Company obtaining an
exclusive, two-year option to acquire from MRC the remaining manufacturing
facilities housed in the buildings located at 60 and 70 South MacQuesten
Parkway, Mt. Vernon at an aggregate purchase price of $2,350,000 and on terms
and conditions substantially the same as those agreed to for the purchase of the
50 Building.
In the event the Company exercises its option to acquire the properties
located at 60 and 70 South MacQuesten, the Company may incur additional
long-term indebtedness in order to finance the purchase.
The Company also owns the building housing its sales and administrative
offices located at 115 South MacQuesten Parkway, in Mount Vernon, New York, and
an adjacent parking area. The headquarters building has approximately 71,000
square feet.
See ITEM 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and ITEM 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
The offices and facilities of the Company are protected by
state-of-the-art security systems, procedures and a security staff.
ITEM 3. LEGAL PROCEEDINGS.
On October 29, 1997, a decision was entered in the case of M.L. Logo v.
Michael Anthony Jewelers, New York State Supreme Court, County of New York,
Index No.: 106327/93 (the "Case"), pursuant to which the Company was ordered to
pay M.L. Logo according to the terms of an agreement entered into on May 16,
1986 (the "Agreement"). On April 20, 1998, the Company settled the Case and any
future payments that would have been due M.L. Logo under the Agreement for a
one-time payment of $600,000.
Other legal proceedings to which the Company is a party are routine
litigation incidental to Michael Anthony's business which is not material to the
Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol MAJ. The Company's Common Stock began its listing on
AMEX on October 25, 1991. Prior to its listing on AMEX, the Company's Common
Stock was traded in NASDAQ National Market System. The following table sets
forth the high and low sale prices per share on AMEX for the fiscal years 1998
and 1997.
FISCAL YEAR ENDED JANUARY 31, 1998 HIGH LOW
- ---------------------------------- ---- ---
First Quarter 3-3/8 2-3/4
Second Quarter 4-1/4 3-1/16
Third Quarter 3-5/8 2-13/16
Fourth Quarter 2-15/16 2
FISCAL YEAR ENDED FEBRUARY 1, 1997 HIGH LOW
- ---------------------------------- ---- ---
First Quarter 3-7/16 2-3/4
Second Quarter 3-5/8 2-3/4
Third Quarter 3-5/8 2-3/4
Fourth Quarter 3-7/16 2-15/16
As of April 10, 1998, there were 224 holders of record of the Company's
Common Stock (including brokers holding in street name).
The Company has never paid a cash dividend. The Company anticipates
that all of its earnings will be retained for use in its business and does not
intend to pay cash dividends in the foreseeable future. In addition, the
Company's senior secured note agreements contain covenants which limit the
payment of dividends. Future dividend policy will depend upon, among other
factors, the Company's earnings and its financial condition. See ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," and Note 6 "Long Term Debt" - Notes to the Consolidated Financial
Statement.
In December 1995, the Company announced a Common Stock Repurchase
Program (the "Stock Repurchase Program") pursuant to which the Company may
repurchase up to 750,000 shares of Common Stock. On April 4, 1997, the Board of
Directors authorized an increase of an additional 500,000 shares of Common Stock
that the Company may repurchase under the Stock Repurchase Plan. As of April 10,
1998, the Company had repurchased a total of 1,058,000 shares of Common Stock
under the Stock Repurchase Program for a total of approximately $2,983,000.
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ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Company should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere in this Form 10-K.
SEVEN YEAR ENDED
YEAR ENDED MONTHS JUNE 30,
------------------------------------------- ENDED ---------------------------
JAN. 31, FEB. 1, JAN. 27, JAN. 28,
1998 1997 1996 1995 1994 1993
-------- ------- -------- -------- ---- ----
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS
Net Sales $129,949 $150,629 $145,257 $93,321 $142,787 $119,615
Cost of goods sold 107,182 124,041 121,195 76,782 114,151 97,509
-------- -------- -------- ------- -------- --------
Gross profit 22,767 26,588 24,062 16,539 28,636 22,106
Selling, general
and administrative
expenses 25,155 21,372 19,455 12,628 17,887 17,148
-------- -------- -------- ------- -------- --------
Operating (loss)/income (2,388) 5,216 4,607 3,911 10,749 4,958
Other(expense)/income:
Interest expense/
gold consignment fee (2,827) (3,155) (3,835) (2,030) (3,157) (3,066)
Other income/
(expense), net 1,002 507 442 117 564 643
-------- -------- -------- ------- -------- --------
(Loss)/income
before income taxes (4,213) 2,568 1,214 1,998 8,156 2,535
Income tax
(benefit)/provision (1,601) 778 486 774 3,176 964
-------- -------- -------- ------- -------- --------
Net (loss)/income $ (2,612) $ 1,790 $ 728 $ 1,224 $ 4,980 $ 1,571
======== ======== ======= ======= ======== ========
(Loss)/earnings
per share - basic $ (0.34) $ 0.22 $ 0.09 $ 0.14 $ 0.63 $ 0.23
======== ======== ======= ======= ======== ========
(Loss)/earnings
per share - diluted $ (0.34) $ 0.22 $ 0.09 $ 0.14 $ 0.62 $ 0.23
======== ======== ======= ======= ======== ========
Weighted average
number of shares -
basic 7,746 8,241 8,475 8,749 7,945 6,916
======== ======== ======= ======= ======== ========
Weighted average
number of shares -
diluted 7,746 8,263 8,479 8,862 8,083 6,916
======== ======== ======= ======= ======== ========
Balance Sheet Data:
Working capital $ 37,260 $ 42,042 $46,136 $42,778 $ 46,250 $ 31,311
Total assets(1) 65,644 72,749 78,646 72,039 69,962 53,707
Long-term debt and
capital lease
liability 12,736 14,294 19,192 13,282 13,210 15,824
Stockholders' equity 43,389 47,042 46,048 46,445 45,608 28,402
(1) The year ended January 31, 1998, February 1, 1997, January 27, 1996,
the seven months ended January 28, 1995 and the years ending June 30,
1994 and 1993 do not include consigned inventory, which had approximate
value of $33,208,000, $40,282,000, $60,700,000, $72,936,000,
$70,818,000 and $61,796,000, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Introduction
On November 3, 1994, the Company's Board of Directors approved a change
in the fiscal year end of the Company from June 30th to a fiscal year ending on
the last Saturday in January, effective for the seven month period ended January
28, 1995. During fiscal 1997, the Company changed its fiscal year end from the
last Saturday in January to the Saturday closest to the end of January,
effective with the fiscal year ended February 1, 1997. Fiscal years ended
January 31, 1998, February 1, 1997 and January 26, 1996 were comprised of 52, 53
and 52 weeks, respectively.
As used below, (a) "fiscal 1998" refers to the fiscal year ended
January 31, 1998, (b) "fiscal 1997" refers to the fiscal year ended February 1,
1997, and (c) "fiscal 1996" refers to the fiscal year ended January 27, 1996.
Results of Operations
The following table sets forth, as a percentage of net sales, certain
items appearing in the Company's Statements of Operations for the indicated
fiscal years.
YEAR ENDED
------------------------------------------------
JANUARY 31, FEBRUARY 1, JANUARY 27,
1998 1997 1996
----------- ----------- -----------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.5 82.3 83.4
Selling, general and
administrative expenses 19.3 14.2 13.4
Interest and gold consignment
fee expense 2.2 2.1 2.6
Other income (.8) (.3) (.2)
Income tax (benefit)/provision (1.2) .5 .3
Net (loss)/income (2.0) 1.2 .5
FISCAL 1998 VS. FISCAL 1997
Net sales for fiscal 1998 were approximately $129,949,000, a decrease of 14%
from net sales of approximately $150,629,000 for the comparable period in fiscal
1997. The decrease in sales was primarily due to the lower average gold price in
fiscal 1998, $335 an ounce versus last year's average of $391 an ounce. Of the
$20,680,000 decrease in sales, $12,827,000 was due to lower gold prices,
$4,653,000 was due to fewer units sold and $3,200,000 due to one less week
compared to the 53 weeks in fiscal 1997.
Gross profit for fiscal 1998 decreased by approximately $3,821,000 from fiscal
1997. As a percentage of net sales, gross profit remained approximately the same
at 17.5% in fiscal 1998 compared to 17.7% in fiscal 1997. In the fourth quarter
of fiscal 1998, management of the Company reassessed its marketing and
production strategy and determined to implement a significantly different
strategy. This is a direct result of the changing order patterns of some of the
Company's major customers. As such, management made the determination to write
down certain inventory, by approximately $3,309,000, that was related to the
implementation of a SKU reduction program and the markdown of discontinued
styles. If it were not for this unusual charge, the Company's gross profit
margin would have been 20.1% for fiscal 1998, primarily due to the lower average
gold price as well as changes in product mix.
Selling, general and administrative expenses for fiscal 1998 were approximately
$25,155,000, an increase of $3,783,000 or 17.7% from approximately $21,372,000
for the comparable period in fiscal 1997. Included in selling, general and
administrative expenses for fiscal 1998 was a charge of approximately $1,191,000
that was due to a write down of certain company assets and other expenses. As a
percentage of net sales, adjusted
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for the gold price difference of $12,827,000 discussed above and excluding the
$1,191,000 charge, selling, general and administrative expenses increased to
16.8% in fiscal 1998, from 14.2% in fiscal 1997. The increase is primarily
attributable to increases in (i) software implementation costs, (ii) payroll and
payroll related expenses, (iii) advertising expenses, and (iv) legal costs
associated with a litigation settlement. See ITEM 3. "LEGAL PROCEEDINGS."
