10-K405 1 l87818be10-k405.txt MICHAEL ANTHONY JEWELERS, INC. 10-K405 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 27, 2001 COMMISSION FILE NUMBER: 0-15230 MICHAEL ANTHONY JEWELERS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 13-2910285 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 115 SOUTH MACQUESTEN PARKWAY 10550 MOUNT VERNON, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 699-0000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK AMERICAN STOCK EXCHANGE 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. X As of April 6, 2001, there were 6,219,733 shares outstanding of Michael Anthony's common stock. The aggregate market value of common stock held by nonaffiliates at April 6, 2001 was $2,000,285. For purposes of this calculation, affiliates includes Michael Anthony's executive officers and directors. 2 DOCUMENTS INCORPORATED BY REFERENCE: Part III Portions of registrant's Definitive Proxy Statement for Annual Meeting of Stockholders for Fiscal 2001 (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 Transition Report on Form 10-K for the transition period from July 1, 1994 to January 28, 1995, (iii) registrant's Annual Report on Form 10-K for the fiscal year ended January 27, 1996, (iv) registrant's Annual Report on Form 10-K for the fiscal year ended February 1, 1997, (v) registrant's Annual Report on Form 10-K for the fiscal year ended January 31, 1998, (vi) registrant's Annual Report on Form 10-K for the fiscal year ended January 30, 1999, (vii) registrant's Current Report on Form 8-K filed on September 21, 1999, (viii) registrant's Annual Report on Form 10-K for the fiscal year ended January 29, 2000, (ix) registrant's Quarterly Report on Form 10-Q for the quarter ended April 29, 2000, (x) registrant's Quarterly Report on Form 10-Q for the quarter ended July 29, 2000, and (xi) registrant's Quarterly Report on Form 10-Q for the quarter ended October 28, 2000. 2 3 PART I 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, catalogue retailers, 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 January 27, 2001, January 29, 2000 and January 30, 1999 were comprised of 52 weeks, respectively. As used throughout this document, (a) fiscal 2001 refers to the fiscal year ended January 27, 2001, (b) fiscal 2000 refers to the fiscal year ended January 29, 2000 and (c) fiscal 1999 refers to the fiscal year ended January 30, 1999. 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 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 for resale to our customers. Through our M.A.J. manufacturing division, we manufacture gold rope, mesh and other chains and gold locks, and design gold tubing and bangle blanks used in the production of bangle bracelets and earrings. Through our M.A.E. manufacturing division, we manufacture gold, stamped and tubed earrings, pendants and certain jewelry components used by the other divisions of Michael Anthony. 3 4 The table below sets forth the approximate percentage of (a) sales and (b) kilograms shipped in fiscal years 2001, 2000 and 1999, respectively, attributable to each of Michael Anthony's product categories.
Fiscal Fiscal Fiscal 2001 2000 1999 ------------------------- ------------------------- ------------------------- % of % of % of % of Kilograms % of Kilograms % of Kilograms Sales Shipped Sales Shipped Sales Shipped ------------------------- ------------------------- ------------------------- Casted charms/rings 30 25 34 29 39 36 Chains 43 53 42 50 37 44 Stamped earrings 10 8 9 7 8 7 Watches and other items 17 14 15 14 16 13
Michael Anthony's jewelry line includes licensed products that we manufacture through licensing arrangements with, for example, Warner Bros., Inc. (licensors of Looney Tunes(R) characters), National Football League Properties, Inc., Major League Baseball Properties, Inc., NHL Enterprises, Inc., United Features Syndicate (Peanuts(R)), Cathy(R) and many nationally recognized colleges, including the University of Notre Dame and the University of Florida. Michael Anthony manufactures jewelry products, particularly charms, pendants and pins, depicting the popular logos and symbols associated with these licensors. Michael Anthony pays each of these licensors a royalty ranging from 6% to 12% on sales of the licensed products. During the fiscal year ended January 27, 2001, Michael Anthony's licensed products represented approximately 2% of our net sales. 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. Items removed from the current catalogue generally remain available on a special order basis. 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 6, 2001, our product development staff consisted of 22 full time employees. Product development expenses for molds and models for fiscal 2001 were approximately $836,000. We anticipate that we will continue to commit substantial resources to product development. 4 5 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 up to 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 2001, Michael Anthony manufactured approximately 90.3% of its products from gold bullion and other raw materials and purchased approximately 9.7% 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 2001, Michael Anthony began leasing a 7,500 square feet assembly facility in the Dominican Republic. We are also in the process of constructing a new 40,000 square feet manufacturing and assembly facility located in the Dominican Republic. The facility is used for finishing and assembly of earrings and bangle bracelets. We anticipate a completion date of April 2001 at a total cost of approximately $2,000,000 for land, building, machinery and equipment. OPEN ORDERS Orders from our retail customers typically have shipment dates that range from 24 hours to 60 days. As of April 6, 2001, the aggregate dollar value of open orders was approximately $11,000,000. We expect that substantially all of the current orders will be shipped in the next 45 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, 5 6 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 catalogue and Internet retailers 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 2001, sales to the five largest of Michael Anthony's customers totaled approximately 55.5% of total net sales. Our two largest customers were JCPenney and Home Shopping Network, accounting for approximately 15.2% and 13.2%, respectively, of net sales. Except for certain retail customers, Michael Anthony generally has no long-term contractual 6 7 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 12.2%, 11.1% and 11.4% of gross sales in each of fiscal 2001, fiscal 2000 and fiscal 1999, 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 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 7 8 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 and discount merchandisers. 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 2001, fiscal 2000 and fiscal 1999:
NET % OF SALES NET SALES ----- --------- ($ IN THOUSANDS) ---------------- Fiscal 2001 Ended January 27, 2001 First Quarter $25,700 21% Second Quarter $24,821 20% Third Quarter $41,045 33% Fourth Quarter $33,152 26% Fiscal 2000 Ended January 29, 2000 First Quarter $28,982 20% Second Quarter $25,331 17% Third Quarter $49,935 35% Fourth Quarter $40,689 28% Fiscal 1999 Ended January 30, 1999 First Quarter $30,432 22% Second Quarter $26,912 20% Third Quarter $43,758 32% Fourth Quarter $36,465 26%
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 8 9 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. SUPPLY; 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 January 27, 2001, we employed 639 persons, 408 of which were directly engaged in manufacturing and distribution operations, 117 of which were engaged in administration and sales and 114 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. 9 10 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. ACQUISITIONS 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. In March, 1999, Michael Anthony acquired certain assets, primarily molds, machinery and equipment, and inventory, of Town & Country Fine Jewelry Group, Inc. Michael Anthony paid an aggregate purchase price of $4,500,000 for these assets. In a separate transaction, Michael Anthony sold a portion of these purchased assets for $2,200,000 to Stuller Settings, Inc. of Lafayette, Louisiana. The assets sold include those associated with the Feature Ring and Bridal Divisions. 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 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 300,000 shares of common stock purchase warrants at a price of $2.00 per share. As a result of acquisitions, 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. PROPERTIES. Our manufacturing and distribution facilities are located in three adjacent buildings in Mount Vernon, New York having a total of approximately 74,000 square feet. The special real estate committee of the board of directors, comprised of our independent, outside directors, obtained an appraisal of the 50 Building, and after reviewing the appraisal and negotiation with MacQuesten Realty as to the terms of purchase, recommended the acquisition to our board of directors. On April 4, 1997, the board of directors voted unanimously, with Michael and Anthony Paolercio abstaining, to authorize the acquisition of the 50 Building, subject to (1) receipt of an updated, satisfactory appraisal and (2) Michael Anthony obtaining an exclusive, two-year option to acquire from MacQuesten Realty the remaining manufacturing facilities housed in the buildings located at 60 and 70 South MacQuesten Parkway, Mt. Vernon. 10 11 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 from its operations. At January 27, 2001, $654,000 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. 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. During fiscal 2000, Michael Anthony began leasing a 7,500 square feet assembly facility in the Dominican Republic. The facility is used for finishing and assembly of earrings and bangle bracelets. Michael Anthony, through MADOR S.A., has entered into a Real Estate Purchase Agreement and a Construction Agreement with Zona Franca San Isidro, S.A. for the construction of a 40,000 square feet assembly and manufacturing facility located in the Dominican Republic that we expect will be operational in August 2001 at a cost of approximately $2,000,000 for land, building, machinery and equipment. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our common stock is traded on the American Stock Exchange under the symbol MAJ. Our common stock began its listing on AMEX on October 25, 1991. Prior to its listing on AMEX, our common stock was traded in NASDAQ National Market System. The following table sets forth the high and low sale prices per share on AMEX for the fiscal years 2001 and 2000. FISCAL YEAR ENDED JANUARY 27, 2001 HIGH LOW ---------------------------------- ---- --- 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 FISCAL YEAR ENDED JANUARY 29, 2000 HIGH LOW ---------------------------------- ---- --- First Quarter 4 15/16 3 3/16 Second Quarter 4 3/16 3 1/2 Third Quarter 4 2 7/8 Fourth Quarter 3 1/4 2 3/4 As of April 6, 2001, there were 972 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 6, 2001, Michael Anthony had purchased a total of 2,100,400 shares on the open market for an aggregate of approximately $6,333,300, at an average price of $3.02. 12 13 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.
