10-Q 1 0001.txt FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended April 28, 2000. --------------- [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _________ to ____________. Commission File Number 0-21862 OROAMERICA, INC. ---------------- (Exact name of registrant as specified in its charter) Delaware 94-2385342 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 443 North Varney Street, Burbank, California 91502 -------------------------------------------- -------- (Address of principal executive offices) (Zip Code) (818) 848-5555 -------------- (Registrant's telephone number, including area code) 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
SHARES OUTSTANDING AS OF CLASS June 5, 2000 ----- ------------------------ Common Stock, $.001 par value 5,743,298
2 OROAMERICA, INC. REPORT ON FORM 10-Q FOR THE QUARTER ENDED April 28, 2000 TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Balance Sheets .................................. 1 Consolidated Statements of Income ............................ 2 Consolidated Statements of Cash Flows ........................ 3 Notes to Condensed Consolidated Financial Statements ......... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 7 PART II - OTHER INFORMATION Items 1 through 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K ............................. 10 SIGNATURES ................................................................... 11
3 PART I - Financial Information Item 1. Financial Statements OROAMERICA, INC. CONSOLIDATED BALANCE SHEETS
April 28, January 28, (Dollars in thousands, except share amounts) 2000 2000 ------------------------------------------------------------------------------------------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 26,815 $ 26,923 Accounts receivable less allowance for returns and doubtful accounts of $8,765 and $11,840 20,555 15,270 Other accounts and notes receivable 342 865 Inventories (Note 2) 13,406 15,846 Deferred income taxes 3,449 3,449 Prepaid items and other current assets 1,239 780 Assets available for sale 400 468 -------- -------- Total current assets 66,206 63,601 Property and equipment, net 14,787 15,232 Goodwill and other intangible assets, net 4,313 4,428 Patents, net 4,075 4,198 Other assets 635 635 -------- -------- $ 90,016 $ 88,094 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 7,806 $ 5,726 Income taxes payable 1,494 1,092 Accrued expenses 8,050 8,733 -------- -------- Current and total liabilities 17,350 15,551 -------- -------- Stockholders' equity: Preferred stock, 500,000 shares authorized, $.001 par value; none issued and outstanding -- -- Common stock, 10,000,000 shares authorized, $.001 par value; 6,370,878 and 6,368,878 shares issued at April 28, 2000 and January 28, 2000, respectively 6 6 Paid-in capital 43,574 43,564 Accumulated other comprehensive loss (34) (34) Note receivable from stock sale (190) (190) Treasury stock, 608,580 shares and 510,830 shares at April 28, 2000 and January 28, 2000, respectively (Note 4) (4,459) (3,841) Retained earnings 33,769 33,038 -------- -------- Total stockholders' equity 72,666 72,543 -------- -------- $ 90,016 $ 88,094 ======== ========
See accompanying notes to condensed consolidated financial statements. 1 4 OROAMERICA, INC. CONSOLIDATED STATEMENTS OF INCOME Thirteen Weeks Ended April 28, 2000 and April 30, 1999 (Unaudited)
April 28, April 30, (Dollars in thousands, except per share amounts) 2000 1999 ----------------------------------------------------------------------------------------- Net sales $ 37,660 $ 37,648 Cost of goods sold, exclusive of depreciation 30,902 31,882 ----------- ----------- Gross profit 6,758 5,766 Selling, general and administrative, and other expenses 5,214 4,362 ----------- ----------- Operating income 1,544 1,404 Interest expense 400 294 ----------- ----------- Income before income taxes 1,144 1,110 Provision for income taxes 423 444 ----------- ----------- Net income from continuing operations 721 666 Net income (loss) from discontinued operations 10 (221) ----------- ----------- Net income $ 731 $ 445 =========== =========== Basic net income per share Net income from continuing operations $ 0.12 $ 0.11 Net income (loss) from discontinued operations 0.00 (0.04) ----------- ----------- Net income per share $ 0.12 $ 0.07 =========== =========== Diluted net income per share Net income from continuing operations $ 0.12 $ 0.10 Net income (loss) from discontinued operations 0.00 (0.03) ----------- ----------- Net income per share $ 0.12 $ 0.07 =========== =========== Weighted average shares outstanding 5,826,131 6,272,211 Dilutive effect of stock options 26,170 79,122 ----------- ----------- Weighted average shares outstanding assuming dilution 5,852,301 6,351,333 =========== ===========