Other income for fiscal 1998, was approximately $705,000, an increase of
$631,000 from approximately $74,000 for the comparable period in fiscal 1997.
The increase was primarily due a gain of $625,000 from the Company's sale of an
asset.
Interest expense and gold consignment fees for fiscal 1998, were approximately
$2,827,000, a decrease of $328,000 or 10% compared to approximately $3,155,000,
for the comparable period in fiscal 1997. The decrease was primarily due to (i)
the Company's lower average level of consigned inventory, (ii) lower average
gold prices and (iii) lower interest expense due to principal payments in
February and May 1997, and January 1998 on the Company's long term debt.
For the year ended January 31, 1998, an income tax benefit of $1,601,000 was
recorded compared to a provision of $778,000 for the prior year. The effective
tax rates for fiscal 1998 and fiscal 1997 were 38% and 30%, respectively. The
lower effective tax rate in fiscal 1997 was due to a reversal in fiscal 1997 of
prior year accruals for taxes.
As a result of the above factors the Company's net loss for fiscal 1998 was
approximately $(2,612,000) compared to net income of $1,790,000 for the
comparable period in fiscal 1997.
FISCAL 1997 VS. FISCAL 1996
Net sales for fiscal 1997 were approximately $150,629,000, an increase of 4%
from net sales of approximately $145,257,000 for the comparable period in fiscal
1996. The increase in net sales resulted primarily from the 53rd week, which
amounted to approximately $3,200,000 and increased shipments to the retail
segment of the Company's customer base, which increase was offset in part by
decreased shipments to the wholesale segment of the Company's customer base.
Gross profit margin increased to approximately 17.7% of net sales for fiscal
1997 compared to approximately 16.6% for the comparable period in fiscal 1996.
The increase in gross margin was attributable to a change in the Company's
product mix and increased sales of the Company's licensed products, which have
higher gross margins.
Selling, general and administrative expenses for fiscal 1997 were approximately
$21,372,000, compared to $19,455,000 for the comparable period in fiscal 1996.
As a percentage of net sales, these expenses increased to 14.2% in fiscal 1997
from 13.4% in fiscal 1996. The increased percentage is primarily attributed to
(i) increased product and packaging supplies, (ii) increased royalty and
licensing expenses, (iii) increased payroll and payroll related expenses and
(iv) the terminated acquisition negotiations with a company. These increases
were offset in part by a decrease in advertising related expenses.
Other expenses-net for fiscal 1997 were approximately $2,648,000, a decrease of
$745,000 or 22% compared to approximately $3,393,000 for the comparable period
in fiscal 1996. Interest expense (including gold consignment fees) was
approximately $3,155,000 a decrease of $680,000, or 18%, from $3,835,000 for the
comparable period in fiscal 1996. This decrease was primarily due to (i) a lower
average level of consignment inventory, (ii) lower consignment rates and (iii)
lower debt levels.
The effective tax rates for fiscal 1997 and fiscal 1996 were 30% and 40%,
respectively. The decrease in the effective tax rate is due to the reversal of
prior year accruals.
As a result of the above factors, the Company's net income for fiscal 1997 was
approximately $1,790,000 compared to $728,000 for the comparable period in
fiscal 1996.
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1996 VS. TWELVE MONTHS ENDED JANUARY 28, 1995 (UNAUDITED)
Net sales for fiscal 1996 were approximately $145,257,000, a decrease of 3% from
net sales of approximately $149,583,000 for the comparable period in the prior
year. The decrease in sales was primarily related to a significant reduction in
volume of sales to the wholesale segment of the Company's customer base. This
decrease was partly offset by an increase in volume of sales to the retail
segment of the Company's customer base.
Gross profit margin decreased to 16.6% of net sales in fiscal 1996 compared to
18.0% for the comparable period in the prior year. The decrease in the gross
margin was due to the sale of discontinued and excess inventory, which
represented approximately 5% of net sales, at margins substantially below the
Company's normal gross margin and an increased percentage of sales of the
Company's rope chain which carries a lower gross margin than the Company's other
products.
Selling, general and administrative expenses for fiscal 1996 were approximately
$19,455,000, compared to $19,454,000 for the comparable period in the prior
year. As a percentage of net sales, these expenses increased to 13.4% in fiscal
1996 from 13.0% in the prior year. The increased percentage of selling expenses
is primarily attributed to advertising expenses that came from additional
support required by the Company's retail customers and the Company's effort to
increase its brand name recognition through advertising placed directly in a
consumer magazine.
Other income and expenses for fiscal 1996 were approximately $3,393,000, an
increase of $604,000 or 22% from $2,789,000 for the comparable period in the
prior year. Interest expense (including gold consignment fees) was approximately
$3,835,000, an increase of $579,000, or 18%, from $3,256,000 for the comparable
period in the prior year. This increase was primarily due to (i) higher
consignment rates, (ii) a higher average level of consigned inventory, and (iii)
loans placed in February and October 1995. The higher consignment rates had a
negative impact later in the fiscal year. The higher average level of consigned
inventory had a more significant impact in the beginning of the fiscal year. The
increase in gold consignment fees was partially offset by lower interest expense
due to principal payments in February and May 1995 on the Company's other
long-term debt and lower interest expense on the Company's short-term
borrowings.
The effective tax rates for fiscal 1996 and the comparable period in fiscal 1995
were 40% and 36.6%, respectively.
As a result of the above factors, the Company's net income for fiscal 1996 was
approximately $728,000 compared to $2,978,000 for the comparable period in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on a gold consignment program, short-term and
long-term borrowings and internally generated funds to finance its inventories
and accounts receivable. The Company fills most of its gold supply needs through
gold consignment arrangements with the Gold Lenders. Under the terms of those
arrangements, the Company is entitled to lease the lesser of (i) an aggregate of
250,000 ounces of fine gold or (ii) consigned gold with an aggregate value equal
to $106,695,000. The consigned gold is secured by certain property of the
Company including inventory and machinery and equipment. The Company pays the
Gold Lenders a consignment fee based on the dollar value of ounces of gold
outstanding under their respective agreements, which value is based on the daily
Second London Gold Fix. The Company believes that its financing rate under the
consignment arrangements is substantially similar to the financing rates charged
to gold consignees similarly situated to the Company. As of January 31, 1998,
the Company held 108,900 ounces of gold on consignment with a market value of
$33,208,000.
The consignment agreements contain certain restrictive covenants relating to
maximum usage, net worth, working capital and other financial ratios and each of
the agreements requires the Company to own a specific amount of gold at all
times. At January 31, 1998, the Company was in compliance with the covenants in
its consignment agreements and the Company's owned gold inventory was valued at
approximately $3,996,000. Management believes that the supply of gold available
through the Company's gold consignment arrangements, in
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16
conjunction with the Company's owned gold, is sufficient to meet the Company's
requirements.
The consignment agreements are terminable by the Company or the
respective Gold Lenders upon 30 days notice. If any Gold Lender were to
terminate its existing gold consignment arrangement, the Company does not
believe it would experience an interruption of its gold supply that would
materially adversely affect its business. The Company believes that other
consignors would be willing to enter into similar arrangements if any Gold
Lender terminates its relationship with the Company.
Consigned gold is not included in the Company's inventory, and there is
no related liability recorded. As a result of these consignment arrangements,
the Company is able to shift a substantial portion of the risk of market
fluctuations in the price of gold to the Gold Lenders, since the Company does
not purchase gold from the Gold Lenders until receipt of a purchase order from,
or shipment of jewelry to its customers. The Company then either locks in the
selling price of the jewelry to its customers concurrently with the required
purchase of gold from the Gold Lenders or hedges against changes in the price of
gold by entering into forward contracts or purchasing futures or options on
futures that are listed on the COMEX.
While the Company believes its supply of gold is relatively secure,
significant increases or rapid fluctuations in the cost of gold may impact the
demand for the Company's products. From July 1, 1995 until January 31, 1998, the
closing price of gold according to the Second London Gold Fix ranged from a low
of $278.70 per ounce to a high of nearly $414.80 per ounce. There can be no
assurances that fluctuations in the precious metals markets and credit would not
result in an interruption of the Company's gold supply or the credit
arrangements necessary to allow the Company to support its accounts receivable
and continue the use of consigned gold.
In 1992, the Company issued $10,000,000 principal amount of senior
secured notes with various insurance companies, which accrue interest at 8.61%
per annum. In February 1995, the Company issued an additional $6,000,000
principal amount of senior secured notes with various insurance companies, with
interest as of January 31, 1998 at 7.38% per annum. These notes are secured by
the Company's accounts receivable, machinery and equipment, inventory (secondary
lien to the Gold Lenders) and proceeds. In addition, the note purchase
agreements contain certain restrictive financial covenants and restrict the
payment of dividends. At January 31, 1998, $11,555,000 of principal remained
outstanding under the notes issued in 1992 and 1995.
In the fourth quarter of fiscal 1998, management of the Company
reassessed its marketing and production strategy and determined to implement a
significantly different strategy. This was a direct result of the changing order
patterns of some of the Company's major customers. As such, management made the
determination to write down certain inventory, by approximately $3,309,000, that
was related to the implementation of a SKU reduction program and the markdown of
discontinued styles. Included in selling, general and administrative expenses
for the year ended January 31, 1998, was a charge of approximately $1,191,000
that was due to the write down of certain Company assets. Due to these unusual
charges in fiscal 1998 totalling $4,500,000, the Company was in default with a
financial covenant under the note agreements and mortgage payable. The Company
obtained waivers of this covenant noncompliance from both the insurance
companies and mortgage lender. In addition, the insurance companies reset the
financial covenant for fiscal 1999. Management expects the Company will be in
compliance with the amended covenant in fiscal 1999.