Jan. 27 Jan. 29, Jan. 30, Jan. 31, Feb. 1, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In thousands, except per share amounts) STATEMENT OF OPERATIONS Net sales $ 124,718 $ 144,937 $ 137,567 $ 129,949 $ 150,629 Cost of goods sold 99,983 110,096 105,870 107,182 124,041 --------- --------- --------- --------- --------- Gross profit 24,735 34,841 31,697 22,767 26,588 Selling, general and administrative expenses 24,940 28,257 25,942 25,155 21,372 --------- --------- --------- --------- --------- Operating (loss)/income (205) 6,584 5,755 (2,388) 5,216 Other(expense)/income: Interest expense/ Gold consignment fee (2,261) (2,699) (2,290) (2,827) (3,155) Other income/(expense), net 140 342 326 1,002 507 --------- --------- --------- --------- --------- (Loss)/income before extraordinary Item and income taxes (2,326) 4,227 3,791 (4,213) 2,568 Income tax (benefit)/provision (886) 1,607 1,441 (1,601) 778 --------- --------- --------- --------- --------- (Loss)/income before (1,440) 2,620 2,350 (2,612) 1,790 --------- --------- --------- --------- --------- extraordinary item Extraordinary item (net of income taxes of $ 130,000) -- -- 212 -- --------- --------- --------- --------- --------- Net (loss)/income $ (1,440) $ 2,620 $ 2,138 $ (2,612) $ 1,790 ========= ========= ========= ========= ========= (Loss)/earnings per share before extraordinary item - basic $ (0.23) $ 0.40 $ 0.30 $ (0.34) $ 0.22 ========= ========= ========= ========= ========= (Loss)/earnings per share before extraordinary item - diluted $ (0.23) $ 0.39 $ 0.30 $ (0.34) $ 0.22 ========= ========= ========= ========= ========= Extraordinary item $ -- $ -- $ (.03) $ -- $ -- ========= ========= ========= ========= ========= Weighted average number of shares - basic 6,319 6,592 7,111 7,746 8,241 Weighted average number of shares - diluted 6,319 6,702 7,111 7,746 8,263 BALANCE SHEET DATA: Working capital $ 33,231 $ 35,960 $ 39,171 $ 37,260 $ 42,042 Total assets(1) 63,335 67,914 65,037 65,644 72,749 Long-term debt and capital Lease liability 10,987 12,684 12,509 12,736 14,294 Stockholders' equity 42,681 44,044 43,298 43,389 47,042
(1) The fiscal years ended January 27, 2001, January 29, 2000, January 30, 1999, January 31, 1998 and February 1, 1997 do not include consigned inventory, which had approximate value of $30,718,000, $38,076,000, $35,096,000, $33,208,000 and $40,282,000, respectively. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Results of Operations The following table sets forth, as a percentage of net sales, certain items appearing in our Statements of Operations for the indicated fiscal years.
YEAR ENDED --------------------------------------------------------------------- JANUARY 27, JANUARY 29, JANUARY 30, JANUARY 31, 2001 2000 1999 1998 ---- ---- ---- ---- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 80.2 76.0 77.0 82.5 Selling, general and administrative expenses 20.0 19.5 18.8 19.3 Interest and gold consignment fee expense 1.8 1.9 1.7 2.2 Other income (.1) (.2) (.2) (.8) Income tax (benefit)/provision (.7) 1.1 1.0 (1.2) Extraordinary item - - .1 - Net (loss)/income (1.2) 1.8 1.6 (2.0)
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. 14 15 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. FISCAL 2000 VS. FISCAL 1999 Net sales for fiscal 2000 were approximately $144,937,000, an increase of 5.4% from net sales of approximately $137,567,000 for the comparable period in fiscal 1999. The increase in sales was primarily due to increased shipments to the retail segment of our customer base. If it were not for the lower average gold price in fiscal 2000, $283 an ounce versus last year's average of $300 an ounce, sales would have increased to $149,097,000 or 8.8% as compared to the prior fiscal period. Gross profit on sales for fiscal 2000 were approximately $34,841,000, an increase of $3,144,000 from approximately $31,697,000 for the comparable period in fiscal 1999. As a percentage of net sales, gross profit increased to 24.0% in fiscal 2000 compared to 23.0% in fiscal 1999. The increase in gross margin was attributable to a lower average gold price and a change in the customer and product mix. Selling, general and administrative expenses for fiscal 2000 were approximately $28,257,000, an increase of $2,315,000 or 8.9% from approximately $25,942,000 for the comparable period in fiscal 1999. The increase is primarily attributable to increases in (a) payroll and payroll related expenses, (b) advertising expenses and (c) product and packaging supplies. As a percentage of the net sales, as adjusted for the gold price difference discussed above of $149,097,000, selling, general and administrative expenses increased to 18.9% in fiscal 2000, from 17.7% in fiscal 1999. Interest expense and gold consignment fees for fiscal 2000, were approximately $2,699,000, an increase of $409,000 or 17.9% compared to approximately $2,290,000, for the comparable period in fiscal 1999. The increase was primarily due to the Company's higher average level of consigned inventory and higher consignment rates. For the year ended January 29, 2000, an income tax provision of $1,607,000 was recorded compared to $1,441,000 for the prior year. The effective tax rates for fiscal 2000 and fiscal 1999 were 38%. As a result of the above factors our net income for fiscal 2000 was approximately $2,620,000 compared to $2,350,000 for fiscal 1999, before an extraordinary item. Net income for fiscal 2000 was approximately $2,620,000 compared to net income of $2,138,000 for the comparable period in fiscal 1999. 15 16 FISCAL 1999 VS. FISCAL 1998 Net sales for fiscal 1999 were approximately $137,567,000, an increase of 5.9% from net sales of approximately $129,949,000 for the comparable period in fiscal 1998. The increase in sales was primarily due to increased shipments to the retail segment of our customer base. If it were not for the lower average gold price in fiscal 1999, $300 an ounce versus last year's average of $335 an ounce, sales would have increased to $146,308,000 or 13% as compared to the prior fiscal period. Gross profit for fiscal 1999 increased by approximately $8,930,000 from fiscal 1998. As a percentage of net sales, gross profit increased to 23.0% in fiscal 1999 compared to 17.5% in fiscal 1998. The increase in gross margin was attributable to a lower average gold price and in the fourth quarter of fiscal 1998, we reassessed our marketing and production strategy and decided to implement a significantly different strategy. This is a direct result of the changing order patterns of some of our major customers. We made the decision 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, our gross profit margin would have been 20.1% for fiscal 1998. Selling, general and administrative expenses for fiscal 1999 were approximately $25,942,000 an increase of $787,000 or 3% from approximately $25,155,000 for the comparable period in fiscal 1998. The increase is primarily attributable to increases in advertising expenses and product and packaging supplies which were offset in part by decreases in software implementation costs and legal costs associated with a litigation settlement in fiscal 1998. As a percentage of the net sales, as adjusted for the gold price difference discussed above of $146,308,000, selling, general and administrative expenses decreased to 17.7% in fiscal 1999, from 19.3% in fiscal 1998. 