See accompanying notes to condensed consolidated financial statements. 2 5 OROAMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Thirteen Weeks Ended April 28, April 30 (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 731 $ 445 Less income (loss) from discontinued operations 10 (221) -------- -------- Net income from continuing operations 721 666 Adjustments to reconcile net income from continuing operations to net cash provided by (used in) continuing operations: Depreciation and amortization 890 662 Provision for losses on accounts receivable 61 165 Provision for estimated returns (3,032) (2,434) Loss (gain) on sale of property 1 (10) Change in assets and liabilities: Accounts receivable (2,314) (3,009) Other accounts and notes receivable 521 400 Inventories 2,440 1,269 Prepaid income taxes and income taxes payable 362 (498) Prepaid items and other current assets (419) (539) Accounts payable, accrued expenses and deferred liabilities 1,498 (2,557) -------- -------- Net cash provided by (used in) operating activities of continuing operations 729 (5,885) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (224) (1,315) Proceeds from sale of property 10 10 Purchase of available for sale securities -- (270) -------- -------- Net cash used in investing activities of continuing operations (214) (1,575) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (618) -- Issuance of common stock 10 13 -------- -------- Net cash (used in) provided by financing activities of continuing operations (608) 13 -------- -------- CASH USED IN DISCONTINUED OPERATIONS (15) (180) DECREASE IN CASH AND CASH EQUIVALENTS (108) (7,627) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 26,923 30,263 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,815 $ 22,636 ======== ======== Supplemental disclosure of cash flow information: Interest paid $ 456 $ 274 Income taxes paid $ 53 $ 795
See accompanying notes to condensed consolidated financial statements. 3 6 OROAMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements included herein include all adjustments, all of which are of a normal recurring nature, that, in the opinion of management, are necessary for a fair presentation of financial information for the thirteen week periods ended April 28, 2000 and April 30, 1999. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's January 28, 2000 audited consolidated financial statements. The results of operations for the thirteen-week period ended April 28, 2000 are not necessarily indicative of the results for a full year. Net income per share Basic net income per share excludes all dilution and is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net income per share includes the dilutive effect of stock options. Reclassifications In fiscal 2000, the Company elected to reclassify certain expenses in its Consolidated Statements of Income. As a result, net sales, cost of sales, and selling, general and administrative expenses have been restated for all periods presented to reflect these new classifications. The effect of this reclassification was to decrease net sales, increase cost of sales and decrease selling, general and administrative expenses for all periods presented. This change in classification has no effect on previously reported net income or earnings per share. In January 2000, the Company decided to discontinue its cigar operating segment. As a result, the Company's cigar operations have been classified as discontinued operations for all periods presented. NOTE 2 - INVENTORIES Inventories consist of the following (in thousands, except per ounce data):
April 28, January 28, 2000 2000 ----------- ----------- (Unaudited) Gold and other raw materials $ 3,220 $ 3,264 Manufacturing costs and other 11,024 13,478 -------- -------- Jewelry inventories 14,244 16,742 LIFO cost less than FIFO cost (158) (216) Allowance for vendor advances (680) (680) -------- -------- $ 13,406 $ 15,846 ======== ======== Gold price per ounce $ 275.05 $ 286.75 ======== ========
The Company values its jewelry inventories using the last-in, first-out (LIFO) method. 4 7 The Company has several consignment agreements with gold consignors providing for a maximum aggregate consignment of 365,000 fine troy ounces. In accordance with the consignment agreements, title remains with the gold consignors until the consigned gold is purchased by the Company. At April 28, 2000 and January 28, 2000, the Company held approximately 202,900 and 227,600 fine troy ounces of gold under consignment agreements, respectively. Consigned gold is not included in inventory and there is no related liability recorded at quarter end. The purchase price per ounce is based on the daily Second London Gold Fixing. Manufacturing costs included in inventory represent costs incurred to process consigned and Company owned-gold into finished jewelry products. The gold consignors and the Company's revolving credit lender (Note 3) have a