On October 6, 1995, the Company obtained a loan from a bank in the
amount of $2,500,000. As collateral for the loan, the Company granted the bank a
first mortgage on the Company's corporate headquarters. The mortgage has a
ten-year term and interest on the mortgage will accrue at 8% per annum. In
addition, the mortgage contains certain restrictive financial covenants. At
January 31, 1998, the Company was in compliance with the covenants after
obtaining a waiver as discussed above. As of January 31, 1998, $2,283,000 of
principal remained outstanding under the mortgage.
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17
The Company has a line of credit arrangement with a commercial bank
(the "Line of Credit"), under which the Company may borrow up to $15,000,000.
The Line of Credit is secured by certain assets of the Company, including
accounts receivable and inventory. As of January 31, 1998, there was no amount
outstanding under the Line of Credit. The Line of Credit has been renewed and
currently expires on July 31, 1998, subject to annual renewal. Management
believes that the Line of Credit will be renewed; however, if the current lender
decides not to renew the Line of Credit, the Company believes that other lenders
would be willing to enter into a similar arrangement.
During fiscal 1998, cash provided from operating activities was
$4,863,000. This was primarily attributable to a decrease in inventory of
$5,990,000.
Cash of $3,976,000 was utilized for investing purposes during fiscal
1998, primarily for purchases of land, building and leasehold improvements of
$2,266,000 and machinery and equipment of approximately $1,744,000.
During fiscal 1998, cash utilized in financing activities totaled
$4,570,000. This was primarily attributed to payments of long term debt of
$3,514,000 and the purchase of treasury stock of $1,056,000.
As part of its long-term strategic planning, the Company may expand its
manufacturing and distribution facilities and acquire certain properties it is
currently leasing from MRC (the "Leased Properties"). If the Company acquires
such properties, the Company may incur or assume additional long-term
indebtedness in order to finance their purchase.
For fiscal 1999, the Company projects capital expenditures of
approximately $1,800,000, which includes machinery and equipment expenses and
certain improvements on its leased and owned properties. See ITEM 2. PROPERTIES"
and ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
Except with respect to financing for the possible acquisition of its
Leased Properties as discussed above, the Company believes that its long-term
debt and existing lines of credit provide sufficient funding for the Company's
operations. In the event that the Company requires additional financing during
fiscal 1999, it will be necessary to fund this requirement through expanded
credit facilities with its existing or other lenders. The Company believes that
such additional financing can be arranged.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date sensitive software may recognize a date of 00 as the
year 1900 rather than 2000. This could result in a system failure or
miscalculations causing disruptions of operation, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
The Company has developed a plan to address the Year 2000 issue. The
Company anticipates maintaining its hardware platform but replacing or upgrading
all affected software. Management expects that the Company will be fully Year
2000 compliant on or before June 1, 1999. The cost of the Year 2000 project is
not expected to have a material adverse affect on the Company's results of
operations.
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These forward-looking statements include the words "believe," "expect,"
"plans" or similar words and are based in part on the Company's reasonable
expectations and are subject to a number of factors and risks, many of which are
beyond the Company's control. Actual results could differ materially from those
discussed under "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", as a result of any of the
following factors:
(i) general economic conditions and their impact on the retail
sales environment;
(ii) fluctuations in the price of gold and other metals used to
manufacture the Company's jewelry;
(iii) risks related to the concentration of the Company's customers,
particularly the operations of any of its top customers;
(iv) increased competition from outside the United States where
labor costs are substantially lower;
(v) variability of customer requirements and the nature of
customers' commitments on projections and orders; and
(vi) the extent to which the Company is able to retain and attract
key personnel.
In light of these uncertainties and risks, there can be no assurance that the
forward-looking statements in this Annual Report on Form 10-K will occur or
continue in the future. Except for its required, periodic filings under the
Securities Exchange Act of 1934, the Company undertakes no obligations to
release publicly any revisions to these forward looking statements that may
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
NEW ACCOUNTING STANDARDS
During fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"), which requires
presentation of basic earnings per share which includes no dilution. Earnings
per share for all periods presented were computed on a basic basis using the
weighted average number of common shares outstanding. Options and warrants
outstanding were not materially dilutive.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of
an Enterprise and Related Information, which will be effective for financial
statements beginning after December 15, 1997. SFAS No. 131 redefines how
operating segments are determined and requires expanded quantitative and
qualitative disclosures relating to a company's operating statements. The
Company anticipates that the adoption of SFAS No. 131 will not have a material
impact on current disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 and pages F1 through F25 and S1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the heading "Election of Directors" of
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" of
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of
Common Stock" of the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders is
incorporated herein by reference. See also ITEM 2. "PROPERTIES".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8K.
(a) The following documents are filed as a part of this Report:
PAGE
----
(1) Financial Statements:
Independent Auditors' Report F1
Consolidated Balance Sheets F2
Consolidated Statements of Operations F3
Consolidated Statements of Changes in Stockholders'
Equity F4
Consolidated Statements of Cash Flows F5
Notes to Consolidated Financial Statements F7
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts S1
All other schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial statements or related
notes.
The financial statement schedule should be read in conjunction with the
financial statements in the 1998 Annual Report to Stockholders.
(3) Exhibits:
Exhibit No. Description Page No.
----------- ----------- --------
3.1 Certificate of Incorporation of Incorporated by reference to
Registrant, as amended Exhibit 3.1 to Amendment No. 2 to
the Company's Registration
Statement on Form S3 (File No.
3371308) (the "1993 Registration
Statement")
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20
3.1.1 Certificate of Merger of Incorporated by reference to
Michael Anthony Jewelers,Inc. Exhibit 3.1.1 of the Company's
(New York) and Michael Anthony Annual Report on Form
Jewelers, Inc.(Delaware) 10K for the fiscal year
ended June 30, 1993
(the "1993 Form 10-K")
3.2 Amended and Restated ByLaws of Incorporated by reference to
Registrant Exhibit 3.2 to the Company's
Quarterly Report on Form 10Q 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 S1
(File No. 338289) (the "1986
Registration Statement")
4.2 Form of Common Stock Purchase Incorporated by reference to
Warrant Certificate Exhibit 3.4 to the 1986
Registration Statement
10.1 Consignment Agreement dated as of Incorporated by reference to
August 20, 1993 between the Exhibit 10.40 of the 1993 Form 10-K
Registrant and Fleet Precious
Metals Inc.
10.2 Security Agreement dated as of Incorporated by reference to
August 20, 1993 among the Exhibit 10.39 of the 1993 Form 10-K
Registrant and Fleet Precious
Metals Inc.