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 assets and other expenses. If it were not for this unusual charge, selling, general and administrative expenses would have been 18.4% in fiscal 1998. Other income and interest income for fiscal 1999 was approximately $326,000, a decrease of $676,000 from approximately $1,002,000 for the comparable period in fiscal 1998. The decrease was primarily due to a gain of $625,000 from our sale of an asset in fiscal 1998. Interest expense and gold consignment fees for fiscal 1999, were approximately $2,290,000, a decrease of $537,000 or 19% compared to approximately $2,827,000, for the comparable period in fiscal 1998. The decrease was primarily due to (a) Michael Anthony's lower average level of our consigned inventory, (b) lower average gold prices and (c) lower interest expense due to principal payments in January 1998 and May 1998 on Michael Anthony's long-term debt. For the year ended January 30, 1999, an income tax provision of $1,441,000, before an extraordinary item, was recorded compared to an income tax benefit of $1,601,000 for the prior year. The effective tax rates for fiscal 1999 and fiscal 1998 were 38%. 16 17 As a result of the above factors our net income, before an extraordinary item, for fiscal 1999 was approximately $2,350,000 compared to a net loss of $2,612,000 for the comparable period in fiscal 1998. Michael Anthony incurred a charge of $212,000, net of income taxes of $130,000, for an extraordinary item during fiscal 1999 related to the refinancing of its long-term debt. Net income for fiscal 1999 was approximately $2,138,000 compared to a net loss of $2,612,000 for the comparable period in fiscal 1998. 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 270,000 ounces of fine gold or (b) consigned gold with an aggregate value equal to $95,000,000. 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 January 27, 2001, Michael Anthony held approximately 116,600 ounces of gold on consignment with a market value of $30,718,000. 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 January 27, 2001, we were not in compliance with one of the covenants in the consignment agreements, but received a waiver and an amended agreement. We expect to be in compliance by the end of the first quarter of fiscal 2002. At January 27, 2001, Michael Anthony's owned gold inventory was valued at approximately $4,474,000. 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 17 18 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 January 27, 2001 there were no forward contracts or 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 1998 until January 27, 2001, the closing price of gold according to the Second London Gold Fix ranged from a low of $254.20 per ounce to a high of nearly $323.50 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. The proceeds from this loan were used to repay two series of senior secured notes with various insurance companies which had an aggregate principal amount of $10,444,444 outstanding. Those senior secured notes accrued interest at 8.61% per annum and 7.38% per annum, respectively. Costs of $342,000 associated with the old debt were written off as an extraordinary charge. As of January 27, 2001, $9,240,000 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. In addition, the mortgage contains restrictive financial covenants. At January 27, 2001, we were not in compliance with one of the covenants in the consignment agreements, but received a waiver and an amendment agreement. We expect to be in compliance by the end of the first quarter of fiscal 2002. As of January 27, 2001, $1,924,000 of principal remained outstanding under the mortgage. At January 27, 2001, the Company had an unused line of credit arrangement with a commercial bank which varies seasonally from $10,000,000 to $18,350,000. 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, 2001 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. 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. 18 19 The mortgage has a fifteen-year term and accrues interest at an annual rate of 7.05%. At January 27, 2001, approximately $865,000 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 January 27, 2001, approximately $654,000 of principal remained outstanding under the loan. During fiscal 2001, cash provided from operating activities was $6,030,000. This was primarily the result of $3,547,000 of non-cash items, mainly depreciation, and a $8,950,000 decrease in accounts receivable, offset by an increase of $4,226,000 in inventory and the net loss of $1,440,000. Cash of $2,546,000 was utilized for investing purposes during fiscal 2001, primarily for the purchase of machinery and equipment. During fiscal 2001, cash utilized in financing activities totaled $1,950,000. This was primarily attributed to the purchase of treasury stock of $293,000 and payments of long-term debt of $1,657,000. For fiscal 2002, 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 long-term debt and existing lines of credit provide sufficient funding for our operations. In the event that we require additional financing during fiscal 2002, 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; 19 20 (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 June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 133, as amended by SFAS No. 137 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. The Company has adopted SFAS No. 133 as of January 28, 2001. The adoption of SFAS No. 133 did not have a material impact on future operating results or financial statement disclosures. 20 21 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. At January 27, 2001, there were no forward contracts outstanding. 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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 and pages F-1 through F-25, S-1 and S-2. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On September 21, 1999, Michael Anthony filed a Form 8-K to report a change in certifying accountants with the firm of Deloitte & Touche, LLP being replaced by BDO Seidman, LLP effective September 15, 1999. During the Company's two most recent fiscal years and subsequent interim principle periods, there were no disagreements with Deloitte & Touche LLP, on any matter of accounting or practices, financial statement disclosures or auditing scope or procedure. 21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained under the headings "Election of Directors" and "Compliance with Section 16 of the Exchange Act" of Michael Anthony's Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information contained under the heading "Executive Compensation" of Michael Anthony's Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained under the heading "Beneficial Ownership of Common Stock" of Michael Anthony's Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information contained under the heading "Certain Transactions" of Michael Anthony's Proxy Statement for the 2001 Annual Meeting of Stockholders is incorporated herein by reference. See also Item 2. "Properties." 22 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K. (a) The following documents are filed as a part of this Report: PAGE ---- (1) Financial Statements: Independent Accountants' Report F-1 Independent Auditors' Report F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-8 (2) Financial Statement Schedule: Independent Accountants' Report on Schedule II S-1 Schedule II Valuation and Qualifying Accounts S-2 All other schedules are omitted as the required information is inapplicable or is presented in the consolidated financial statements or related notes. The financial statement schedule should be read in conjunction with the financial statements in the 2001 Annual Report to Stockholders. (3) Exhibits:
Exhibit No. Description Page No. ------- ----------- -------- 3.1 Certificate of Incorporation of Registrant, as amended Incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company's Registration Statement on Form S3 (File No. 3371308) (the "1993 Registration Statement") 3.1.1 Certificate of Merger of Michael Anthony Jewelers, Inc. Incorporated by reference to Exhibit 3.1.1 of (New York) and Michael Anthony Jewelers, Inc. (Delaware) the Company's Annual Report on Form 10K for the fiscal year ended June 30, 1993 (the "1993 Form 10-K")
