ITEM 1. BUSINESS.
GENERAL
Michael Anthony Jewelers, Inc. ("Michael Anthony") is a leading designer, marketer and manufacturer of affordable fine jewelry in the United States. We sell our jewelry directly to jewelry chain stores, discount stores, department stores, television home shopping networks, and wholesalers. Our jewelry is targeted towards the middle market, which generally retails between $20 and $200 and between $300 and $1,200 for watches. Our products include rope chain, bracelets, charms, pendants, earrings, rings and watches. Our products are sold in over 20,000 retail locations nationwide.
Our home page on the Internet is www.michaelanthony.com. You can learn about Michael Anthony by visiting that site.
Michael Anthony was organized as a Delaware corporation in 1986 and is the successor to Michael Anthony Jewelers, Inc., a New York corporation, organized in 1977.
FISCAL YEAR
Fiscal years ended February 2, 2002, January 27, 2001, and January 29, 2000 were comprised of 53, 52 and 52 weeks, respectively.
As used throughout this document, (a) fiscal 2002 refers to the fiscal year ended February 2, 2002 (b) fiscal 2001 refers to the fiscal year ended January 27, 2001, and (c) fiscal 2000 refers to the fiscal year ended January 29, 2000.
PRODUCT LINES
Michael Anthony offers a broad selection of handcrafted gold and gemstone jewelry. Many of our products carry the "Ma" trademark, which has become widely recognized in the jewelry industry and with certain consumers. Michael Anthony manufactures an extensive selection of casted gold charms and pendants including religious symbols; popular sayings; sport themes and team logos; animal motifs; nautical, seashore, western, musical, zodiac and other thematic figures; initials; and abstract artistic creations. We manufacture gold rope, mesh and other chains and gold locks, and gold tubing and bangle blanks used in the production of bangle bracelets and earrings. We manufacture gold, stamped and tubed earrings, pendants and certain jewelry components. We also manufacture a line of men's and ladies' 14 karat gold watches under the "Michael Anthony" brand name. In addition, Michael Anthony designs, manufactures and distributes karat gold jewelry accented with colored gemstones and invisible set diamond rings. We have begun the outsourcing of certain gold products to enhance our product line.
The table below sets forth the approximate percentage of (a) sales and (b) kilograms shipped in fiscal years 2002, 2001 and 2000, respectively, attributable to each of Michael Anthony's product categories.
Michael Anthony maintains an in-house design staff which utilizes CAD/CAM (computer aided design/computer aided manufacturing) technology to enhance our design, modeling and production capabilities. The equipment is utilized for the design of Michael Anthony's new products and for modifying the scale of existing designs whenever possible. Michael Anthony obtains proprietary protection for its products and designs. Michael Anthony updates its product offerings periodically by adding new designs and eliminating less popular styles.
We believe that our future success will depend, in part, on our ability to enhance existing product lines and develop new styles and products to meet an expanding range of customer requirements. As of April 5, 2002, our product development staff consisted of 21 full time employees. Product development expenses for molds and models for fiscal 2002 were approximately $794,310. We anticipate that we will continue to commit substantial resources to product development.
MANUFACTURING PROCESS
Our manufacturing facility is located in Mount Vernon, New York. We utilize manufacturing processes that combine modern technology and mechanization with hand craftsmanship to produce fashionable and affordable gold jewelry. Our manufacturing processes include:
- the casting (or lost wax) method, which is a long-standing jewelry manufacturing process;
- a photo etching process, which has allowed Michael Anthony to enter the lower priced segment of the market through production of ultra light weight products; and
- the diamond cut process, which produces a sparkling effect on a finished piece of gold jewelry.
The machinery on which we manufacture our rope chain products can operate 24 hours a day and requires minimal direct labor. This has enabled us to become one of the lowest cost producers of rope chain in the world.
During fiscal 2002, Michael Anthony manufactured approximately 89% of its products from gold bullion and other raw materials and purchased approximately 11% of its product as semi-finished or finished goods. Michael Anthony does not believe the loss of any supplier would have a material adverse effect on its business. Alternative sources of supply for the goods purchased by Michael Anthony are readily available.
During fiscal 2002, Michael Anthony completed construction of a new 40,000 square feet manufacturing and assembly facility located in the Dominican Republic. The facility is used for manufacturing, finishing, assembly of castings, earrings and bangle bracelets.
OPEN ORDERS
Orders from our retail customers typically have shipment dates that range from 24 hours to 60 days. As of April 5, 2002, the aggregate dollar value of open orders was approximately $10,851,000. We expect that substantially all of the current orders will be shipped in the next 90 days. We do not believe that open orders are indicative of our future results of operations, as open orders as of any given date are not necessarily indicative of sales trends.
MARKETING AND SALES
We market and sell our jewelry primarily through our in-house sales force. Sales are made by our sales personnel primarily at our showroom in Mount Vernon, New York and direct presentations at customers' locations. Products are promoted through the use of catalogues, advertisements in trade publications, trade show exhibitions, cooperative advertising allowances with certain customers and advertisements in consumer magazines like Vogue, In Style, Martha Stewart and Vanity Fair.
Our marketing strategy is to increase brand recognition of the "Michael Anthony" name. This includes advertising in consumer magazines and other publications of many of America's finest retailers. We believe that there is growing brand recognition of the "Michael Anthony" name and the "Ma" trademark with consumers and that this recognition has enhanced sales of our products.
To better meet our customers' needs, we have a wide range of customer service programs:
- inventory management assistance through electronic data interchange;
- customized packaging and bar coding; and
- computerized analysis of sales and marketing trends.
Our vertical integration and customer service programs enable us to be responsive to our customers' needs. We manufacture and deliver most orders on a timely and more cost-effective basis than many of our competitors.
Our jewelry is sold primarily to jewelry chain stores, discount stores, department stores, television home shopping networks, and wholesalers. We assist our customers in allocating their purchasing budget among the items in the various product lines. We advise them of items having higher consumer demand as determined by Michael Anthony's computerized market analysis. Prices vary on the basis of service required by customers. We ship our products in bulk to wholesale distributors. For certain retail jewelry chains, 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 and Kmart, we prepackage and price tag most items. We then ship an order of many different items to distribution centers and stores in the chain. We provide additional services to certain customers to meet their specific marketing needs, such as tagging, boxing and point-of-sale displays.
We also ship our jewelry to a limited number of customers on a consignment basis. Through these arrangements, we deliver our products on consignment, and upon sale, the customer pays Michael Anthony for the consigned merchandise. Consigned merchandise is subject to our own consignment arrangements with our gold lenders. See Item 1. "Business - Supply; Related Financing Arrangements" and Item 7. "Management's Discussion And Analysis Of Financial Condition And Results of Operations - Liquidity and Capital Resources."