10.3 Amended and Restated Consignment Incorporated by reference to
Agreement dated as of August 20, Exhibit 10.41 of the 1993 Form 10-K
1993 between the Registrant and
Rhode Island Hospital Trust
National Bank
10.4 Amended and Restated Consignment Incorporated by reference to
Agreement dated as of August 20, Exhibit 10.44 to the 1993 Form 10-K
1993 between the Registrant and
ABN AMRO Bank N.V., New York
Branch
10.5 Amended and Restated Security Incorporated by reference to
Agreement dated as of August 20, Exhibit 10.46 to the 1993 Form 10-K
1993 between the Registrant and
Rhode Island Hospital Trust
National Bank ("RIHT")
10.6 Amended and Restated Intercreditor Incorporated by reference to
Agreement dated as of August 20, Exhibit 10.47 to the 1993 Form 10-K
1993, among the Registrant, its
gold lenders, the holders of the
Registrant's Senior Notes due 1998
and the holders of the
Registrant's 2002 Notes
10.7 First Amendment to 1993 Long-term Incorporated by reference to
Incentive Plan of the Registrant Exhibit 10.48 to the 1993 Form 10-K
dated as of September 21, 1993
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21
10.8 Second Amendment to Assignment of Incorporated by reference to
Trademarks and Service Marks as Exhibit 10.49 to the 1993 Form 10-K
Collateral dated as of July
12, 1990 between the Registrant and
RIHT, individually and as agent
10.9 Consignment Agreement dated as of Incorporated by reference to
January 31, 1994 (effective as of Exhibit 10.46 to the Company's
May 16, 1994 between the Annual report on Form 10K for the
Registrant and Credit Suisse, New fiscal year ended June 30, 1994
York Branch (the "1994 Form 10-K")
10.10 First Amendment to Amended and Incorporated by reference to
Restated Security Agreement dated Exhibit 10.47 to the 1994 Form 10-K
as of May 16, 1994 among the
Registrant, RIHT, individually and
as agent
10.11 Second Amendment to Amended and Incorporated by reference to
Restated Intercreditor Agreement Exhibit 10.48 to the 1994 Form 10-K
dated as of May 16, 1994 among the
Registrant, its gold lenders, the
holders of the Registrant's Senior
Notes due 1998 and the holders of
the Registrant's 2002 Notes
10.12 Third Amendment to Assignment of Incorporated by reference to
Trademarks and Service Marks as Exhibit 10.49 to the 1994 Form 10-K
Collateral dated as of May 16,
1994 between the Registrant and
RIHT individually and as agent
10.13 Second Amendment to Amended and Incorporated by reference to
Restated Security Agreement dated Exhibit 10.53 to the 1994 Form 10-K
as of September 1, 1994 among the
Registrant, RIHT, individually and
as agent
10.14 Third Amendment to Amended and Incorporated by reference to
Restated Intercreditor Agreement Exhibit 10.54 to the 1994 Form 10-K
dated as of September 1, 1994
among the Registrant, its gold
lenders, the holders of the
Registrant's Senior Notes due
1998, the holders of the
Registrant's 2002 Notes and
Chemical Bank
10.15 Fourth Amendment to Assignment of Incorporated by reference to
Trademarks and Service Marks as Exhibit 10.55 to the 1994 Form 10-K
collateral dated as of September
1, 1994 between the Registrant and
RIHT, individually and as agent
10.16 Third Amendment to Amended and Incorporated by reference to
Restated Consignment Agreement Exhibit 10.56 to the 1994 Form 10-K
dated as of September 1, 1994
between the Registrant and RIHT
-21-
22
10.17 Fourth Amendment to Amended and Incorporated by reference to
Restated Consignment Agreement Exhibit 10.51 to the Company's
dated as of November 22, 1994 Transition Report on Form 10-K for
between the Registrant and RIHT the transition period ended
January 28, 1995 (the "1995 Form
10-K")
10.18 Contract of Sale dated as of Incorporated by reference to
November 28, 1994 between Michael Exhibit 10.52 to the 1995 Form 10-K
Anthony Company and the Registrant
10.19 Note Purchase Agreement dated as Incorporated by reference to
of February 15, 1995, among the Exhibit 10.53 to the 1995 Form 10-K
Registrant and the holders of the
Registrant's Senior Notes due 2004
(the "2004 Notes")
10.20 Security Agreement, dated as of Incorporated by reference to
February 15, 1995, among the Exhibit 10.54 to the 1995 Form 10-K
Registrant and the holders of the
2004 Notes
10.21 $5,000,000 Senior Note due 2004 of Incorporated by reference to
the Registrant in favor of Exhibit 10.55 to the 1995 Form 10-K
Northern Life Insurance Company
10.22 $1,000,000 Senior Note due 2004 of Incorporated by reference to
the Registrant in favor of Exhibit 10.56 to the 1995 Form 10-K
Northwestern National Life
Insurance Company
10.23 Third Amendment to Amended and Incorporated by reference to
Restated Security Agreement dated Exhibit 10.57 to the 1995 Form 10-K
as of February 15, 1995 among the
Registrant and its gold lenders
10.24 Fourth Amendment to Amended and Incorporated by reference to
Restated Intercreditor Agreement Exhibit 10.58 to the 1995 Form 10-K
dated as of February 15, 1995
among the Registrant, its gold
lenders, the holders of the
Registrant's Senior Notes due
1998, the holders of the
Registrant's 2002 Notes, the
holders of the Registrant's 2004
Notes and Chemical Bank
10.25 Fifth Amendment to Amended and Incorporated by reference to
Restated Consignment Agreement Exhibit 10.59 to the 1995 Form 10-K
dated as of February 15, 1995
between the Registrant and RIHT
10.26 Amended Security Agreement dated Incorporated by reference to
as of March 29, 1995 between the Exhibit 10.61 to the 1995 Form 10-K
Registrant and Chemical Bank
10.27 Loan Agreement dated October 6, Incorporated by reference to
1995 between First Fidelity Bank, Exhibit 10.1 to the Company's
National Association ("First Quarterly Report on Form 10Q for
Fidelity") and Registrant the quarter ended October 28, 1995
(the "October 1995 Form 10-Q")
-22-
23
10.28 Mortgage Note in principal amount Incorporated by reference to
of $2,500,000 dated October 6, Exhibit 10.2 to the October 1995
1995 issued by Registrant in favor Form 10-Q
of First Fidelity
10.29 Mortgage and Security Agreement Incorporated by reference to
dated October 6, 1995 by Registrant Exhibit 10.3 to the October 1995
for the benefit of First Fidelity Form 10-Q
10.30 Fourth Amendment to Amended and Incorporated by reference to
Restated Security Agreement dated Exhibit 10.5 to the October 1995
October 20, 1995 among Registrant Form 10-Q
and Registrant's gold lenders.
10.31 Fifth Amendment to Amended and Incorporated by reference to
Restated Security Agreement dated Exhibit 10.6 to the October 1995
October 20, 1995 among Registrant Form 10-Q
and Registrant's gold lenders.
10.32 Fifth Amendment to Assignment of Incorporated by reference to
Trademarks and Service Marks dated Exhibit 10.7 to the October 1995
October 20, 1995 among Registrant Form 10-Q
and Registrant's gold lenders
10.33 Seventh Amendment to Amended and Incorporated by reference to
Restated Consignment Agreement Exhibit 10.8 to the October 1995
dated October 20, 1995 between Form 10-Q
Registrant and Rhode Island
Hospital Trust National Bank
10.34 Assignment of Trademarks and Incorporated by reference to
Service Marks as Collateral, dated Exhibit 10.56 to the Company's
July 12, 1990, between Registrant Annual Report on Form 10-K for the
and Rhode Island Hospital Trust fiscal year ended January 27, 1996
National Bank, individually and as (the "1996 Form 10-K")
agent
10.35 First Amendment to Assignment of Incorporated by reference to
Trademarks and Service Marks as Exhibit 10.57 to the 1996 Form 10-K
Collateral dated as of June
5, 1992, between Registrant and
Rhode Island Hospital Trust
National Bank, individually and as
agent
10.36 Deferred Compensation Plan dated Incorporated by reference to
as of March 4, 1996 Exhibit 10.59 to the 1996 Form 10-K
10.37 Letter Agreement dated July 23, Incorporated by reference to
1996 among the Company and certain Exhibit 10.3 to the Company's
of the Senior Note Holders Quarterly Report on Form 10-Q for
the quarter ended July 27, 1996
(the "July 1996 Form 10-Q")
10.38 Letter Agreement dated July 23, Incorporated by reference to
1996 among the Company and certain Exhibit 10.4 to the July 1996 Form
of the Senior Note Holders 10-Q
-23-
24
10.39 Amendment to the 1993 Long Term Incorporated by reference to
Incentive Plan Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q
for the quarter ended October
26, 1996 (the "October 1996
Form 10-Q")
10.40 Amendment to the NonEmployees Incorporated by reference to
Directors' Plan Exhibit 10.2 to the Company's
October 1996 Form 10-Q
10.41 Lease dated as of May 1, 1991 Incorporated by reference to
between Michael Anthony Company Exhibit 10.60 to the Company's
d/b/a MacQuesten Realty Company Annual Report on Form 10-K for the
and Registrant year ended February 1, 1997 (the
"1997 Form 10-K")
10.42 Lease dated as of May 1, 1991 Incorporated by reference to
between Michael Anthony Company Exhibit 10.61 to the 1997 Form-10-K
d/b/a MacQuesten Realty Company
and Registrant
10.43 Contract of Sale dated May 16, Incorporated by reference to
1997 between Registrant and Exhibit 10 to the Company's
MacQuesten Realty Company Quarterly Report on Form 10-Q for
the quarter ended May 3, 1997
10.44 Promissory Note dated August 22, Incorporated by reference to
1997 issued by Registrant to the Exhibit 10 to the Company's
Chase Manhattan Bank Quarterly Report on Form 10-Q for
the quarter ended August 2, 1997
10.45 Severance and Termination Incorporated by reference to
Agreement dated October 22, 1997 Exhibit 10 to the Company's
between Registrant and Mark Hanna Quarterly Report on Form 10-Q for
the quarter ended November 1, 1997
10.46 Note Purchase Agreement, dated as Filed as an Exhibit to this Form
of May 1, 1992, among the 10-K on page 54
Registrant and the holders of the
Registrant's Senior Notes due 2002
(the "2002 Notes")
10.47 Security Agreement, dated as of Filed as an Exhibit to this Form
June 5, 1992, among the Registrant 10-K on page 78
and the holders of the 2002 Notes
10.48 $3,500,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of 10-K on page 88
Northern Life Insurance Company
10.49 $3,000,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of Royal 10-K on page 90
Maccabees Life Insurance Company
-24-
25
10.50 $1,000,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of The 10-K on page 92
North Atlantic Life Insurance
Company of America
10.51 $1,000,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of Farm 10-K on page 94
Bureau Life Insurance Company of
Michigan
10.52 $1,000,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of FB 10-K on page 96
Annuity Company
10.53 $500,000 Senior Note due 2002 of Filed as an Exhibit to this Form
the Registrant in favor of Farm 10-K on page 98
Bureau Mutual Insurance Company of
Michigan
10.54 1993 Long-term Incentive Plan of Filed as an Exhibit to this Form
the Registrant 10-K on page 100
10.55 1993 NonEmployee Directors' Stock Filed as an Exhibit to this Form
Option Plan of the Registrant 10-K on page 129
10.56 Letter agreement, dated April 14, Filed as an Exhibit to this Form
1998, among the Registrant and 10-K on page 145
holders of the 2002 Notes
10.57 Letter agreement, dated April 14, Filed as an Exhibit to this Form
1998, among the Registrant and 10-K on page 147
holders of the 2004 Notes
21 Subsidiaries of the Registrant Filed as an Exhibit to this Form
10-K on page 149
27 Financial Data Schedule Filed as an Exhibit to this Form
10-K on page 150
REPORT ON FORM 8K
(b) Not applicable
-25-
26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Michael Anthony Jewelers, Inc.