23 24 3.2 Amended and Restated ByLaws of Registrant Incorporated by reference to 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 S-1 (File No. 338289) (the "1986 Registration Statement") 4.2 Form of Common Stock Purchase Warrant Certificate Incorporated by reference to Exhibit 3.4 to the 1986 Registration Statement 10.1 Consignment Agreement dated as of August 20, 1993 between Incorporated by reference to Exhibit 10.40 of the Registrant and Fleet Precious Metals Inc. the 1993 Form 10-K 10.2 Security Agreement dated as of August 20, 1993 among the Incorporated by reference to Exhibit 10.39 of Registrant and Fleet Precious Metals Inc. the 1993 Form 10-K 10.3 Amended and Restated Consignment Agreement dated as of Incorporated by reference to Exhibit 10.44 to August 20, 1993 between the Registrant and ABN AMRO Bank the 1993 Form 10-K N.V., New York Branch 10.4 First Amendment to 1993 Long-term Incentive Plan of the Incorporated by reference to Exhibit 10.48 to Registrant dated as of September 21, 1993 the 1993 Form 10-K 10.5 Consignment Agreement dated as of January 31, 1994 Incorporated by reference to Exhibit 10.46 (effective as of May 16, 1994) between the Registrant and to the Company's Annual report on Form 10K Credit Suisse, New York Branch for the fiscal year ended June 30, 1994 (the "1994 Form 10-K") 10.6 Loan Agreement dated October 6, 1995 between First Incorporated by reference to Exhibit 10.1 to Fidelity Bank, National Association ("First Fidelity") the Company's Quarterly Report on Form 10Q and Registrant for the quarter ended October 28,1995 (the "October 1995 Form 10-Q") 10.7 Mortgage Note in principal amount of $2,500,000 dated Incorporated by reference to Exhibit 10.2 to October 6, 1995 issued by Registrant in favor of First the October 1995 Form 10-Q Fidelity
24 25 10.8 Mortgage and Security Agreement dated October 6,1995 by Incorporated by reference to Exhibit 10.3 to Registrant for the benefit of First Fidelity the October 1995 Form 10-Q 10.9 Fourth Amendment to Amended and Restated Security Incorporated by reference to Exhibit 10.5 to Agreement dated October 20, 1995 among Registrant and the October 1995 Form 10-Q Registrant's gold lenders 10.10 Fifth Amendment to Amended and Restated Security Incorporated by reference to Exhibit 10.6 to Agreement dated October 20, 1995 among Registrant and the October 1995 Form 10-Q Registrant's gold lenders 10.11 Fifth Amendment to Assignment of Trademarks and Service Incorporated by reference to Exhibit 10.7 to Marks dated October 20, 1995 among Registrant and the October 1995 Form 10-Q Registrant's gold lenders 10.12 Deferred Compensation Plan dated as of March 4, 1996 Incorporated by reference to Exhibit 10.59 to the 1996 Form 10-K 10.13 Amendment to the 1993 Long Term Incentive Plan Incorporated by reference to 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") 10.14 Amendment to the NonEmployees Directors' Plan Incorporated by reference to Exhibit 10.2 to the Company's October 1996 Form 10-Q 10.15 Severance and Termination Agreement dated October 22, Incorporated by reference to Exhibit 10 to 1997 between Registrant and Mark Hanna the Company's Quarterly Report on Form 10-Q for the quarter ended November 1, 1997 10.16 1993 Long-term Incentive Plan of the Registrant Filed as Exhibit 10.54 to the 1998 Form 10-K 10.17 1993 NonEmployee Directors' Stock Option Plan of the Filed as Exhibit 10.55 to the 1998 Form 10-K Registrant 10.18 Loan and Security Agreement, dated January 29, 1999, by Filed as Exhibit 10.33 to the 1999 Form 10-K and between the Registrant and General Electric Capital Business Asset Funding Corporation
25 26 10.19 Amendment No. One to Loan and Security Agreement, dated Filed as Exhibit 10.34 to the 1999 Form 10-K January 29, 1999, by and between the Registrant and General Electric Capital Business Asset Funding Corporation 10.20 Term Promissory Note, dated January 29, 1999, of the Filed as Exhibit 10.35 to the 1999 Form 10-K Registrant in favor of General Electric Capital Business Asset Funding Corporation 10.21 Asset Purchase Agreement, dated March 3, 1999, by and Filed as Exhibit 10.36 to the 1999 Form 10-K between the Registrant and Town & Country Fine Jewelry Group, Inc. 10.22 Mortgage, Security Agreement and Assignment of Leases and Filed as Exhibit 10.37 to the 1999 Form 10-K Rents dated February 10, 1999, by and between Registrant and General Electric Capital Business Asset Funding Corporation 10.23 Promissory Note dated February 10, 1999 by and between Filed as Exhibit 10.38 to the 1999 Form 10-K the Registrant and General Electric Capital Business Asset Funding Corporation 10.24 Consignment Agreement dated as of November 29,1999 Filed as Exhibit 10.40 to the 2000 Form 10-K between Registrant and Mitsui & Co. (U.S.A.), Inc. 10.25 Amended and Restated Intercreditor Agreement dated, Filed as Exhibit 10.41 to the 2000 Form 10-K January 28, 1999 among Registrant and Registrant's gold lenders 10.26 First Amendment to Amended and Restated Intercreditor Filed as Exhibit 10.42 to the 2000 Form 10-K Agreement, dated March 1,2000, among Registrant and Registrant's gold lenders 10.27 Second Amendment and Agreement to Amended and Restated Filed as Exhibit 10.43 to the 2000 Form 10-K Collateral Sharing Agreement, dated March 1,2000, among Registrant and Registrant's gold lenders 10.28 Sixth Amendment to Amended and Restated Security Filed as Exhibit 10.44 to the 2000 Form 10-K Agreement dated March 1, 2000, among Registrant and Registrant's gold lenders
26 27 10.29 Ninth Amendment and Agreement to Consignment Agreement Filed as Exhibit 10.45 to the 2000 Form 10-K dated March 1, 2000, between Registrant and Fleet Precious Metals Inc. among Registrant and Registrant's gold lenders 10.30 1999 Employee Change of Control Plan of the Registrant Filed as Exhibit 10.46 to the 2000 Form 10-K 10.31 1999 Non-Employee Director Change of Control Plan of the Filed as Exhibit 10.47 to the 2000 Form 10-K Registrant 10.32 Contract of Sale dated September 16, 1999 between Filed as Exhibit 10.48 to the 2000 Form 10-K Registrant and MacQuesten Realty Company 10.33 Assumption Agreement dated September16, 1999 among Filed as Exhibit 10.50 to the 2000 Form 10-K Registrant, MacQuesten Realty Company, and First Union National Bank, successor in interest to First Fidelity 10.34 Registrant's Form 8-K filed on September 21, 1999 Filed as Exhibit 10.51 to the 2000 Form 10-K 10.35 Bill of Sale dated October 28, 1999 between MADOR, S.A. Filed as Exhibit 10.52 to the 2000 Form 10-K and Zona Franca San Isidro S.A. 10.36 Construction Agreement dated October 28, 1999 between Filed as Exhibit 10.53 to the 2000 Form 10-K MADOR, S.A. and Zona Franca San Isidro, S.A. 10.37 Promissory Note dated August 16, 2000 issued by Filed as an Exhibit to this Form 10-K Registrant to the Chase Manhattan Bank 21 Subsidiaries of the Registrant Filed as an Exhibit to this Form 10-K 23 Consent of BDO Seidman, LLP Filed as an Exhibit to this Form 10-K 23.1 Consent of Deloitte & Touche, LLP Filed as an Exhibit to this Form 10-K