During fiscal 2002, sales to the five largest of Michael Anthony's customers totaled approximately 60% of total net sales. Our two largest customers were Wal-Mart and Home Shopping Network, accounting for 17.4% and 14.3%, respectively, of net sales. Except for certain retail customers, Michael Anthony generally has no long-term contractual commitments with any of our customers. None of Michael Anthony's customers are prohibited from purchasing products from our competitors.
We reduce gross sales by the amount of returns and discounts to determine net sales each month. Each month we establish a reserve for returns based on our historical experience, the amount of gross sales and the customer base. The total of actual returns and the provision for the returns reserve amounted to approximately 11.5%, 12.2% and 11.1% of gross sales in each of fiscal 2002, fiscal 2001 and fiscal 2000, respectively. For further information regarding the reserve for returns, see Note 1 - Notes to Consolidated Financial Statements.
If we lose one or more of our top customers or if any of them reduce, delay or cancel orders, return significant amounts of product or experience financial difficulties that result in their inability to pay, it could have a material adverse effect on our business, operating results and financial condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We use Italian-made machinery, together with acquired proprietary knowledge, to manufacture our rope chain products. Michael Anthony maintains certain trademarks and generally applies for copyrights covering the design of certain of our products. The level of protection available for our proprietary designs and products varies depending on a number of factors, including the distinctiveness of the product and originality of design. Our patents, trademarks and copyrights may not prevent competitors from producing products that are substantially similar to those of Michael Anthony. See Item 1. "Business - Product Lines."
Michael Anthony seeks to avoid disclosure of its trade secrets, and requires those people with access to our proprietary information to sign confidentiality agreements. Access to our systems is also restricted.
Despite Michael Anthony's efforts to protect our trademarks, copyrights and other proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that Michael Anthony considers confidential. Policing unauthorized use of Michael Anthony's intellectual property rights is difficult. We take appropriate action whenever we discover unauthorized use of our trademarks or if any of our copyrighted designs have been copied. Knockoffs and counterfeit products are a persistent problem in the jewelry industry. The laws of many countries do not protect our intellectual property rights to the same extent as the laws of the United States. There can be no assurance, that even if Michael Anthony's means of protecting our intellectual property and other proprietary rights were successful, our competitors may not independently develop similar products.
We do not believe that our products or processes infringe on the proprietary rights of any third parties. There can be no assurance that third parties will not claim infringement with respect to existing or future products or processes. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Michael Anthony to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Michael Anthony or at all, which could have a material adverse effect on Michael Anthony's business, operating results and financial condition.
COMPETITION
The jewelry industry is highly competitive, both in the United States and on a global basis. Michael Anthony encounters competition primarily from manufacturers with national and international distribution capabilities and, to a lesser extent, from small regional suppliers of jewelry. We believe that we are well positioned in the industry and have a reputation for responsive customer service, high quality and well-designed jewelry with broad consumer appeal.
The principal competitive factors in the industry are price, quality, design and customer service. Our specialized customer service programs are important competitive factors in sales to nontraditional jewelry retailers, including television shopping networks. The recent trend towards consolidation at the retail level in the jewelry industry and low labor costs outside of the United States may increase the level of competition facing Michael Anthony. There can be no assurance that Michael Anthony will be able to compete successfully against current and future competitors or that competitive pressures faced by us will not have a material adverse effect on our business, operating results and financial condition.
SEASONAL NATURE OF BUSINESS
Our business is seasonal in nature. Presented below are our net sales for each quarter of fiscal 2002, fiscal 2001 and fiscal 2000:
Michael Anthony has experienced a seasonal pattern in its operating results with the third and fourth quarters typically having the highest sales. This fluctuation is mitigated to a degree by the early placement of orders by many of our customers, particularly for the Christmas holiday season. In addition, we market holiday and seasonal products year round for such
occasions as Mother's Day, Valentine's Day, Father's Day, religious holidays and school graduations.
GOLD SUPPLY AND RELATED FINANCING ARRANGEMENTS
Gold used in the manufacturing process is at least .995 fine and is then combined with other metals to produce 14 karat and 10 karat gold. The term "karat" refers to the gold content of alloyed gold, measured from a maximum of 24 karats (100% fine gold). Varying quantities of metals such as silver, copper, nickel and zinc are combined with fine gold to produce 14 karat gold of different colors. These alloys are in abundant supply and are readily available to Michael Anthony.
Michael Anthony uses gold consignment arrangements with the gold lenders to supply substantially all of its gold needs. See Item 7. "Management's Discussion And Analysis And Financial Condition And Results Of Operations-Liquidity and Capital Resources."
INSURANCE
We maintain primary all-risk insurance, with limits in excess of our current inventory levels (including consigned gold), to cover thefts and damage to inventory located on our premises and insurance on Michael Anthony goods in transit. We also maintain insurance covering theft and damage to inventory at our suppliers' locations. The amount of coverage available under such policies is limited and may vary by location, but generally is in excess of the value of the gold held by a particular supplier. Additional insurance coverage is provided by some of Michael Anthony's suppliers. We also maintain fidelity insurance, which is insurance providing coverage against theft or embezzlement by our employees.
EMPLOYEES
As of February 2, 2002, we employed 742 persons, 368 of which were directly engaged in manufacturing and distribution operations, 164 of which were engaged in administration and sales and 210 of which were employed at our assembly facility in the Dominican Republic. None of our employees are represented by a union and we have not experienced any labor-related work stoppage. We place a heavy emphasis on employee relations through educational and training programs and employee teams. We consider our relations with our employees to be good. We believe there is an adequate pool of labor available to satisfy our foreseeable hiring needs for our sales, manufacturing and distribution operations.
ENVIRONMENTAL MATTERS
Extensive environmental laws and regulations and various other federal, state and local laws and regulations regarding health and safety matters affect our operations. Since our manufacturing operations routinely use materials regulated by the environmental laws we may incur material liabilities if any claims are brought against us in connection with these operations. We have taken steps to reduce the environmental risks associated with our operations and believe that we are currently in substantial compliance with all environmental laws.
AGREEMENTS
Although we intend to continue to aggressively market our gold jewelry product lines to our existing customer base, we believe there are opportunities to increase sales by expanding our customer base and exploring product lines that may utilize diamonds or colored stones, which are precious, semiprecious or synthetic. Our strategy is to increase sales to new and existing customers as well as raise our average price points and gross margins.