Mount Vernon, New York
We have audited the accompanying consolidated balance sheets of Michael Anthony
Jewelers, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended January
31, 1998. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Michael Anthony Jewelers, Inc. and
subsidiaries as of January 31, 1998 and February 1, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended January 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/DELOITTE & TOUCHE LLP
April 20, 1998
Parsippany, New Jersey
F-1
27
MICHAEL ANTHONY JEWELERS, INC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
January 31, February 1,
ASSETS 1998 1997
- ------ ----------- -----------
CURRENT ASSETS:
Cash and equivalents $6,747 $10,430
Accounts receivable:
Trade (less allowances of $1,196 and $1,404, respectively) 22,234 21,500
Other 40 91
Inventories 12,913 18,903
Income tax refundable 1,667 -
Prepaid expenses and other current assets 1,640 885
Deferred taxes 720 578
------- -------
Total current assets 45,961 52,387
PROPERTY, PLANT AND EQUIPMENT - net 18,045 18,621
INTANGIBLES - net 584 916
OTHER ASSETS 1,054 825
------- -------
$65,644 $72,749
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable - trade $ 2,870 $ 3,141
Current portion of long-term debt
and lease liability 1,446 3,402
Accrued expenses 4,385 3,802
------- -------
Total current liabilities 8,701 10,345
------- -------
LONG-TERM DEBT 12,617 13,946
------- -------
CAPITAL LEASE LIABILITY 119 348
------- -------
DEFERRED TAXES 818 1,068
------- -------
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; 8,282,000 and
8,279,000 shares issued and outstanding as of
January 31, 1998, and February 1, 1997, respectively 8 8
Additional paid-in capital 31,747 31,732
Retained earnings 13,484 16,096
Treasury stock, 578,000 and 250,000 shares as of
January 31, 1998 and February 1, 1997,
respectively (1,850) (794)
------- -------
Total stockholders' equity 43,389 47,042
------- -------
$65,644 $72,749
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
28
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended
----------------------------------------------
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
NET SALES $129,949 $150,629 $145,257
COST OF GOODS SOLD 107,182 124,041 121,195
-------- -------- --------
GROSS PROFIT ON SALES 22,767 26,588 24,062
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 25,155 21,372 19,455
-------- -------- --------
OPERATING (LOSS)/INCOME (2,388) 5,216 4,607
-------- -------- --------
OTHER INCOME (EXPENSES):
Gold consignment fee (1,305) (1,457) (2,006)
Interest expense (1,522) (1,698) (1,829)
Interest income 297 433 359
Other income 705 74 83
-------- -------- --------
Total other income (expenses) (1,825) (2,648) (3,393)
-------- -------- --------
(LOSS)/INCOME BEFORE INCOME TAXES (4,213) 2,568 1,214
INCOME TAX (BENEFIT)/PROVISION (1,601) 778 486
-------- -------- --------
NET (LOSS)/INCOME $ (2,612) $ 1,790 $ 728
========= ======== ========
(LOSS)/EARNINGS PER SHARE - BASIC
AND DILUTED $ (.34) $ .22 $ .09
========= ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES 7,746 8,241 8,475
========= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
29
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Common Stock Additional Treasury Stock
-------------------- Paid-In Retained ------------------
Shares Dollars Capital Earnings Shares Dollars Total
------ ------- ------- -------- ------ ------- -----
Balance - January 28, 1995 9,239 $ 9 $35,170 $13,578 (578) $(2,312) $46,455
Purchase of treasury stock - - - - (387) (1,125) (1,125)
Net income - - - 728 - - 728
----- ------- ------- ------- ---- ------- -------
Balance - January 27, 1996 9,239 9 35,170 14,306 (965) (3,437) 46,048
Purchase of treasury stock - - - - (250) (811) (811)
Retirement of treasury stock (965) (1) (3,453) - 965 3,454 -
Issuance of stock 5 - 15 - - - 15
Net income - - - 1,790 - - 1,790
----- ------- ------- ------- ---- ------- -------
Balance - February 1, 1997 8,279 $ 8 $31,732 $16,096 (250) $ (794) $47,042
Purchase of treasury stock - - - - (328) (1,056) (1,056)
Issuance of stock 3 - 15 - - - 15
Net loss - - - (2,612) - - (2,612)
----- ------- ------- ------- ---- ------- -------
Balance - January 31, 1998 8,282 $ 8 $31,747 $13,484 (578) $(1,850) $43,389
===== ======= ======= ======= ==== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
30
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
----------------------------------------
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)/income $(2,612) $1,790 $ 728
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Depreciation and amortization 4,761 3,749 4,009
Provision for accounts receivable 284 170 247
Provision for sales returns - 261 200
Deferred tax (benefit)/provision (392) 307 (160)
(Gain)/loss on disposal of property, plant
and equipment (2) 19 48
Provision for stock compensation 15 15 -
(Increase)/decrease in operating assets:
Accounts receivable (761) 8,087 (3,735)
Inventories 5,990 795 452
Prepaid expenses and other current assets (2,422) 284 (593)
Other assets (310) (164) (833)
Increase/(decrease) in operating liabilities:
Accounts payable (271) (1,434) (414)
Accrued expenses 583 (719) 872
------ ------ -----
Net cash provided by operating activities 4,863 13,160 821
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (4,010) (3,816) (4,616)
Proceeds from sale of equipment 34 - -
------ ------ -----
Net cash used in investing activities (3,976) (3,816) (4,616)
------ ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt
and capital lease liabilities (3,514) (4,776) (2,722)
Proceeds from line of credit 15,700 6,600 9,400
Payments to line of credit (15,700) (6,600) (9,400)
Purchase of treasury stock (1,056) (811) (1,125)
Proceeds from mortgage - - 2,500
Borrowings of long-term debt - - 6,000
------ ------ -----
Net cash (used in)/provided by financing activities (4,570) (5,587) 4,653
------ ------ -----
NET (DECREASE)/INCREASE IN CASH (3,683) 3,757 858
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 10,430 6,673 5,815
------ ------ -----
CASH AND EQUIVALENTS AT END OF PERIOD $6,747 $10,430 $6,673
====== ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
31
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended
-----------------------------------------
January 31, February 1, January 27,
1998 1997 1996
----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING ACTIVITIES:
Liability incurred for acquisition of
equipment $ - $ - $ 200
Capital lease obligations $ - $ 8 $ 524
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest and gold consignment fees $2,858 $3,451 $3,701
Income taxes $ 95 $ 425 $ 475
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
32
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Michael Anthony Jewelers, Inc. ("the Company"), is a leading designer,
marketer and manufacturer of affordable fine jewelry whose customers
include jewelry chain stores, discount stores, department stores,
television home shopping networks, catalogue retailers, and wholesalers.
Basis of Consolidation and Presentation
The accompanying consolidated financial statements include the accounts
of Michael Anthony Jewelers, Inc. and its subsidiaries, all of which are
wholly-owned. All intercompany balances and transactions have been
eliminated.
Inventories and Cost of Goods Sold
Inventories are valued at lower of cost (first in first-out method) or
market.
The Company satisfies a majority of its gold supply needs through gold
consignment agreements with financial institutions that lease gold to
the Company ("gold lenders"), whereby the gold lenders have agreed to
consign fine gold to the Company (see Note 4). In accordance with the
terms of the agreements, the Company has the option of repaying the gold
lenders in an equivalent number of ounces of fine gold or cash based
upon the then quoted market price of gold.
The principal component of cost of goods sold is the cost of the gold
bullion and other raw materials used in the production of the Company's
jewelry. Other components of cost of goods sold include direct costs
incurred by the Company in its manufacturing operations, depreciation,
freight and insurance.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives
of the assets, five to fifteen years for machinery and equipment and
thirty years for buildings. Leasehold improvements are amortized over
the lesser of the estimated life of the asset or the lease.
F-7
33
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangibles
Intangible assets (net of accumulated amortization of $1,416,000 and
$1,209,000 as of January 31, 1998 and February 1, 1997, respectively),
consist of patents which are amortized on a straight-line basis over the
lives of the patents, approximately 14 years and a covenant-not-to-
compete which is amortized on a straight-line basis over the life of the
covenant of five years.
Revenue Recognition
Revenue from sales to customers (other than consignment) is recognized
at the time the merchandise is shipped. Merchandise sold under
consignment arrangements between the Company and certain customers is
not recognized as revenue by the Company until the products are sold by
the consignee. In certain cases, the Company accepts payment for
merchandise in gold. Additionally, the Company enters into arrangements
for certain customers of its rope chain and tubing products whereby the
gold value of the finished product is transferred in the form of fine
gold ounces from the customer to the Company. The value of the finished
product that exceeds the gold content value is recovered as revenue and
the related cost to manufacture is recorded as an expense ("tolling
arrangements").
Allowance for Sales Returns
The Company reduces gross sales by the amount of discounts and returns
to determine net sales. Each month the Company estimates a reserve for
returns based on historical experience and the amount of gross sales.
The reserve is adjusted periodically to reflect the Company's actual
return experience.
Catalog Costs
Catalog costs are charged to expense as incurred, the only exception
being major catalog revisions. Costs capitalized are amortized over the
units of catalogs shipped, up to a maximum of two years. At January 31,
1998, February 1, 1997 and January 27, 1996, in connection with three
significant catalog revisions, approximately $210,000, $124,000 and
$250,000 respectively, had been capitalized. Included in the statement
of operations for the years ended January 31, 1998, February 1, 1997 and
January 27, 1996, is amortization expense of $229,000, $230,000 and
$82,000, respectively.