REPORT ON FORM 8-K None 27 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 26, 2001 MICHAEL ANTHONY JEWELERS, INC. By: /s/ Michael Paolercio ----------------------------------------- Michael W. Paolercio, Co-Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MICHAEL PAOLERCIO Co-Chairman of the Board April 26, 2001 ----------------------------------- and Chief Executive Officer (Michael W. Paolercio) (Principal Executive Officer) /s/ ANTHONY PAOLERCIO Co-Chairman of the Board April 26, 2001 ----------------------------------- and President (Anthony Paolercio, Jr.) /s/ ALLAN CORN Chief Financial Officer, April 26, 2001 ----------------------------------- Senior Vice President (Allan Corn) and Director (Principal Accounting Officer) /s/ MICHAEL A. PAOLERCIO Senior Vice President, April 26, 2001 ----------------------------------- Treasurer and Director (Michael Anthony Paolercio) /s/ MICHAEL WAGER Director April 26, 2001 ----------------------------------- (Michael Wager) /s/ DAVID HARRIS Director April 26, 2001 ----------------------------------- (David Harris) /s/ DONALD MILLER Director April 26, 2001 ----------------------------------- (Donald Miller) /s/ NATHAN LIGHT Director April 26, 2001 ----------------------------------- (Nathan Light) /s/ BARRY SCHECKNER Director April 26, 2001 ----------------------------------- (Barry Scheckner)
28 29 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 January 27, 2001 and January 29, 2000 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. 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 January 27, 2001, and January 29, 2000 and the result of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. BDO Seidman New York, New York April 6, 2001 F-1 30 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Michael Anthony Jewelers, Inc. Mount Vernon, New York We have audited the accompanying consolidated statements of operations, changes in stockholders' equity and cash flows of Michael Anthony Jewelers, Inc. and subsidiaries for the year ended January 30, 1999. Our audit also included the financial statement schedule listed in the Index at Item 14(a) (2) for the year ended January 30, 1999. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the results of operations and cash flows of Michael Anthony Jewelers, Inc. for the year ended January 30, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule for the year ended January 30, 1999 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. Deloitte & Touche LLP Parsippany, New Jersey April 9, 1999 (April 14, 1999 as to the Purchase Agreement with Eurospark Industries, Inc.) F-2 31 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS January 27, January 29, ------ 2001 2000 ----------- ----------- CURRENT ASSETS: Cash and equivalents $ 4,114 $ 2,580 Accounts receivable: Trade (less allowances of $2,536 and $1,007, respectively) 15,105 25,521 Other 224 287 Inventories 20,496 16,270 Prepaid expenses and other current assets 1,424 1,389 Deferred taxes 1,186 682 -------- -------- Total current assets 42,549 46,729 PROPERTY, PLANT AND EQUIPMENT - net 19,675 20,614 INTANGIBLES - net 62 169 OTHER ASSETS 1,049 402 -------- -------- $ 63,335 $ 67,914 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable - trade $ 3,302 $ 2,198 Current portion of long-term debt 1,696 1,580 Current portion of capital leases -- 76 Taxes payable 529 1,974 Accrued expenses 3,791 4,941 -------- -------- Total current liabilities 9,318 10,769 -------- -------- LONG-TERM DEBT 10,987 12,684 -------- -------- DEFERRED TAXES 349 417 -------- -------- 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; 8,317,000 and 8,308,000 shares issued and outstanding as of January 27, 2001, and January 29, 2000, respectively 8 8 Additional paid-in capital 32,196 31,826 Retained earnings 16,802 18,242 Treasury stock, 2,095,000 and 1,951,000 shares as of January 27, 2001 and January 29, 2000, respectively (6,325) (6,032) -------- -------- Total stockholders' equity 42,681 44,044 -------- -------- $ 63,335 $ 67,914 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 32 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED ------------------------------------------------ January 27 January 29, January 30, 2001 2000 1999 ----------- ----------- ----------- NET SALES $ 124,718 $ 144,937 $ 137,567 COST OF GOODS SOLD 99,983 110,096 105,870 --------- --------- --------- GROSS PROFIT ON SALES 24,735 34,841 31,697 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 24,940 28,257 25,942 --------- --------- --------- OPERATING (LOSS)/INCOME (205) 6,584 5,755 --------- --------- --------- OTHER INCOME (EXPENSES): Gold consignment fee (1,039) (1,483) (1,106) Interest expense (1,222) (1,216) (1,184) Interest income 139 175 245 Other income 1 167 81 --------- --------- --------- TOTAL OTHER EXPENSES (2,121) (2,357) (1,964) --------- --------- --------- (LOSS)/INCOME BEFORE EXTRAORDINARY ITEM AND INCOME TAXES (2,326) 4,227 3,791 INCOME TAX (BENEFIT)/PROVISION (886) 1,607 1,441 --------- --------- --------- (LOSS)/INCOME BEFORE EXTRAORDINARY ITEM (1,440) 2,620 2,350 --------- --------- --------- EXTRAORDINARY ITEM - REFINANCING OF DEBT (net of income taxes of $130,000) - - 212 --------- --------- --------- NET (LOSS)/INCOME $ (1,440) $ 2,620 $ 2,138 ========= ========= ========= (LOSS)/EARNINGS PER SHARE - Basic (Loss)/income before extraordinary item $ (.23) $ .40 $ .33 Extraordinary item - - (.03) --------- --------- --------- NET (LOSS)/EARNINGS PER SHARE - Basic $ (.23) $ .40 $ .30 ========= ========= ========= (LOSS)/EARNINGS PER SHARE - Diluted (Loss)/income before extraordinary item $ (.23) $ .39 $ .33 Extraordinary item - - (.03) --------- --------- --------- NET (LOSS)/EARNINGS PER SHARE - Diluted $ (.23) $ .39 $ .30 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES - Basic 6,319 6,592 7,111 ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES - Diluted 6,319 6,702 7,111 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 33 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 31, 1998 8,282 8 31,747 13,484 (578) (1,850) 43,389 Purchase of treasury stock - - - - (879) (2,244) (2,244) Issuance of stock 6 - 15 - - - 15 Net income - - - 2,138 - - 2,138 -------- -------- -------- -------- -------- -------- -------- Balance - January 30, 1999 8,288 8 31,762 15,622 (1,457) (4,094) 43,298 Purchase of treasury stock - - - - (494) (1,938) (1,938) Proceeds from exercise of stock options 15 - 44 - - - 44 Issuance of stock 5 - 20 - - - 20 Net income - - - 2,620 - - 2,620 -------- -------- -------- -------- -------- -------- -------- Balance - January 29, 2000 8,308 $ 8 $ 31,826 $ 18,242 (1,951) $ (6,032) $ 44,044 Purchase of treasury stock - - - - (144) (293) (293) Issuance of stock 9 - 25 - - - 25 Issuance of warrants - - 345 - - - 345 -------- -------- -------- -------- -------- -------- -------- Net loss - - - (1,440) - - (1,440) -------- -------- -------- -------- -------- -------- -------- Balance - January 27, 2001 8,317 $ 8 $ 32,196 $ 16,802 (2,095) $ (6,325) $ 42,681 ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-5 34 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended ------------------------------------------ January 27 January 29, January 30, 2001 2000 1999 ---------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)/income $ (1,440) $ 2,620 $ 2,138 Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization 3,547 4,091 3,535 Provision for doubtful accounts 79 60 212 Provision for sales returns 1,450 (110) 106 Deferred tax (benefit)/provision (572) (293) (70) Loss/(gain) on disposal of property, plant and equipment 45 (45) 7 Provision for stock compensation 25 20 15 (Increase)/decrease in operating assets: Accounts receivable 8,950 3,639 (7,441) Inventories (4,226) (2,058) (1,299) Prepaid expenses and other current assets 137 8 1,910 Other assets (474) 210 480 Increase/(decrease) in operating liabilities: Accounts payable 1,104 (610) (62) Taxes payable (1,445) 1,162 -- Accrued expenses (1,150) 789 579 -------- -------- -------- Net cash provided by operating activities 6,030 9,483 110 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (2,553) (6,642) (2,221) Proceeds from sale of equipment 7 175 15 -------- -------- -------- Net cash used in investing activities (2,546) (6,467) (2,206) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt and capital lease liabilities (1,657) (404) (1,446) Proceeds from long-term debt -- 901 -- Proceeds from line of credit 17,100 16,400 10,500 Payments to line of credit (17,100) (16,400) (10,500) Proceeds from exercise of stock options -- 44 -- Purchase of treasury stock (293) (1,938) (2,244) -------- -------- -------- Net cash used in financing activities (1,950) (1,397) (3,690) -------- -------- -------- NET INCREASE/(DECREASE) IN CASH 1,534 1,619 (5,786) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 2,580 961 6,747 -------- -------- -------- CASH AND EQUIVALENTS AT END OF YEAR $ 4,114 $ 2,580 $ 961 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 35 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Year Ended ----------------------------------------- January 27, January 29, January 30, 2001 2000 1999 ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Investing: Mortgage incurred with purchase of building - $ 929 - Issuance of warrants $ 345 - - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest and gold consignment fees $2,399 $2,959 $2,592 Income taxes $1,441 $ 804 $ 835