On December 22, 2000, Michael Anthony entered into a distribution agreement with the Almond Jewelry Group. Under the arrangement, Michael Anthony has acquired the exclusive rights to market and distribute gold jewelry products manufactured by Almond to retailers in the United States. Almond will no longer directly market its gold jewelry products to retailers in the United States. Michael Anthony has also entered into a supply agreement with Almond, which will assure its customer base the continuity of a supply of high quality and innovative merchandise. In connection with the distribution agreement, Almond was issued warrants to purchase 300,000 shares of common stock at a price of $1.62 per share.
As a result of this agreement, we have increased our market share with an existing customer and added new customers. We plan to pursue our long term growth strategy, that may include the acquisition of one or more additional companies that manufacture and distribute jewelry products.
ITEM 2.
ITEM 2. PROPERTIES.
Our manufacturing and distribution facilities are all owned and they are located in three adjacent buildings in Mount Vernon, New York having a total of approximately 74,000 square feet.
On September 16, 1999, Michael Anthony acquired the buildings which house two manufacturing facilities, located at 70 and 60 South MacQuesten Parkway, Mount Vernon, NY from MacQuesten Realty Company for a price of $2,450,000. Michael Anthony incurred $929,000 of long term debt, which has a four-year term and accrues interest at an annual rate of 7.50%, and paid the balance with cash. At February 2, 2002, $427,000 of principal remained outstanding under the loan.
On February 10, 1999, the Company obtained a loan in the amount of $937,500. As collateral for the loan, the Company granted the lender a first mortgage on one of its manufacturing facilities. The mortgage has a fifteen-year term and accrues interest at an annual rate of 7.05%. At February 2, 2002, $823,000 of principal remained outstanding under the loan.
We also own the building housing our 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. The mortgage has a ten-year term and accrues interest at an annual rate of 8.0%. There is a balloon payment of $1,149,000 due on October 20, 2002. At February 2, 2002, $1,785,000 of principal remained outstanding under the loan.
See Item 7. "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" and Item 13. "Certain Relationships And Related Transactions."
Our offices and facilities are protected by state-of-the-art security systems, procedures and a security staff. The Company believes our current manufacturing, distribution and administrative facilities are adequate for our current needs.
During fiscal 2000, Michael Anthony began leasing a 7,500 square foot assembly facility in the Dominican Republic. The facility was used for finishing and assembly of earrings and bangle bracelets. The lease was terminated in June 2001.
During fiscal 2002, Michael Anthony, through MADOR S.A., completed the construction of a 40,000 square feet assembly and manufacturing facility located in the Dominican Republic. The facility was operational in May 2001 at a cost of approximately $2,000,000 for land, building, machinery and equipment with cash.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings to which Michael Anthony is a party are routine litigation incidental to our business which are not material to Michael Anthony's business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the American Stock Exchange under the symbol MAJ. Our common stock began its listing on AMEX on October 25, 1991. Prior to its listing on AMEX, our common stock was traded in NASDAQ National Market System. The following table sets forth the high and low sale prices per share on AMEX for the fiscal years 2002 and 2001.
HIGH LOW ---- ---
FISCAL YEAR ENDED FEBRUARY 2, 2002 - ----------------------------------
First Quarter 1 1/2 2 Second Quarter 1 11/16 2 13/16 Third Quarter 2 1/8 2 3/4 Fourth Quarter 2 13/16 2 15/16
FISCAL YEAR ENDED JANUARY 27, 2001 - ---------------------------------- First Quarter 3 1/8 2 9/16 Second Quarter 3 2 1/8 Third Quarter 2 1/2 1 3/4 Fourth Quarter 2 1 7/16
As of April 5, 2002, there were 1,094 holders of record of Michael Anthony's common stock.
We have never paid a cash dividend. We anticipate that all of our earnings will be retained for use in our business and we do not intend to pay cash dividends in the foreseeable future. Future dividend policy will depend upon, among other factors, our earnings and financial condition. See Item 7. "Management's Discussion And Analysis Of Financial Condition And Results Of Operations," and Note 6 "Long Term Debt" - Notes to the Consolidated Financial Statements.
In December 1995, we announced a common stock repurchase program under which Michael Anthony may repurchase up to 750,000 shares of common stock. On April 4, 1997, the board of directors authorized an increase of an additional 500,000 shares of common stock that we may repurchase under the stock repurchase plan. On May 26, 1998, the board authorized a further increase of up to an additional 1,000,000 shares of common stock that we may repurchase under the stock repurchase plan. The combined total of the stock repurchase programs amount to 2,250,000 shares.
As of April 5, 2002, Michael Anthony had purchased a total of 2,143,000 shares on the open market for an aggregate of approximately $6,429,000, at an average price of $3.00.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of Michael Anthony should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K.
(1) The fiscal years ended February 2, 2002, January 27, 2001, January 29, 2000, January 30, 1999, and January 31, 1998 do not include consigned inventory, which had approximate value of $40,635,000, $30,718,000, $38,076,000, $35,096,000, and $33,208,000, respectively.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES
Inventories and Cost of Goods Sold - ----------------------------------
Inventories are valued at lower of cost (first-in, first-out method) or market.
The Company satisfies a majority of its gold supply needs through gold consignment agreements with financial institutions that lease gold to the Company ("gold lenders"), whereby the gold lenders have agreed to consign fine gold to the Company (see Note 4). In accordance with the terms of the agreements, the Company has the option of repaying the gold lenders in an equivalent number of ounces of fine gold or cash based upon the then quoted market price of gold.
The principal component of cost of goods sold is the cost of the gold bullion and other raw materials used in the production of the Company's jewelry. Other components of cost of goods sold include direct costs incurred by the Company in its manufacturing operations, depreciation, freight and insurance.
Revenue Recognition - -------------------
Revenue from sales to customers (other than consignment) is recognized at the time the merchandise is shipped. Merchandise sold under consignment arrangements between the Company and certain customers is not recognized as revenue by the Company until the products are sold by the consignee. In certain cases, the Company accepts payment for merchandise in gold. 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. Adjustments to the Company's reserve have not been material.
Derivative Financial Instruments - --------------------------------
On January 28, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended, and interpreted, which requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 133 requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The impact of adopting FAS 133 on the Company's Consolidated Statement of Operations and Consolidated Balance Sheet was not material.
The Company uses financial instruments, including commodity futures, forwards and options on futures, to limit its exposure to fluctuations in the price of gold. The Company does not enter such contracts for speculative purposes.
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in expected future cash flows that would be attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated comprehensive loss (a component of stockholders' equity) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if any (i.e., the ineffective portion and any portion of the derivative instrument excluded from the assessment of effectiveness) is recognized in earnings in the current period.
Results of Operations
The following table sets forth, as a percentage of net sales, certain items appearing in our Statements of Operations for the indicated fiscal years.