F-8
34
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Cash Equivalents
Highly liquid investments with maturities of three months or less at the
date of acquisition are classified as cash equivalents.
Financial Instruments
The Company utilizes financial instruments, including commodity futures,
forwards and options on futures, to limit its exposure to fluctuations
in the price of gold. The Company does not hold or issue such
instruments for trading purposes. The Company hedges its future
contracts for gold against anticipated sales commitments with its
customers. Gains or losses on the future contracts are deferred until
settlement of the related anticipated sales to a customer. At January
31, 1998, there were forward contracts outstanding for the delivery of
an aggregate of 5,000 ounces of gold at an average price of $302 or
approximately $1.5 million. The Company's exposure to market risk
related to the derivative financial instruments is limited to
fluctuations in the price of gold. The Company is also exposed to credit
loss in the event of nonperformance by the counterparties to the
instruments; however, the risk of credit loss is not considered to be
significant.
Earnings Per Share
During fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share", ("SFAS 128"), which
requires presentation of basic and diluted earnings per share ("EPS") on
the face of the consolidated statements of operations and requires a
reconciliation of the numerators and denominators of the basic and
diluted EPS calculations. Basic EPS is computed by dividing net income
by the weighted average shares outstanding for the period. Earnings per
share for all periods presented were computed on a basic basis using the
weighted average number of common shares outstanding. Diluted EPS
reflects the potential dilution that could occur if options to issue
common stock were exercised and converted to common stock. Options and
warrants outstanding were not materially dilutive. Earnings per share
for prior periods have been computed in accordance with SFAS 128.
F-9
35
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 131, Disclosures about
Segments of an Enterprise and Related Information, which will be
effective for fiscal years beginning after December 15, 1997. SFAS No.
131 redefines how operating segments are determined and requires
expanded quantitative and qualitative disclosures relating to a
company's operating segments. The Company anticipates that the adoption
of SFAS No. 131 will not have a material impact on current disclosures.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fiscal Year End
The Company's fiscal year end is the Saturday closest to the end of
January, effective with the fiscal year ended February 1, 1997. The
financial statements for the fiscal years ended January 31, 1998,
February 1, 1997 and January 27, 1996 were comprised of 52, 53 and 52
weeks, respectively.
Reclassifications
Certain reclassifications were made to the prior year's financial
statements to confirm to the current presentation.
F-10
36
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
------------------------------------------------------------------------------
2. INVENTORIES
Inventories consist of: January 31, February 1,
1998 1997
----------- -----------
(In thousands)
Finished goods $27,691 $37,020
Work in process 13,335 14,597
Raw materials 5,095 7,568
------- -------
46,121 59,185
Less:
Consigned gold 33,208 40,282
------- -------
$12,913 $18,903
======= =======
At January 31, 1998 and February 1, 1997, inventories excluded
approximately 108,900 and 116,950 ounces of gold on consignment,
respectively.
In the fourth quarter of fiscal 1998, management of the Company
reassessed its marketing and production strategy and determined to
implement a significantly different strategy. This was a direct result
of the changing order patterns of some of the Company's major customers.
As such, management made the determination to write down certain
inventory, by approximately $3,309,000, as part of the implementation of
a SKU reduction program and the markdown of discontinued styles.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
January 31, February 1,
1998 1997
----------- -----------
(In thousands)
Machinery and equipment $32,437 $30,257
Leasehold improvements 2,492 2,318
Building and building improvements 6,331 5,156
Land 1,508 1,070
------- -------
42,768 38,801
Less: Accumulated depreciation
and amortization 24,723 20,180
------- -------
$18,045 $18,621
======= =======
Included in selling, general and administrative expenses for the year
ended January 31, 1998, was a charge of approximately $441,000 that was
due to the write down of certain long-lived assets.
F-11
37
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
------------------------------------------------------------------------------
4. GOLD CONSIGNMENT AGREEMENTS
The Company has gold consignment agreements with gold lenders. Under the
terms of the agreements, the Company is entitled to lease the lesser of
an aggregate amount of 250,000 ounces, or an aggregate consigned gold
value not to exceed $106,695,000. The consigned gold is secured by
certain property of the Company including its inventory and equipment.
Title to such consigned gold remains with the gold lenders until the
Company purchases the gold. However, during the period of consignment,
the entire risk of physical loss, damage or destruction of the gold is
borne by the Company. The purchase price per ounce is based on the daily
Second London Gold Fix. The Company pays the gold consignors a
consignment fee based on the dollar value of gold ounces outstanding, as
defined in the agreements.
The consignment agreements are terminable by the Company or the
respective gold lenders upon 30 days notice. If any gold lender were to
terminate its existing gold consignment agreement, the Company does not
believe it would experience an interruption of its gold supply that
would materially adversely affect its business. The Company believes
that other consignors would be willing to enter into similar
arrangements if any gold lender terminates its relationship with the
Company.
The consignment agreements contain certain restrictive covenants
relating to maximum usage, net worth, working capital, and other
financial ratios and each of the agreements require the Company to own a
specific amount of gold at all times. As of January 31, 1998, the
Company was in compliance with these covenants and the Company's owned
gold inventory was valued at approximately $3,996,000.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
January 31, February 1,
1998 1997
----------- -----------
(In thousands)
Accrued advertising $1,177 $1,493
Accrued legal expense 600 -
Accrued payroll expenses 497 515
Accrued interest 317 347
Customer deposits payable 154 130
Other accrued expenses 1,640 1,317
------ ------
$4,385 $3,802
====== ======
F-12
38
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
6. LONG-TERM DEBT
Long-term debt consists of the following:
January 31, February 1,
1998 1997
----------- -----------
(In thousands)
Notes payable - insurance companies, interest at 8.61% payable
semi-annually, principal payable in annual installments of $1,111,000
through May 15, 2002. $5,555 $6,667
Notes payable - insurance companies, interest at 1.5% above the London
Interbank Offered Rate (LIBOR), adjusted and payable quarterly (7.38%
as of January 31, 1998), principal payable in annual installments of
$1,000,000 commencing May 1999 through May 15, 2004, interest increases
to 2.5% above LIBOR effective May 15, 1998. 6,000 6,000
Mortgage payable - interest at 8%, interest and principal of $24,000
payable monthly over a ten-year term through October 2005. 2,283 2,384
Notes payable - insurance companies, interest at 10.5%, paid in full
at January 31, 1998. - 1,750
Other - 100
------- -------
13,838 16,901
Less: current portion 1,221 2,955
------- -------
$12,617 $13,946
======= =======
The notes payable are secured by the Company's accounts receivable,
machinery and equipment, inventory (secondary lien to the gold lenders)
and proceeds. The mortgage payable is secured by the Company's corporate
headquarters building and land, having a net book value of approximately
$4,778,000 at January 31, 1998, and certain equipment therein.
The note purchase agreements contain restrictive financial covenants and
limit the payment of dividends. Although the Company does not expect to
pay dividends in the near future, approximately $1,914,000 would have
been available for payment at January 31, 1998. Additionally, the
mortgage agreement contains certain restrictive financial covenants.
F-13
39
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
6. LONG-TERM DEBT (Continued)
Due to the unusual charges (see Notes 2 and 3) in fiscal 1998 of
approximately $3,750,000 and asset write-offs and other accruals of
approximately $750,000, the Company was in default with a financial
covenant under the note agreements and mortgage payable. The Company
obtained waivers of this covenant noncompliance from both the insurance
companies and mortgage lender. In addition, the insurance companies
reset the financial covenant for fiscal 1999. Management expects the
Company will be in compliance with the amended covenant in fiscal 1999.
Maturities of long-term debt as of January 31, 1998 are as follows (in
thousands):
Year Ending January
-------------------
1999 $1,221
2000 2,230
2001 2,240
2002 2,251
2003 2,262
Thereafter 3,634
-------
$13,838
=======
7. LINE OF CREDIT
At January 31, 1998, the Company had a $15,000,000 line of credit
agreement with no borrowings outstanding. The line of credit is secured
by certain assets of the Company, including accounts receivable and
inventory. Borrowings under the facility bear interest at the Company's
option of the bank's prime rate, the fixed rate loan (as defined in the
agreement) or the adjusted Eurodollar rate plus 2.5%. The line of credit
expires on July 31, 1998 subject to annual renewal. Management believes
that the line of credit will be renewed; however, if the current lender
decides not to renew the line, the Company believes that other lenders
would be willing to enter into a similar arrangement.
F-14
40
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial
instruments are as follow:
January 31, 1998 February 1, 1997
---------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Notes with insurance companies:
10.5% notes payable $ - $ - $1,750 $1,760
8.61% notes payable $5,556 $5,725 $6,667 $6,814
1995 notes payable $6,000 $6,000 $6,000 $6,000
Mortgage payable $2,283 $2,283 $2,384 $2,384
Promissory notes $ - $ - $ 100 $ 100
The fair values of the 10.5% and 8.61% notes payable and the mortgage
payable were based on current rates available to the Company for debt
with similar remaining maturities. The fair value of the 1995 notes
payable was assumed to reasonably approximate its carrying amount since
it contains a variable interest rate.