The accompanying notes are an integral part of these consolidated financial statements. F-7 36 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. ("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-8 37 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 2001, 2000 and 1999 the Company capitalized approximately $538,000, $556,000 and $446,000, respectively. INTANGIBLES Intangible assets (net of accumulated amortization of $1,937,000 and $1,830,000 as of January 27, 2001 and January 29, 2000, 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. 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 and certain identifiable intangibles (excluding financial instruments and deferred tax assets) 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 January 27, 2001, January 29, 2000 and January 30, 1999, there were no impairment losses. REVENUE RECOGNITION Revenue from sales to customers (other than consignment) is recognized at the time the merchandise is shipped. Merchandise sold under consignment arrangements between the Company and certain customers is not recognized as revenue by the Company until the F-9 38 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. 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 27, 2001, January 29, 2000 and January 30, 1999, in connection with three significant catalog revisions, approximately $36,000, $169,000 and $52,000, respectively, had been capitalized. Included in the statements of operations for the years ended January 27, 2001, January 29, 2000 and January 30, 1999, is amortization expense of $110,000, $124,000 and $158,000, 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. As a result of adopting EITF 00-10 sales increased and selling expenses decreased by approximately $400,000 in each of the years ended January 27, 2001, January 29, 2000 and January 30, 1999. Shipping expenses for the years ended January 27, 2001, January 29, 2000 and January 30, 1999 were $669,000, $630,000 and $707,000, respectively. CASH EQUIVALENTS Highly liquid investments with maturities of three months or less at the date of acquisition are classified as cash equivalents. F-10 39 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 27, 2001, there were no forward contracts and options on futures outstanding. 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 (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. Options and warrants outstanding were not materially dilutive for each of the three years in the period ended January 27, 2001. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be measured at fair value and recognized in the balance sheet as either assets or liabilities. The Company has adopted SFAS No. 133 as of January 28, 2001. The adoption of SFAS No. 133 did not have a material impact on future opening results or financial statement disclosure. F-11 40 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 January 27, 2001, January 29, 2000 and January 30, 1999 were comprised of 52 weeks, respectively. RECLASSIFICATIONS Certain reclassifications were made to the prior year's financial statements to conform to the current year's presentation. F-12 41 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 2. INVENTORIES Inventories consist of: January 27, January 29, 2001 2000 ---------- ----------- (In thousands) Finished goods $32,837 $34,908 Work in process 14,636 14,012 Raw materials 3,741 5,426 ------- ------- 51,214 54,346 Less: Consigned gold 30,718 38,076 ------- ------- $20,496 $16,270 ======= ======= At January 27, 2001 and January 29, 2000, inventories excluded approximately 117,000 and 133,000 ounces of gold on consignment, respectively. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following: January 27, January 29, 2001 2000 ----------- ----------- (In thousands) Machinery and equipment $41,351 $39,130 Building and building improvements 11,381 11,137 Land 2,192 2,192 ------- ------- 54,924 52,459 Less: Accumulated depreciation and amortization 35,249 31,845 ------- ------- $19,675 $20,614 ======= ======= Included in property, plant and equipment as of January 27, 2001, are capitalized leases with a carrying value of $83,000. Total capitalized lease amortization expense was $191,000, $207,000 and $215,000 for the years ended January 27, 2001, January 29,2000 and January 30, 1999. F-13 42 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 270,000 ounces, or an aggregate consigned gold value not to exceed $95,000,000. 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. 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 27, 2001, the Company was not in compliance with one of the covenants. The Company expects to be in compliance by the end of the first quarter of fiscal 2002. The Company's owned gold inventory was valued at approximately $4,474,000. 5. ACCRUED EXPENSES Accrued expenses consist of the following:
January 27, January 29, 2001 2000 ----------- ----------- (In thousands) Accrued advertising and royalty expenses $2,115 $2,508 Accrued payroll expenses 845 1,585 Customer deposits payable 331 252 Accrued interest 179 57 Other accrued expenses 321 539 ------ ------ $3,791 $4,941 ====== ======
F-14 43 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 6. LONG-TERM DEBT Long-term debt consists of the following:
January 27, January 29, 2001 2000 ----------- ----------- (In Thousands) Note payable - interest at 6.85%, interest only of $60,000 payable monthly for first year, interest and principal of $157,000 payable monthly over a seven-year term through January 2007. (a) $ 9,240 $10,444 Mortgage payable - interest at 8%, interest and principal of $24,000 payable monthly over a ten-year term through October 2005. (b) 1,924 2,053 Note payable - interest at 7.05%, interest and principal of $8,500 payable monthly over a fifteen year term through March 2014. (c) 865 904 Mortgage payable - interest at 7.5%, interest and principal of $22,000 payable monthly over a four-year term through September 2003. (d) 654 863 ------- ------- 12,683 14,264 Less: current portion 1,696 1,580 ------- ------- $10,987 $12,684 ======= =======