FISCAL 2002 VS. FISCAL 2001
Net sales for fiscal 2002 were approximately $141,918,000, an increase of 13.8% from net sales of approximately $124,718,000 for the comparable period in fiscal 2001. The increase in sales was primarily due to increased shipments to the retail segment of our customer base, primarily from the introduction of new products.
Gross profit on sales for fiscal 2002 were approximately $28,655,000, an increase of $3,920,000 from approximately $24,735,000 for the comparable period in fiscal 2001. As a percentage of net sales, gross profit increased to 20.2% in fiscal 2002 compared to 19.8% in fiscal 2001. The increase in gross margin was attributable to a change in the customer and product mix and a reduction of costs primarily from the Company's manufacturing facility located in the Dominican Republic.
Selling, general and administrative expenses for fiscal 2002 were approximately $24,435,000, a decrease of $505,000 or 2.0% from approximately $24,940,000 for the comparable period in fiscal 2001. The decrease is primarily attributable to decreases in (a) advertising expenses, (b) payroll and payroll related expenses, and (c) product and packaging supplies.
Interest expense and gold consignment fees for fiscal 2002, were approximately $2,806,000, an increase of $545,000 or 24.1% compared to approximately $2,261,000 for the comparable period in fiscal 2001. The increase was primarily due to the Company's higher average level of consigned inventory, higher consignment rates and increased borrowings under the Company's line of credit.
For the year ended February 2, 2002, an income tax provision of $582,000 was recorded compared to an income tax benefit of $886,000 for the prior year. The effective tax rates for fiscal 2002 and fiscal 2001 were 38%.
As a result of the above factors our net income for fiscal 2002 was approximately $951,000 compared to a net loss of $(1,440,000) for fiscal 2001.
FISCAL 2001 VS. FISCAL 2000 - ---------------------------
Net sales for fiscal 2001 were approximately $124,718,000, a decrease of 14.0% from net sales of approximately $144,937,000 for the comparable period in fiscal 2000. The decrease in sales was primarily due to decreased shipments to the retail segment of our customer base.
Gross profit on sales for fiscal 2001 were approximately $24,735,000, a decrease of $10,106,000 from approximately $34,841,000 for the comparable period in fiscal 2000. As a percentage of net sales, gross profit decreased to 19.8% in fiscal 2001 compared to 24.0% in fiscal 2000. The decrease in gross margin was attributable to a change in the customer and product mix.
Selling, general and administrative expenses for fiscal 2001 were approximately $24,940,000, a decrease of $3,317,000 or 11.7% from approximately $28,257,000 for the
comparable period in fiscal 2000. The decrease is primarily attributable to decreases in (a) advertising expenses, (b) payroll and payroll related expenses, and (c) product and packaging supplies.
Interest expense and gold consignment fees for fiscal 2001, were approximately $2,261,000, a decrease of $438,000 or 16.2% compared to approximately $2,699,000 for the comparable period in fiscal 2000. The decrease was primarily due to the Company's lower consignment rates and lower average level of consigned inventory.
For the year ended January 27, 2001, an income tax benefit of $886,000 was recorded compared to an income tax provision of $1,607,000 for the prior year. The effective tax rates for fiscal 2001 and fiscal 2000 were 38%.
As a result of the above factors our net loss for fiscal 2001 was approximately $(1,440,000) compared to net income of $2,620,000 for fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
We rely on a gold consignment program, short-term borrowings and internally generated funds to finance our inventories and accounts receivable. We fill most of our gold supply needs through gold consignment arrangements with gold lenders. Under the terms of those arrangements, we are entitled to lease the lesser of (a) an aggregate of 240,000 ounces of fine gold or (b) consigned gold with an aggregate value equal to $79,000,000. The consigned gold is secured by certain property of Michael Anthony, including inventory and machinery and equipment. Michael Anthony pays the gold lenders a consignment fee based on the dollar value of ounces of gold outstanding under their respective agreements, which value is based on the daily Second London Gold Fix. We believe that our financing rate under the consignment arrangements is substantially similar to the financing rates charged to gold consignees similarly situated to Michael Anthony. As of February 2, 2002, Michael Anthony held approximately 143,100 ounces of gold on consignment with a market value of $40,635,000.
In December 2001, Michael Anthony was notified by one of its gold lenders that it planned to discontinue its involvement in gold trading and jewelry financing. In January 2002, the Company received approval from a new gold lender, and in February 2002, began a relationship with this new lender.
The consignment agreements contain restrictive covenants relating to maximum usage, net worth, working capital and other financial ratios and each of the agreements requires Michael Anthony to own a specific amount of gold at all times. At February 2, 2002, Michael Anthony's owned gold inventory was valued at approximately $6,280,000. We believe that the supply of gold available through our gold consignment arrangements, together with the gold we own, is sufficient to meet our requirements.
The consignment agreements are terminable by Michael Anthony or the respective gold lenders upon 30 days notice. If any gold lender were to terminate its existing gold consignment arrangement, we do not believe we would experience an interruption of our gold supply that would materially adversely affect the business. Michael Anthony believes that other consignors
would be willing to enter into similar arrangements if any gold lender terminates its relationship with Michael Anthony.
Consigned gold is not included in our inventory, and there is no related liability recorded. As a result of these consignment arrangements, Michael Anthony is able to shift a substantial portion of the risk of market fluctuations in the price of gold to the gold lenders, since Michael Anthony does not purchase gold from the gold lenders until receipt of a purchase order from, or shipment of jewelry to, our customers. Michael Anthony then either locks in the selling price of the jewelry to our customers at the same time as the required purchase of gold from the gold lenders or hedges against changes in the price of gold by entering into forward contracts or purchasing futures or options on futures that are listed on the COMEX. At February 2, 2002 there were 17,000 ounces on forward contracts and no options on futures outstanding.
While we believe our supply of gold is relatively secure, significant increases or rapid fluctuations in the cost of gold may impact the demand for our products. From February 1999 until February 2, 2002, the closing price of gold according to the Second London Gold Fix ranged from a low of $252.80 per ounce to a high of nearly $325.50 per ounce. Fluctuations in the precious metals markets and credit may result in an interruption of our gold supply or the credit arrangements necessary to allow us to support our accounts receivable and continue the use of consigned gold.
In January 1999, Michael Anthony entered into a Loan and Security Agreement with General Electric Capital Business Asset Funding Corporation in the principal amount of $10,444,444. This loan is secured by our machinery and equipment. The loan agreement contains a cross collateral/cross default clause in connection with Michael Anthony's line of credit agreement. The loan agreement does not contain any restrictive financial covenants. The loan bears interest at 6.85% per annum and payments of interest only are due for the first year of the loan. The loan matures in January 2007. As of February 2, 2002, $7,951,000 of principal remained outstanding under the notes.