The Company believes the carrying amount of the following financial
instruments is equal to their fair value due to their short period of
maturity: cash, accounts receivable, accounts payable and accrued
expenses. The Second London Gold Fix is used daily to value the ounces
of gold and as such the carrying value of gold inventory approximates
fair value.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carry amounts of assets and liabilities for
financial purposes and for income tax purposes.
As of January 31 1998, the balance sheet includes refundable income
taxes of $1,667,000 which management anticipates receiving. The Company
plans, for federal tax purposes, to carry back the net operating loss
generated during the year ended January 31, 1998.
F-15
41
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
9. INCOME TAXES (Continued)
Income tax (benefit)/provision consists of the following:
Year Ended
-----------------------------------------------
January 31, February 1, January 27,
1998 1997 1996
---- ---- ----
(In thousands)
Current:
Federal $(1,080) $398 $565
State and local (129) 73 81
------- ---- ----
(1,209) 471 646
Deferred income tax (392) 307 (160)
------- ---- ----
Total $(1,601) $778 $486
======= ==== ====
The following is a reconciliation of the federal statutory rate to the
effective tax rate:
Year Ended
-----------------------------------------------
January 31, February 1, January 27,
1998 1997 1996
---- ---- ----
(In thousands)
Statutory tax rate 34.0% 34.0% 34.0%
State and local taxes/(benefit),
net of federal benefit 4.0 3.0 5.0
Reversal of prior year accruals - (7.3) -
Other - .6 1.0
---- ---- ---
Statutory tax/(benefit) rate 38.0% 30.3% 40.0%
==== ==== ====
F-16
42
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
9. INCOME TAXES (Continued)
The tax effects of significant items comprising the Company's deferred
tax liabilities and assets are as follows (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Non-current deferred tax liabilities:
Difference between book and tax
depreciation methods $818 $1,068
---- ------
Current deferred tax assets:
Reserves for sales returns and
doubtful accounts 454 520
Inventory reserve 150 50
Other 116 8
---- ------
720 578
---- ------
Net deferred tax liabilities $ 98 $ 490
==== ======
10. OTHER INCOME
Other income for the year ended January 31, 1998, includes a gain of
approximately $625,000 on the sale of an asset.
11. RELATED PARTY TRANSACTIONS
In May 1991, the Company entered into two lease agreements with
MacQuesten Realty Company ("MRC"), a partnership consisting of certain
stockholders of the Company. Pursuant to the agreements, the Company
agreed to rent the manufacturing and distribution facilities from MRC
for a period of ten years, at an average annual rental of $536,000, plus
real estate taxes and other occupancy costs.
The Company had another lease agreement with MRC to rent a manufacturing
facility from MRC. On May 16, 1997, the Company acquired the facility
for a purchase price of $1,150,000. As part of the transaction, the
Company obtained an exclusive, two-year option to acquire from MRC the
two remaining manufacturing and distribution facilities that are
currently being leased from MRC (the "Leased Properties").
F-17
43
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
12. LEASES AND COMMITMENTS
(a) Leases
The Company conducts certain operations from leased manufacturing and
distribution facilities. In addition to rent, the Company pays property
taxes, insurance and certain expenses relating to leased facilities and
equipment. The Company also leases machinery and equipment.
The following is a schedule of net minimum lease payments owed under
capital and operating leases as of January 31, 1998:
Year Ending Capital Operating
January Leases Leases
------- ------ ------
(in thousands)
1999 $241 $504
2000 111 531
2001 8 540
2002 - 135
---- ----
Minimum lease payments: 360 $1,710
======
Less: Interest 19
----
Present value of net
minimum lease payments 341
Less: current portion 222
----
$119
====
The majority of the payments set forth above for operating leases are to
MacQuesten Realty Company.
F-18
44
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
12. LEASES AND COMMITMENTS (Continued)
The interest rates applicable to the capital leases range from 4.84% -
8.18%. Included in property plant and equipment as of January 31, 1998,
are capitalized assets with a carrying value of $696,000. Total
capitalized lease amortization expense was $242,000, $353,000 and
$256,000 for the years ended January 31, 1998, February 1, 1997 and
January 27, 1996.
Rent expense related to the MRC leases, for the years ended January 31,
1998, February 1, 1997 and January 27, 1996, amounted to $498,000,
$624,000 and $563,000, respectively, principally for manufacturing and
distribution facilities.
(b) The Company's product line includes licensed goods manufactured
pursuant to two or three year agreements with licensors. Royalty fees
range from 6% to 12% of net sales of these products, or a minimum
guarantee, whichever is greater. The Company records the related expense
over the units sold.
As of January 31, 1998, the future guaranteed royalty commitments are as
follows:
Guaranteed
Year Ending Royalty
January Commitments
------- -----------
(in thousands)
1999 $239
2000 45
----
$284
13. STOCK PLANS
The Company has elected to continue to account for employees stock-based
transactions under Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees". Since the exercise price of all stock
options granted under the stock plans were equal to the price of the
stock at the date of grant, no compensation has been recognized by the
Company.
F-19
45
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
13. STOCK PLANS (Continued)
Under the Company's stock option agreements, had the compensation
expense been determined based upon the fair value at the grant date
consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock Based Compensation," the Company's pro forma, net
(loss)/income and (loss)/earnings per share would have been net
(loss)/income of $(2,691,000), $1,712,000 and $692,000, and $(.35), $.21
and $.08, (loss)/earnings per share for the years ended January 31,
1998, February 1, 1997 and January 27, 1996, respectively. The weighted
average per share fair value of the option granted during the year ended
January 31, 1998 was estimated at $.74 on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
January 31,
1998
-----------
Expected life (years) 2
Risk-free interest rates 5.6%
Expected volatility 36.9%
Expected dividend yield -
The pro forma effect on net loss and loss per share for the year ended
January 31, 1998 may not be representative of the pro forma effect in
future years because it includes compensation cost on a straight line
basis over the vesting periods of the grants and does not take into
consideration the pro forma compensation costs for grants made prior to
1996.
INCENTIVE STOCK OPTION PLANS
(1) During July 1986, the Company adopted the 1986 Incentive Stock
Option Plan. The Plan, as amended, permits the granting of incentive
stock options and non-qualified stock options to employees for the
purchase of up to an aggregate of 500,000 shares of common stock. The
option term is for a period not to exceed ten years from the date of
grant. At January 31, 1998, all shares reserved under the plan had been
granted.
F-20
46
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
- --------------------------------------------------------------------------------
13. STOCK PLANS (Continued)
The changes in the number of shares under option, the weighted average
option price per share and the exercisable price per share are as
follows:
1986 Incentive Stock Option Plan
Weighted
Average Exercise
Shares Option Price Price
------ ------------ -----
Outstanding and exercisable, January 28, 1995 91,500 $3.74 $3.50 - $4.00
Lapsed (37,000) $3.91 $3.50 - $4.00
-------
Outstanding and exercisable, January 27, 1996 54,500 $3.63 $3.63
Lapsed (1,000) $3.63 $3.63
-------
Outstanding and exercisable, February 1, 1997 53,500 $3.63 $3.63
Lapsed (53,500) $3.63 $3.63
-------
Outstanding and exercisable, January 31, 1998 - $ - $ -
=======
(2) During the year ended June 30, 1994, the Company adopted the 1993
Long-Term Incentive Plan and the 1993 Non-Employee Directors' Stock
Option Plan. The Plans permit the granting of incentive stock options
and non-qualified stock options to employees and non-employee directors
for the purchase of up to an aggregate of 2,000,000 and 250,000 shares
of common stock, respectively. The option term is for a period not to
exceed five years from the date of grant.
Long-term Incentive Plan
Weighted
Average Exercise
Shares Option Price Price
------ ------------ -----
Outstanding at January 28, 1995 320,500 $5.12 $4.13 - $7.75
Lapsed (27,000) $5.52 $4.13 - $7.75
Granted 371,400 $3.00 $2.63 - $3.23
-------
Outstanding at January 27, 1996 664,900 $3.92 $2.63 - $7.75
Lapsed (11,400) $3.88 $2.94 - $4.13
Granted 15,000 $3.31 $3.31
F-21
47
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
13. STOCK PLANS (Continued)
Long-term Incentive Plan (Continued)
Weighted
Average Exercise
Shares Option Price Price
------ ------------ -----
Outstanding at February 1, 1997 668,500 $3.91 $2.63 - $7.75
Lapsed (114,000) $2.63 - $6.13 $2.63 - $6.13
Granted 134,000 $3.00 $2.13 - $3.00
--------
Outstanding at January 31, 1998 688,500 $3.60 $2.13 - $7.75
=======
Options exercisable at January 31, 1998 were for 454,933 shares of
common stock at a price between $2.63 - $7.75 a share. At January 31,
1998, shares for future option grants totaling 1,296,500 were available
under the plan.
Non-Employee Directors' Stock Option Plan
Weighted
Average Exercise
Shares Option Price Price
------ ------------ -----
Outstanding at January 28, 1995 40,000 $5.85 $4.19 - $8.00
Lapsed (10,000) $7.31 $6.63 - $8.00
Granted 15,000 $3.02 $2.63 - $3.50
-------
Outstanding at January 27, 1996 45,000 $4.58 $2.63 - $8.00
Lapsed (10,000) $7.31 $6.63 - $8.00
Granted 10,000 $3.03 $3.00 - $3.06
-------
Outstanding at February 1, 1997 45,000 $3.63 $2.63 - $5.00
Lapsed (5,000) $4.18 $4.18
Granted 15,000 $3.00 $2.69 - $3.00
-------
Outstanding at January 31, 1998 55,000 $2.69 $2.63 - $5.00
=======
Options exercisable at January 31, 1998 were for 25,065 shares of common
stock at a price between $2.63 - $5.00 a share. At January 31, 1998,
shares for future option grants totaling 195,000 were available under
this plan.