(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 has an eight-year term and accrues interest at 6.85%. 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). The proceeds from the loan were used to repay the notes with the insurance companies. The Company incurred $10,000 of costs which are being amortized over the term of the new loan. Costs of $342,000 associated with the old debt were written off as an extraordinary charge. (b) The 8.0% mortgage is secured by a lien on the Company's corporate headquarters. Additionally, the mortgage agreement contains certain restrictive financial covenants. F-15 44 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 6. LONG-TERM DEBT (Continued) (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. The mortgage has a fifteen-year term and accrues interest at an annual rate of 7.05%. At January 27, 2001, $865,000 of principal remained outstanding under the loan. (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. The Company incurred $929,000 of long-term debt, which has a four-year term and accrues interest at an annual rate of 7.50%. At January 27, 2001, $654,000 of principal remained outstanding under the loan. Maturities of long-term debt as of January 27, 2001 are as follows (in thousands): YEAR ENDING JANUARY 2002 $ 1,696 2003 1,821 2004 1,873 2005 1,812 2006 3,162 Thereafter 2,319 ------- $12,683 ======= 7. LINE OF CREDIT At January 27, 2001, the Company had an unused line of credit arrangement with a commercial bank which varies seasonally from $10,000,000 to $18,350,000 (the "line of credit"). The line of credit is secured by a lien on certain assets of the Company, including accounts receivable and inventory. 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, 2001 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-16 45 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments are as follow: January 27, 2001 January 29, 2000 ---------------- ---------------- Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- (In thousands) Notes with lenders: 6.85% note payable $ 9,240 $ 9,496 $10,444 $10,078 8.0% mortgage payable 1,924 2,040 2,053 2,053 7.05% note payable 865 891 904 852 7.5% mortgage payable 654 654 863 863 The fair value of the 7.5% mortgage payable was assumed to reasonably approximate the carrying amount since the debt was recently issued. The fair value of the mortgage payable was based on current rates available to the Company for debt with similar remaining maturities. At January 29, 2000 the fair value of the 8.0% and 7.5% mortgages payable were assumed to reasonably approximate the carrying amount since the debt was recently issued. 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 carrying amounts of assets and liabilities for financial purposes and for income tax purposes. Income tax provision/(benefit) consists of the following: Year Ended ------------------------------------------- January 27, January 29, January 30, 2001 2000 1999 ---- ---- (In thousands) Current: Federal $ (268) $ 1,630 $ 1,406 State and local (46) 270 105 ------- ------- ------- (314) 1,900 1,511 Deferred income tax (572) (293) (70) ------- ------- ------- Total $ (886) $ 1,607 $ 1,441 ======= ======= ======= F-17 46 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 9. INCOME TAXES (Continued) The following is a reconciliation of the federal statutory rate to the effective tax rate:
Year Ended ----------------------------------------------- January 27, January 29, January 30, 2001 2000 1999 ----------- ----------- ----------- Statutory tax (benefit) rate (34.0)% 34.0% 34.0% State and local taxes (benefit), net of federal benefit (3.0) 3.0 3.0 Other (1.0) 1.0 1.0 ------ ---- ---- Statutory tax (benefit) rate (38.0)% 38.0% 38.0% ====== ==== ====
The tax effects of significant items comprising the Company's deferred tax (liabilities) and assets are as follows (in thousands): January 27, January 29, 2001 2000 ----------- ----------- Non-current deferred tax items: Difference between book and tax depreciation methods $ (349) $ (417) ------- ------- Current deferred tax assets: Reserves for sales returns and doubtful accounts 964 383 Inventory reserve 95 222 Other 127 77 ------- ------- 1,186 682 ------- ------- Net deferred tax asset $ 837 $ 265 ======= ======= F-18 47 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 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 years ended January 27, 2001, January 29, 2000 and January 30, 1999 amounted to $-0-, $349,000 and $504,000, respectively, principally for manufacturing and distribution facilities. The Company 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 January 27, 2001, $654,000 of principal remained outstanding under the loan. 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, 2001 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, 2001. 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 January 27, 2001, the future guaranteed royalty commitments are as follows: Year Ending Guaranteed January Royalty ------- Commitments ----------- (in thousands) 2002 $233 2003 48 ---- $281 ==== F-19 48 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 11. COMMITMENTS (Continued) The Company, through MADOR S.A., has entered into a Real Estate Purchase Agreement and a Construction Agreement with Zona Franca San Isidro, S.A. for the construction of a 40,000 square feet assembly and manufacturing facility located in the Dominican Republic that is expected to be operational in August 2001 at a cost of approximately $2,000,000 for land, building and machinery. 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 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 300,000 shares of common stock purchase warrants at a price of $2.00 per share. The warrants were ascribed a value of $345,000 using the Black-Scholes option pricing model. The Company recorded $172,000 of the warrants value in prepaid expenses and other current assets and the remaining balance in other assets. The warrants will be amortized in to expense as the related income is earned. 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 (loss)/income of $(1,541,000), $2,472,000, and $2,074,000, and $(.24), $.37, and $.29 (loss)/earnings per share for the years ended January 27, 2001, January 29, 2000 and January 30, 1999, respectively. The weighted average per share fair value of the options granted during the years ended January 27, 2001, January 29, 2000 and January 30, 1999 were estimated at $.77, $1.00, and $.84, respectively, on the dates of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: F-20 49 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 12. STOCK PLANS (Continued)
January 27, January 29, January 30, 2001 2000 1999 ---- ---- ---- Expected life (years) 3 3 2 Risk-free interest rates 6.5% 6.5% 5.5% Expected volatility 60.0% 49.7% 44.4% Expected dividend yield - - -
The pro forma effect on net income and earnings per share for the year ended January 27, 2001 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 During the year ended June 30, 1994, the Company adopted the 1993 Long-Term Incentive Plan and the 1993 Non-Employee Directors' Stock Option Plan. The Plans permit the granting of incentive stock options and non-qualified stock options to employees and non-employee directors for the purchase of up to an aggregate of 2,000,000 and 250,000 shares of common stock, respectively. The option term is for a period not to exceed five years from the date of grant. F-21 50 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 12. STOCK PLANS (Continued) LONG-TERM INCENTIVE PLAN
Weighted Average Exercise Shares Option Price Price ------ ------------ -------- Outstanding at January 31, 1998 688,500 $3.60 $2.13-$7.75 Lapsed (190,000) $4.14 $2.94-$7.75 Granted - Additions 150,000 $3.13 $3.13 -------- Outstanding at January 30, 1999 648,500 $3.33 $2.13-$6.13 Lapsed (86,000) $5.35 $2.75-$6.13 Exercised (15,000) $2.94 $2.94 Granted 288,000 $3.51 $3.13-$3.63 -------- Outstanding at January 29, 2000 835,500 $3.19 $2.13-$3.63 -------- Lapsed (433,440) $3.15 $2.13-$3.63 Granted - $ - $ - -------- Outstanding at January 27, 2001 402,060 $3.01 $2.88-$3.63 ========