On October 6, 1995, Michael Anthony obtained a loan from a bank in the amount of $2,500,000. As collateral for the loan, we granted the bank a first mortgage on our corporate headquarters. The mortgage has a ten-year term and interest on the mortgage will accrue at 8% per annum. There is a balloon on payent of $1,149,000 due on October 10, 2005. In addition, the mortgage contains restrictive financial covenants. As of February 2, 2002, $1,785,000 of principal remained outstanding under the mortgage.
At February 2, 2002, the Company had a line of credit arrangement with a commercial bank which varies seasonally from $10,000,000 to $18,350,000. On October 20, 2001, the Bank temporarily increased the Company's line of credit to $24,000,000. This temporary increase was repaid on December 21, 2001. 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, at (a) the bank's prime rate, (b) the fixed rate loan (as defined in the agreement) or (c) the adjusted Eurodollar rate plus 2.5%. The line of credit expires on July 31, 2002 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, we believe that other lenders would
be willing to enter into a similar arrangement. As of February 2, 2002, $3,300,000 was outstanding under the line of credit. The amount was repaid in full on February 13, 2002.
On February 10, 1999, Michael Anthony obtained a loan in the amount of $937,500. As collateral for the loan, we granted the lender a first mortgage on one of our manufacturing facilities. The mortgage has a fifteen-year term and accrues interest at an annual rate of 7.05%. At February 2, 2002, approximately $823,000 of principal remained outstanding under the loan.
On September 16, 1999, Michael Anthony acquired two buildings which house two manufacturing facilities, located at 70 and 60 South MacQuesten Parkway, Mount Vernon, NY from MacQuesten Realty Company for a price of $2,450,000. Michael Anthony incurred $929,000 of long-term debt, which has a four-year term and accrues interest at an annual rate of 7.50%, and paid the balance with cash from its operations. At February 2, 2002, approximately $427,000 of principal remained outstanding under the loan.
During fiscal 2002, cash used from operating activities was $2,127,000. This was primarily the result of an increase in inventory and accounts receivable, offset by depreciation and amortization, and the provision for sales returns. The increase in inventory at year end was primarily due to the increase in projected sales for the months of February and March 2002.
Cash of $1,357,000 was utilized for investing purposes during fiscal 2002, primarily for the purchase of machinery and equipment.
During fiscal 2002, cash provided by financing activities totaled $1,499,000. This was primarily attributed to the net proceeds from the line of credit which were offset by payments of long-term debt.
For fiscal 2003, Michael Anthony projects capital expenditures of approximately $1,000,000, 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."
We believe that our existing lines of credit provide sufficient funding for our operations. In the event that we require additional financing during fiscal 2003, it will be necessary to fund this requirement through expanded credit facilities with existing or other lenders. We believe that additional financing can be arranged.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include the words "believe," "expect," "plans" or similar words and are based in part on Michael Anthony's reasonable expectations and are subject to a number of factors and risks, many of which are beyond Michael Anthony's control. Actual results could differ materially from those discussed under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," as a result of any of these factors:
(a) general economic conditions and their impact on the retail sales environment;
(b) fluctuations in the price of gold and other metals used to manufacture our jewelry;
(c) risks related to the concentration of our customers, particularly the operations of any of our top customers;
(d) increased competition from outside the United States where labor costs are substantially lower;
(e) variability of customer requirements and the nature of customers' commitments on projections and orders; and
(f) the extent to which we are able to retain and attract key personnel.
In light of these uncertainties and risks, there can be no assurance that the forward-looking statements in this annual report on Form 10-K will occur or continue in the future. Except for as required in periodic filings under the Securities Exchange Act of 1934, Michael Anthony undertakes no obligations to release publicly any revisions to these forward-looking statements that may reflect events or circumstances after the date of this annual report on Form 10-K or to reflect the occurrence of unanticipated events.
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), which supersedes APB Opinion No. 16, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The Company is currently reviewing the statement, but does not anticipate the new standard will have any effect on its financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date. SFAS No. 142 is effective for fiscal 2003. As of February 2, 2002, the Company had no goodwill or intangible assets with indefinite lives. Therefore, this standard has no impact on the financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount of fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company does not expect the adoption of SFAS No. 144 to have a material effect on its financial condition or results of operations.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor consideration to any purchasers of the vendor's products at any point along the distribution chain, regardless of whether the purchaser receiving the consideration is a direct customer of the vendor. Issue 01-9 is to be applied to annual or interim periods beginning after December 15, 2001. Our adoption, effective February 3, 2002 will not change the Company's presentation of cooperative advertising expenses.
ITEM 7a.
ITEM 7a. QUANTATIVE AND QUALITATIVE DISCOUNT ABOUT MARKET RISK.
The Company utilizes financial instruments, including commodity futures, forwards and options on futures, to limit its exposure to fluctuations in the price of gold. The Company does not hold or issue such instruments for trading purposes. The Company hedges its future contracts for gold against anticipated sales commitments with its customers. Gains or losses on the future contracts are deferred until settlement of the related anticipated sales to a customer. The Company's exposure to market risk related to the derivative financial instruments is limited to fluctuations in the price of gold. The Company is also exposed to credit loss in the event of nonperformance by the counterparties to the instruments; however, the risk of credit loss is not considered to be significant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 and pages through, S-1 and S-2.
PART III
ITEM 9.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained under the headings "Election of Directors" and "Compliance with Section 16 of the Exchange Act" of Michael Anthony's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION.
The information contained under the heading "Executive Compensation" of Michael Anthony's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under the heading "Beneficial Ownership of Common Stock" of Michael Anthony's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated by reference herein.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under the heading "Certain Transactions" of Michael Anthony's Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by reference. See also Item 2. "Properties."
PART IV
ITEM 13.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
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 2002 Annual Report to Stockholders.
(3) Exhibits:
REPORT ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 22, 2002 MICHAEL ANTHONY JEWELERS, INC.
By: /s/ Michael Paolercio -------------------------------------------- Michael W. Paolercio, Co-Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of Michael Anthony Jewelers, Inc. Mount Vernon, New York
We have audited the accompanying consolidated balance sheets of Michael Anthony Jewelers, Inc. and subsidiaries as of February 2, 2002 and January 27, 2001 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended February 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Michael Anthony Jewelers, Inc. and subsidiaries at February 2, 2002, and January 27, 2001 and the result of their operations and their cash flows for each of the three years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States.