F-22
48
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
13. STOCK PLANS (Continued)
WARRANTS AND NON-QUALIFIED OPTIONS
The Company has granted common stock purchase warrants and non-qualified
options.
The changes in the number of shares under the stock purchase warrants
and non-qualified options and the weighted average option price per
share are as follows:
Weighted
Average Exercise
Shares Option Price Price
------ ------------ -----
Outstanding at January 28, 1995 122,500 $4.75 $3.25 - $7.50
Lapsed (52,500) $4.21 $4.00 - $4.50
--------
Outstanding at January 27, 1996 70,000 $5.15 $3.25 - $7.50
Lapsed (45,000) $4.75 $4.00 - $6.25
--------
Outstanding at February 1, 1997 25,000 $5.82 $3.25 - $7.50
Granted 96,000 $3.00 $3.00
--------
Outstanding and exercisable at
January 31, 1998 121,000 $3.58 $3.00 - $7.50
========
14. RETIREMENT PLAN
The Company established a 401(k) Retirement Plan and Trust for all
eligible employees. Under the terms of the plan the employee may
contribute 1% to 20% of compensation. There is a partial employer
matching contribution. Included in the statement of operations for the
years ended January 31, 1998 and February 1, 1997 is $96,000 and $34,000
of expense for the employer portion of the contribution. There were no
employer contributions for the year ended January 27, 1996.
F-23
49
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JANUARY 31, 1998
-----------------------------------------------------------------------------
15. SIGNIFICANT CUSTOMERS
Sales to the Company's two largest customers aggregated approximately
25%, 25% and 29%, respectively, of net sales for the years ended January
31, 1998, February 1, 1997 and January 27, 1996.
16. STOCK REPURCHASE PROGRAM
In December 1995, the Company announced a Common Stock Repurchase
Program, (the "1995 Stock Repurchase Program"), pursuant to which the
Company may repurchase up to 750,000 share of Common Stock. On April 4,
1997, the Board of Directors authorized an increase of an additional
500,000 shares of common stock that the Company may repurchase under the
stock repurchase plan. During the years ended January 31, 1998, February
1, 1997, and January 27, 1996, the Company repurchased a total of
328,000, 250,000 and 60,000 shares, respectively, on the open market
under the 1995 Stock Repurchase Program for an aggregate price of
approximately $1,056,000, $811,000 and $159,000, respectively. Effective
May 24, 1996, the Board of Directors authorized the Company to retire
965,200 shares of common stock, previously held as treasury stock. As of
April 10, 1998, the Company had purchased an additional 420,000 shares
on the open market for an aggregate of approximately $957,000.
During the year ended January 27, 1996, the Company had repurchased
327,500 shares on the open market under their 1994 stock repurchase
program for $966,000. The Company will not re-issue these shares to the
public. In November 1995, the Company discontinued this program.
17. LEGAL PROCEEDINGS
In October 1997, a decision was entered in a case whereby the Company
was ordered to pay the plaintiff according to the terms of an agreement
entered into on May 16, 1986. On April 20, 1998, the Company settled the
case and any future payments that would have been payable under the
agreement for a one-time payment of $600,000. The settlement expense is
included in selling, general and administrative expenses for the year
ended January 31, 1998.
The Company is involved in various legal claims and disputes, none of
which is considered material and all of which, for the most part, are
normal to the Company's business. In the opinion of management, the
amount of losses that might be sustained, if any, from such claims and
disputes would not have a material effect on the Company's financial
statements.
F-24
50
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Summary of Quarterly Results (Unaudited) in thousands
Year Ended January 31, 1998 Year Ended February 1, 1997
------------------------------------------- -------------------------------------------
Quarter Ended Quarter Ended
------------------------------------------- -------------------------------------------
May 3, Aug. 2, Nov. 1, Jan. 31, Apr. 27, Jul. 27, Oct. 26, Feb. 1,
1997 1997 1997 1998 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
Net sales (A) $27,606 $22,618 $41,753 $37,972 $29,203 $27,706 $48,772 $44,948
Cost of goods sold 22,544 18,967 33,193 32,478 24,250 23,641 39,800 36,350
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 5,062 3,651 8,560 5,494 4,953 4,065 8,972 8,598
Selling, general
& administrative
expenses 5,252 5,845 6,233 7,825 4,335 4,482 6,019 6,536
------- ------- ------- ------- ------- ------- ------- -------
Operating (loss)/income (190) (2,194) 2,327 (2,331) 618 (417) 2,953 2,062
Other income (expense):
Gold consignment fees (260) (347) (378) (320) (351) (312) (349) (445)
Interest expense (381) (304) (363) (474) (429) (410) (426) (433)
Interest income 125 113 31 28 160 125 94 54
Other - net 24 643 19 19 14 6 34 20
------- ------- ------- ------- ------- ------- ------- -------
Total other income (492) 105 (691) (747) (606) (591) (647) (804)
(expense)
(Loss)/Income from
operations before
income taxes (682) (2,089) 1,636 (3,078) 12 (1,008) 2,306 1,258
Income (benefit)/provision (259) (822) 650 (1,170) 4 (383) 878 279
------- ------- ------- ------- ------- ------- ------- -------
Net (loss)/income $ (423) $(1,267) $ 986 $(1,908) $ 8 $ (625) $ 1,428 $ 979
======= ======= ======= ======= ======= ======= ======= =======
(Loss)/earnings per
share(B) $ (0.05) $ (0.15) $ 0.13 $ (0.25) $ 0.00 $ (0.08) $ 0.17 $ 0.12
======= ======= ======= ======= ======= ======= ======= =======
(A) The Company's net sales for the second quarter are subject to seasonal
fluctuation. This fluctuation is mitigated to a degree by the early
placement of orders for the holiday season.
(B) Per share amounts do not always add to the annual per share amount because
the figures are required to be independently calculated.
F-25
51
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF ADDITIONS CHARGED TO OTHER END OF
DESCRIPTION PERIOD COSTS AND EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for
doubtful accounts:
- ---------------------------------------------------------------------------------------------------------------------------
Year ended January 31, 1998 $656 $284 $ - $(224) $716
Year ended February 1, 1997 901 170 - (415) 656
Year ended January 27, 1996 646 247 - 8 901
Allowance for sales
returns:
Year ended January 31, 1998 $748 $ - $ - $(268) $480
Year ended February 1, 1997 674 261 - (187) 748
Year ended January 27, 1996 754 200 - (280) 674
(A) Allowances, returns and uncollectible accounts charged against the
reserve, (net of collections on previously written-off accounts).
S-1
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MICHAEL ANTHONY JEWELERS, INC.
By: /s/ MICHAEL PAOLERCIO
-------------------------------------
Michael W. Paolercio, Co-Chairman of the
Board and Chief Executive Officer
Date: April 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MICHAEL PAOLERCIO Co-Chairman of the Board April 30, 1998
- --------------------------- and Chief Executive Officer
(Michael W. Paolercio) (Principal Executive Officer)
/s/ ANTHONY PAOLERCIO Co-Chairman of the Board April 30, 1998
- --------------------------- and President
(Anthony Paolercio, Jr.)
/s/ ALLAN CORN Chief Financial Officer, April 30, 1998
- --------------------------- Senior Vice President
(Allan Corn) and Director (Principal
Accounting Officer)
/s/ MICHAEL A. PAOLERCIO Senior Vice President, April 30, 1998
- --------------------------- Treasurer and Director
(Michael Anthony Paolercio)
/s/ MICHAEL WAGER Director April 30, 1998
- ---------------------------
(Michael Wager)
/s/ DAVID HARRIS Director April 30, 1998
- ---------------------------
(David Harris)
/s/ DONALD MILLER Director April 30, 1998
- ---------------------------
(Donald Miller)
53
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.46 Note Purchase Agreement, dated as
of June 5, 1992, among the
Registrant and the holders of the
Registrant's Senior Notes due 2002
(the "2002 Notes")
10.47 Security Agreement, dated as of
June 5, 1992, among the Registrant
and the holders of the 2002 Notes
10.48 $3,500,000 Senior Note due 2002 of
the Registrant in favor of Northern
Life Insurance Company
10.49 $3,000,000 Senior Note due 2002 of
the Registrant in favor of Royal
Maccabees Life Insurance Company
10.50 $1,000,000 Senior Note due 2002 of
the Registrant in favor of The
North Atlantic Life Insurance
Company of America
10.51 $1,000,000 Senior Note due 2002 of
the Registrant in favor of Farm
Bureau Life Insurance Company of
Michigan
10.52 $1,000,000 Senior Note due 2002 of
the Registrant in favor of FB
Annuity Company
10.53 $500,000 Senior Note due 2002 of
the Registrant in favor of Farm
Bureau Mutual Insurance Company of
Michigan
10.54 1993 Long-term Incentive Plan of
the Registrant
10.55 1993 NonEmployee Directors' Stock
Option Plan of the Registrant
10.56 Letter agreement, dated April 14,
1998, among the Registrant and
holders of the 2002 Notes
10.57 Letter agreement, dated April 14,
1998, among the Registrant and
holders of the 2004 Notes
21 Subsidiaries of Registrant
27 Financial Data Schedule