Options exercisable at January 27, 2001 were for 203,560 shares of common stock at prices between $2.88 - $3.63 a share. At January 27, 2001, shares for future option grants totaling 1,552,940 were available under the plan. F-22 51 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 12. STOCK PLANS (Continued) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Weighted Average Exercise Shares Option Price Price ------ ------------ -------- Outstanding at January 31, 1998 60,000 $2.69 $2.63 - $5.00 Lapsed (10,000) $4.19 $4.19 Granted 15,000 $2.75 $2.56 - $3.00 ------- Outstanding at January 30, 1999 65,000 $3.08 $2.39 - $5.00 Lapsed (5,000) $5.00 $5.00 Granted 15,000 $3.27 $2.88-$3.88 ------- Outstanding at January 29, 2000 75,000 $3.03 $2.56-$3.88 Lapsed (15,000) $3.02 $2.63-$3.50 Granted 35,000 $2.49 $1.88-$2.94 ------- Outstanding at January 27, 2001 95,000 $2.81 $1.88-$3.06 =======
Options exercisable at January 27, 2001 for 50,200 shares of common stock at prices between $1.88 - $3.06 a share. At January 27, 2001, shares for future option grants totaling 155,000 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: F-23 52 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 12. STOCK PLANS (Continued) NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Weighted Average Exercise Shares Option Price Price ------ ------------ -------- Outstanding at January 31, 1998 60,000 $ 2.69 $2.63 - $5.00 Lapsed (10,000) $ 4.19 $4.19 Granted 15,000 $ 2.75 $2.56 - $3.00 ------- Outstanding at January 30, 1999 65,000 $ 3.08 $2.39 - $5.00 Lapsed (5,000) $ 5.00 $5.00 Granted 15,000 $ 3.27 $2.88-$3.88 ------- Outstanding at January 29, 2000 75,000 $ 3.03 $2.56-$3.88 Lapsed (15,000) $ 3.02 $2.63-$3.50 Granted 35,000 $ 2.49 $1.88-$2.94 ------- Outstanding at January 27, 2001 95,000 $ 2.81 $1.88-$3.06 =======
Options exercisable at January 27, 2001 for 50,200 shares of common stock at prices between $1.88 - $3.06 a share. At January 27, 2001, shares for future option grants totaling 155,000 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: F-24 53 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 12. STOCK PLANS (Continued)
Weighted Average Exercise Shares Option Price Price ------ ------------ -------- Outstanding at January 31, 1998 121,000 $3.58 $3.00 - $7.50 Lapsed (25,000) $5.82 $3.25 - $7.50 -------- Outstanding at January 30, 1999 96,000 $3.00 $3.00 Granted - $ - $ - ------- Outstanding and exercisable at January 29, 2000 96,000 $3.00 $3.00 Issued 300,000 $2.00 $2.00 Lapsed (96,000) $3.00 $3.00 ------- Outstanding at January 27, 2001 300,000 $2.00 $2.00 =======
In connection with the distribution agreement with Almond, Almond was issued 300,000 shares of common stock purchase warrants. (See Note 11.)
OUTSTANDING EXERCISABLE -------------------------------------------- --------------------------- Weighted Average Remaining Weighted Weighted Years of Average Number of Average Range of Exercise Number of Contractual Exercise Options Exercise Prices Options Life Price Price -------------------- ------------------------------------------- --------------------------- $1.88 - $2.75 340,000 3.9 $2.07 13,500 $2.78 $2.81 - $3.06 159,000 1.9 $2.94 144,200 $2.94 $3.13 - $3.88 298,060 3.1 $3.42 96,060 $3.47 ------------------------------------------- --------------------------- In Total 797,060 3.1 $2.75 253,760 $3.13 ------------------------------------------- ---------------------------
F-25 54 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 January 27, 2001, January 29, 2000 and January 30, 1999 is $70,000, $58,000 and $69,000 of expense for the employer portion of the contribution. 14. SIGNIFICANT CUSTOMERS Sales to the Company's two largest customers were approximately 15% and 13%, 15% and 13%, and 13% and 11%, respectively, of net sales for the years ended January 27, 2001, January 29, 2000 and January 30, 1999. One customer accounted for approximately 22% of accounts receivable at January 27, 2001. 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 January 27, 2001, January 29, 2000 and January 30, 1999, the Company repurchased a total of 144,000, 494,000 and 879,000 shares, respectively, on the open market under the 1995 Stock Repurchase Program for an aggregate price of approximately $293,000, $1,938,000 and $2,244,000, 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. F-26 55 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. F-27 56 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Summary of Quarterly Results (Unaudited) (in thousands)
YEAR ENDED JANUARY 27, 2001 YEAR ENDED JANUARY 29, 2000 -------------------------------------------- ------------------------------------------- QUARTER ENDED QUARTER ENDED -------------------------------------------- ------------------------------------------- Apr. 29, Jul. 29, Oct. 28, Jan. 27, May 1, Jul. 31, Oct. 30, Jan. 29, 2000 2000 2000 2001 1999 1999 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- Net sales (A) $ 25,700 $ 24,821 $ 41,045 $ 33,152 $ 28,982 $ 25,331 $ 49,935 $ 40,689 Cost of goods sold 20,111 20,147 33,203 26,522 22,171 19,187 38,418 30,320 -------- -------- -------- -------- -------- -------- -------- -------- Gross profit 5,589 4,674 7,842 6,630 6,811 6,144 11,517 10,369 Selling, general & administrative expenses 5,955 5,821 6,854 6,310 6,163 6,420 8,265 7,409 -------- -------- -------- -------- -------- -------- -------- -------- Operating (loss)/income (366) (1,147) 988 320 648 (276) 3,252 2,960 Other income (expense): Gold consignment fees (222) (246) (347) (224) (224) (277) (581) (401) Interest expense (249) (244) (294) (435) (233) (239) (270) (474) Interest income 90 20 5 24 76 63 18 17 Other - net 14 16 10 (39) 27 28 141 (28) -------- -------- -------- -------- -------- -------- -------- -------- Total other income (expense) (367) (454) (626) (674) (354) (425) (692) (886) (Loss)/income from operations before income taxes (733) (1,601) 362 (354) 294 (701) 2,560 2,074 Income tax (benefit)/provision (279) (608) 137 (136) 111 (265) 972 789 -------- -------- -------- -------- -------- -------- -------- -------- Net (loss)/income $ (454) $ (993) $ 225 $ (218) $ 183 $ (436) $ 1,588 $ 1,285 ======== ======== ======== ======== ======== ======== ======== ======== (Loss)/earnings per share (B): Net (loss)/earnings per share $ (.07) $ (.16) $ .04 $ (.03) $ 0.03 $ (0.06) $ 0.25 $ .20 ======== ======== ======== ======== ======== ======== ======== ========
(A) The Company's net sales are subject to seasonal fluctuation. This fluctuation is mitigated to a degree by the early placement of orders for the holiday season. (B) Per share amounts do not always add to the annual per share amount because the figures are required to be independently calculated. F-28 57 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 April 6, 2001 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 January 27, 2001 and January 29, 2000. 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. BDO Seidman, LLP New York, New York April 6, 2001 S-1 58 MICHAEL ANTHONY JEWELERS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------------- ADDITIONS BALANCE AT ADDITIONS CHARGED TO BALANCE AT BEGINNING OF CHARGED TO COSTS OTHER END OF DESCRIPTION PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS(A) PERIOD --------------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts: --------------------------------------------------------------------------------------------------------------------------- Year ended January 27, 2001 $530 $ 60 $ - $ 20 $ 610 Year ended January 29, 2000 538 60 - (68) 530 Year ended January 30, 1999 716 212 - (390) 538 Allowance for sales returns: Year ended January 27, 2001 $477 $1,926 $ - $(477) $1,926 Year ended January 29, 2000 586 397 - (506) 477 Year ended January 30, 1999 480 506 - (400) 586
(A) Allowances, returns and uncollectible accounts charged against the reserve, (net of collections on previously written-off accounts). S-2