BDO Seidman, LLP New York, New York March 28, 2002
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -------------------------------------------------------------------
Nature of Operations --------------------
Michael Anthony Jewelers, Inc. ("Michael Anthony" or "the Company"), is a leading designer, marketer and manufacturer of affordable fine jewelry whose customers include jewelry chain stores, discount stores, department stores, television home shopping networks, catalogue retailers, and wholesalers.
Basis of Consolidation and Presentation ---------------------------------------
The accompanying consolidated financial statements include the accounts of Michael Anthony Jewelers, Inc. and its subsidiaries, all of which are wholly-owned. All intercompany balances and transactions have been eliminated.
Inventories and Cost of Goods Sold ----------------------------------
Inventories are valued at lower of cost (first-in, first-out method) or market.
The Company satisfies a majority of its gold supply needs through gold consignment agreements with financial institutions that lease gold to the Company ("gold lenders"), whereby the gold lenders have agreed to consign fine gold to the Company (see Note 4). In accordance with the terms of the agreements, the Company has the option of repaying the gold lenders in an equivalent number of ounces of fine gold or cash based upon the then quoted market price of gold.
The principal component of cost of goods sold is the cost of the gold bullion and other raw materials used in the production of the Company's jewelry. Other components of cost of goods sold include direct costs incurred by the Company in its manufacturing operations, depreciation, freight and insurance.
Property, Plant and Equipment -----------------------------
Property, plant and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, five to fifteen years for machinery and equipment and thirty years for buildings. Leasehold improvements are amortized over the lesser of the estimated life of the asset or the lease.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
Molds and Models ----------------
For molds and models with a life greater than one year, the Company capitalizes and amortizes the costs over a three-year period. In fiscal 2002, 2001 and 2000 the Company capitalized approximately $475,000, $538,000 and $556,000, respectively.
Intangibles -----------
Intangible assets which became fully amortized in fiscal 2002 (net of accumulated amortization of $1,938,000 as of January 27, 2001), consisted of patents which were amortized on a straight-line basis over the lives of the patents, approximately 14 years and a covenant-not-to-compete which was amortized on a straight-line basis over the life of the covenant of five years.
Long-lived Assets -----------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of ", long-lived assets, consisting of property, plant and equipment, to be held, and used are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
If a review for recoverability is necessary, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Otherwise, an impairment loss is not recognized. Any impairment loss recognized is measured as excess of carrying amount of the asset over the fair value of the asset. For the years ended February 2, 2002, January 27, 2001 and January 29, 2000, there were no impairment losses.
Revenue Recognition -------------------
Revenue from sales to customers (other than consignment) is recognized at the time the merchandise is shipped. Merchandise sold under consignment arrangements between the Company and certain customers is not recognized as revenue by the Company until the
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
Revenue Recognition (Continued) -------------------
products are sold by the consignee. In certain cases, the Company accepts payment for merchandise in gold. 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. Adjustments to the Company's reserve have not been material.
Catalog Costs -------------
Catalog costs are charged to expense as incurred, the only exception being major catalog revisions. Costs capitalized are amortized over the units of catalogs shipped, up to a maximum of two years. At February 2, 2002, January 27, 2001 and January 29, 2000, in connection with three significant catalog revisions, approximately $-0-, $36,000, and $169,000, respectively, had been capitalized. Included in the statements of operations for the years ended February 2, 2002, January 27, 2001 and January 29, 2000, is amortization expense of $36,000, $110,000 and $124,000, respectively.
Shipping and Handling Costs ---------------------------
Shipping and handling costs billed to customers are recorded as revenue. The costs associated with shipping goods to customers are recorded as a selling expense. Shipping and handling expenses for the years ended February 2, 2002, January 27, 2001 and January 28, 2000 were $1,078,000, $1,051,000 and $1,030,000, respectively.
<
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
Advertising Expense -------------------
Advertising costs are expensed as incurred. Advertising costs associated with our cooperative advertising programs are accrued as the related revenues are recognized. Total advertising expenses were $4,464,000, $5,038,000 and $6,057,000 for the years ended February 2, 2002, January 27, 2001 and January 29, 2000, respectively.
Cash Equivalents ----------------
Highly liquid investments with maturities of three months or less at the date of acquisition are classified as cash equivalents.
Derivative Financial Instruments --------------------------------
On January 28, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("FAS 133") "Accounting for Derivative Instruments and Hedging Activities", as amended, and interpreted, which requires that all derivative instruments be recorded on the balance sheet at their fair value. SFAS 133 requires the Company to recognize all derivatives as either assets or liabilities on the balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. The impact of adopting FAS 133 on the Company's Statement of Income and Balance Sheet was not material.
The Company uses financial instruments, including commodity futures, forwards and options on futures, to limit its exposure to fluctuations in the price of gold. The Company does not enter such contracts for speculative purposes.
For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings in the current period. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure of variability in expected future cash flows that would be attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of Accumulated comprehensive loss (a component of stockholders' equity) and reclassified
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
Derivative Financial Instruments (Continued) --------------------------------
into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument, if any (i.e., the ineffective portion and any portion of the derivative instrument excluded from the assessment of effectiveness) is recognized in earnings in the current period.
Earnings (Loss) Per Share -------------------------
Basic EPS is computed by dividing net income (loss) by the weighted average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if options to issue common stock were exercised and converted to common stock.
The following table sets forth the computation of diluted earnings per share (in thousands):
The following options to purchase shares of common stock were outstanding during a portion of each year but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares and, therefore, would be antidilutive.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
New Accounting Pronouncements Not Yet Adopted ---------------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), which supersedes APB Opinion No. 16, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and modifies the application of the purchase accounting method. The elimination of the pooling-of-interests method is effective for transactions initiated after June 30, 2001. The remaining provisions of SFAS No. 141 will be effective for transactions accounted for using the purchase method that are completed after June 30, 2001. The Company is currently reviewing the statement, but does not anticipate the new standard will have any effect on its financial statements.
In July 2001, the FASB also issued Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS No. 142), which supersedes APB Opinion No. 17, "Intangible Assets". SFAS No. 142 eliminates the current requirement to amortize goodwill and indefinite-lived intangible assets, addresses the amortization of intangible assets with a defined life and addresses the impairment testing and recognition for goodwill and intangible assets. SFAS 142 will apply to goodwill and intangible assets arising from transactions completed before and after the Statement's effective date. SFAS No. 142 is effective for fiscal 2003. As of February 2, 2002, the Company had no goodwill or intangible assets with indefinite lives. Therefore, this standard has no impact on the financial statements.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount of fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. The Company does not expect the adoption of SFAS No. 144 to have a material effect on its financial condition or results of operations.
In November 2001, the FASB Emerging Issues Task Force released Issue 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The scope of Issue 01-9 includes vendor consideration to any purchasers of the vendor's products at any point along the distribution chain, regardless of
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------------------------------- (Continued)
New Accounting Pronouncements Not Yet Adopted (Continued) ---------------------------------------------
whether the purchaser receiving the consideration is a direct customer of the vendor. Issue 01-9 is to be applied to annual or interim periods beginning after December 15, 2001. The adoption, effective February 3, 2002, will not change the Company's presentation of cooperative advertising expenses.
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. The financial statements for the fiscal years ended February 2, 2002, January 27, 2001 and January 29, 2000 were comprised of 53, 52 and 52 weeks, respectively.
Reclassifications -----------------
Certain reclassifications were made to the prior year's financial statements to conform to the current year's presentation.
2. INVENTORIES -----------
At February 2, 2002 and January 27, 2001, inventories excluded approximately 143,000 and 117,000 ounces of gold on consignment, respectively.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT -----------------------------
Property, plant and equipment consist of the following:
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 240,000 ounces, or an aggregate consigned gold value not to exceed $79,000,000. 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.
In December 2001, Michael Anthony was notified by one of its gold lenders that it planned to discontinue its involvement in gold trading and jewelry financing. In January 2002, the Company received approval from a new gold lender, and in February 2002, began a relationship with this new lender.
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.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
4. GOLD CONSIGNMENT AGREEMENTS (Continued) ---------------------------
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. The Company was in compliance of all restrictive covenants as of February 2, 2002.
5. ACCRUED EXPENSES ----------------
Accrued expenses consist of the following:
6. LONG-TERM DEBT --------------
Long-term debt consists of the following:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
6. LONG-TERM DEBT (Continued) --------------
(a) On January 27, 1999, the Company repaid its existing long-term debt with the insurance companies. The Company obtained a loan from a new lender in the amount of $10,444,000. As collateral for the loan, the Company granted the lender a lien on the Company's machinery and equipment. The loan does not contain any restrictive financial covenants. The loan agreement contains a cross collateral/cross default clause in connection with the Company's Line of Credit Agreement (see Note. 7).
(b) The 8.0% mortgage is secured by a lien on the Company's corporate headquarters. There is a balloon payment of $1,149,000 due on October 10, 2002. Additionally, the mortgage agreement contains certain restrictive financial covenants. The Company was in compliance of all restrictive financial covenants as of February 2, 2002.
(c) On February 10, 1999, the Company obtained a loan in the amount of $937,500. As collateral for the loan, the Company granted the lender a first mortgage on one of its manufacturing facilities.
(d) On September 16, 1999 the Company exercised the option to purchase the remaining manufacturing and distribution facilities housed in the buildings located at 60 and 70 South MacQuesten Parkway, Mt. Vernon at an aggregate purchase price of $2,450,000.
Maturities of long-term debt as of February 2, 2002 are as follows (in thousands):
Year Ending January -------------------
2003 1,820 2004 1,873 2005 1,812 2006 3,042 2007 1,874 Thereafter 565 ------- $10,986 =======
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
7. LINE OF CREDIT --------------
At February 2, 2002, the Company had a credit arrangement with a commercial bank which varies seasonally from $10,000,000 to $18,350,000 (the "line of credit"). On October 20, 2001, the Bank temporarily increased the Company's line of credit to $24,000,000. This temporary increase was repaid on December 21, 2001. The line of credit is secured by a lien on 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, 2002 subject to annual renewal. Management believes that the line of credit will be renewed; however, if the current lender decides not to renew the line, the Company believes that other lenders would be willing to enter into a similar arrangement.
At February 2, 2002, there was $3,300,000 outstanding under the line of credit. The amount was repaid in full on February 13, 2002.
8. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS ----------------------------------------------------
(A) Notes and mortgage payable
The carrying amounts and fair values of the Company's financial instruments are as follow:
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.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS (Continued) -----------------------------------------------------
(B) Forward Contracts
To reduce its exposure to fluctuations in the price of gold, the Company is party to commodity futures, forwards and options on futures, which are hedged against anticipated sales commitments with its customers. Gains or losses on the future contracts are deferred until settlement of the related anticipated sales to a customer.
As of February 2, 2002, there were 17,000 ounces on forward contracts which were all related to the sale of merchandise to customers. The contracts hedge against fluctuations of gold prices. As of February 2, 2002, the fair value of these contracts, which are determined by quoted market prices and expire through June 25, 2002 was $61,000 which was recorded as accumulated comprehensive income and will be reclassed to cost of goods sold during fiscal 2003. For the year ended February 2, 2002, the Company recognized an immaterial loss relating to its future contracts.
While the Company is exposed to credit loss in the event of nonperformance by the counter parties of these contracts, the Company does not anticipate nonperformance by the counter parties. The risk of credit loss is not considered to be significant.
(C) Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade receivables and short-term cash investments. The Company places its short-term cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to a large customer base and its dispersion across geographic areas. The Company maintains an allowance for losses based on the expected collectability of all receivables.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
9. INCOME TAXES ------------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial purposes and for income tax purposes.
Income tax provision/(benefit) consists of the following:
Year Ended --------------------------------------- February 2, January 27, January 29, 2002 2001 2000 ------- ------- ------- (In thousands) Current: Federal $ 342 $ (268) $ 1,630 State and local 40 (46) 270 ------- ------- ------- 382 (314) 1,900 Deferred income tax 200 (572) (293) ------- ------- ------- Total $ 582 $ (886) $ 1,607 ======= ======= =======
The following is a reconciliation of the federal statutory rate to the effective tax rate:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
9. INCOME TAXES (Continued) ------------
The tax effects of significant items comprising the Company's deferred tax (liabilities) and assets are as follows (in thousands):
February 2, January 27, 2002 2001 ------- ------- Non-current deferred tax items: Difference between book and tax depreciation methods $ (35) $ (349) ------- -------
Current deferred tax assets: Reserves for sales returns and doubtful accounts 473 964 Other 199 222 ------- -------
672 1,186 ------- -------
Net deferred tax asset $ 637 $ 837 ======= =======
10. RELATED PARTY TRANSACTIONS --------------------------
On September 16, 1999, the Company acquired two buildings which house two manufacturing facilities, located at 70 and 60 South MacQuesten Parkway, Mount Vernon, New York from MacQuesten Realty Company ("MRC"), a partnership consisting of certain stockholders of the Company, for a price of $2,450,000.
Rent expense related to the MRC leases for the year ended January 29, 2000 amounted to $349,000, principally for manufacturing and distribution facilities.
On February 29, 2000, the Company loaned $123,000 to an officer. On December 31, 2000, the Company extended the term of the note until December 31, 2002 and increased the principal to $131,000. Interest on the unpaid principal of $131,000 accrues at the rate of 8% per annum until the maturity date of December 31, 2002.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
11. COMMITMENTS -----------
The Company's product line includes licensed goods manufactured pursuant to two or three year agreements with licensors. Royalty fees range from 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 February 2, 2002, the future guaranteed royalty commitments are $152,000 for the fiscal year ending February 1, 2003.
On December 22, 2000 the Company entered into a distribution agreement with the Almond Jewelry Group. Under the arrangement, the Company acquired the exclusive rights to market and distribute gold jewelry products manufactured by Almond to retailers in the United States. Almond will no longer directly market its gold jewelry products to retailers in the United States. The Company has also entered into a supply agreement with Almond, which will assure its customer base the continuity of a supply of high quality and innovative merchandise. In connection with the distribution agreement, Almond was issued warrants to purchase 300,000 shares of common stock at a price of $1.62 per share. The warrants were ascribed a value of $345,000 using the Black-Scholes option pricing model. The warrants are being amortized into expense as the related income is earned. As of February 2, 2002 the unamortized balance was $247,000 and is recorded in prepaid and other current assets.
12. 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. 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 income (loss) and earnings (loss) per share would have been net income/(loss) of $828,000, $(1,526,000) and $2,543,000, and $.13, $(.24) and $.38 earnings/(loss) per share for the years ended February 2, 2002, January 27, 2001 and January 29, 2000, respectively. The weighted average per share fair value of the options granted during the years ended February 2, 2002, January 27, 2001 and January 29, 2000 were estimated at $.67, $.75 and $1.11, respectively, on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
12. STOCK PLANS (Continued) -----------
February 2, January 27, January 29, 2002 2001 2000 ---- ---- ----
Expected life (years) 3 3 3 Risk-free interest rates 6.5% 6.5% 6.5% Expected volatility 60.0% 60.0% 49.7% Expected dividend yield - - -
The pro forma effect on net income and earnings per share for the year ended February 2, 2002 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.
INCENTIVE STOCK OPTION PLANS
During the year ended June 30, 1994, the Company adopted the 1993 Long-Term Incentive Plan and the 1993 Non-Employee Directors' Stock Option Plan. The Plans permit the granting of incentive stock options and non-qualified stock options to employees and non-employee directors for the purchase of up to an aggregate of 2,000,000 and 250,000 shares of common stock, respectively. The option term is for a period not to exceed five years from the date of grant.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
12. STOCK PLANS (Continued) -----------
Long-term Incentive Plan
Options exercisable at February 2, 2002 were for 271,510 shares of common stock at prices between $2.88 - $3.63 a share. At February 2, 2002, shares for future option grants totaling 1,287,980 were available under the plan.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
12. STOCK PLANS (Continued) -----------
Non-Employee Directors' Stock Option Plan -----------------------------------------
Options exercisable at February 2, 2002 for 66,850 shares of common stock at prices between $1.88 - $3.06 a share. At February 2, 2002, shares for future option grants totaling 140,000 were available under this plan.
WARRANTS AND NON-QUALIFIED OPTIONS
The Company has granted common stock purchase warrants and non-qualified options.
The changes in the number of shares under the stock purchase warrants and non-qualified options and the weighted average option price per share are as follows:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
12. STOCK PLANS (Continued) -----------
In connection with the distribution agreement with Almond, Almond was issued 300,000 shares of common stock purchase warrants. (See Note 11.)
Options outstanding and exercisable at February 2, 2002 were as follows:
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
13. RETIREMENT PLAN ---------------
The Company established a 401(k) Retirement Plan and Trust for all eligible employees. Under the terms of the plan the employee may contribute 1% to 20% of compensation. There is a partial employer matching contribution. Included in the statement of operations for the years ended February 2, 2002, January 27, 2001 and January 29, 2000 is $72,000, $70,000 and $58,000 of expense for the employer portion of the contribution.
14. SIGNIFICANT CUSTOMERS ---------------------
Sales to the Company's two largest customers were approximately 17% and 14%, 15% and 13%, and 15% and 13%, respectively, of net sales for the years ended February 2, 2002, January 27, 2001 and January 29, 2000. One customer accounted for approximately 16% of accounts receivable at February 2, 2002.
15. 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 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. On May 26, 1998, the Board of Directors authorized an increase of up to an additional 1,000,000 shares of common stock that the Company may repurchase under the Stock Repurchase Plan. During the years ended February 2, 2002, January 27, 2001 and January 29, 2000, the Company repurchased a total of 48,000, 144,000 and 494,000 shares, respectively, on the open market under the 1995 Stock Repurchase Program for an aggregate price of approximately $104,000, $293,000 and $1,938,000, respectively.
16. LEGAL PROCEEDINGS -----------------
The Company is involved in various legal claims and disputes, none of which is considered material and all of which, for the most part, are normal to the Company's business. In the opinion of management, the amount of losses that might be sustained, if any, from such claims and disputes would not have a material effect on the Company's financial statements.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES ------------------------------
In early 1999, at the decision of the compensation committee the Company adopted a Change of Control Plan for executive officers, other key employees, and Non-Employee Directors. The Plan provides for severance payments to executive officers and other key employees. The severance payments will be an amount equal to one times the individual's most recent salary and bonus. The Plan also provides for continuation of medical and dental benefits for a period of one year and automatic vesting of stock options, if permissible under the applicable stock option plan. The Non-Employee Director Plan provides for a payment of the sum of the Non-Employee Director's regular compensation at the rate in effect at the time of the change of control. These benefits are triggered upon a change of control, as defined in the plan. Individual Agreements under the Plan have been entered into with each of the executive officers, other key employees and Non-Employee Directors.
MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. Summary of Quarterly Results (Unaudited) (in thousands)
(A) The Company's net sales 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.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Michael Anthony Jewelers, Inc. Mount Vernon, New York
The audits referred to in our report dated March 28, 2002 relating to the consolidated financial statements of Michael Anthony Jewelers, Inc. and subsidiaries which is contained in Item 8 of this Form 10-K, included the audits of the financial statements schedule listed in the accompanying index for the years ended February 2, 2002 and January 27, 2001. The financial statements schedule is the responsibility of management. Our responsibility is to express an opinion on the financial statements schedule based on our audits.
In our opinion, such financial statements schedule presents fairly, in all material respects, the information set forth therein.
/s/: BDO Seidman, LLP BDO Seidman, LLP New York, New York March 28, 2002
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MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
(A) Allowances, returns and uncollectible accounts charged against the reserve, (net of collections on previously written-off accounts).
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