security interest in substantially all the assets of the Company. The Company pays to the gold consignors a consignment fee based on the dollar equivalent of ounces outstanding, computed based on the Second London Gold Fixing, as defined in the gold consignment agreements. Each consignment agreement is terminable on 30 days notice by the Company or the consignor. The gold consignment agreements require the Company to comply with certain covenants with respect to its working capital, current ratio, and tangible net worth and to maintain the aggregate of its accounts receivable and inventory of gold at specified minimums. Additional provisions of the agreements (a) prohibit the payment of dividends, (b) limit capital expenditures, (c) limit the amount of debt the Company may incur, (d) prohibit the Company from engaging in mergers and acquisitions without prior approval, (e) require the Company to maintain and assign as additional collateral key man life insurance on its chief executive officer in the amount of $5.0 million, (f) prohibit termination of the chief executive officer's employment for any reason other than death or disability and prohibit any material amendment to his employment contract, and (g) require notice if the Company's principal stockholder (who is also its chief executive officer) ceases to own at least 40% of the Company's outstanding common stock. At April 28, 2000, the Company was in compliance with all of the requirements of its consignment agreements. NOTE 3 - NOTES PAYABLE The Company has a $10 million revolving credit facility with Bank of America, NT & SA which expires August 1, 2000. Available borrowings may not exceed the lesser of $10 million or 75% of eligible accounts receivable minus a reserve amount, as provided for under the credit facility. Advances under the credit facility bear interest at the lender's prime rate minus 0.25%, or, at the Company's option, at short-term fixed rates or rates determined by reference to offshore interbank market rates plus 1.75%. No short-term advances were outstanding at April 28, 2000 or January 28, 2000. The revolving credit facility also provides for the issuance of banker's acceptances and for the issuance of letters of credit in an aggregate amount not to exceed $2.5 million at any one time. Banker's acceptances bear interest at a rate based on the bank's prevailing discount rate at the time of issuance plus 1.75%. No banker's acceptances were outstanding as of April 28, 2000 or January 28, 2000. Stand-by letters of credit outstanding at April 28, 2000 and at January 28, 2000 totaled $1,000,000 and $1,000,000, respectively. Amounts outstanding under the Bank of America credit agreement are secured by substantially all of the Company's assets; the Company's gold consignors also have security interests in these assets, and all of the consignors and Bank of America are parties to a collateral sharing agreement. The revolving credit agreement contains substantially the same covenants and other requirements as are contained in the Company's gold consignment agreements (Note 2). At April 28, 2000, the Company was in compliance with all of the requirements of the revolving credit agreement. 5 8 NOTE 4 - STOCK REPURCHASE PROGRAM In fiscal 1999, the Company's Board of Directors approved a stock repurchase program pursuant to which the Company is authorized to purchase shares of its outstanding common stock in the open market at prevailing market prices or off the market in negotiated transactions. During the quarter ended April 28, 2000, the Board of Directors authorized the Company to repurchase an additional 300,000 shares for a total of 900,000 shares authorized for repurchase. During the quarter ended April 28, 2000, the Company repurchased 97,750 shares for an aggregate price of approximately $618,000. At April 28,2000, the Company has repurchased a total of 608,580 shares at an approximate cost of $4.5 million. NOTE 5 - NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which the Company is required to adopt in fiscal years beginning after June 15, 2000. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Additionally, SFAS 133 defines the accounting for changes in the fair value of the derivatives depending on the intended use of the derivative. The impact of SFAS 133 on the Company's financial statements will depend on a variety of factors, including, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. The Company is currently assessing the impact SFAS 133 will have on its consolidated financial statements. 6 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read together with the financial statements and notes thereto. General The Company's business, and the jewelry business in general, is highly seasonal. Historically, the third and fourth quarters of the Company's fiscal year, which include the Christmas shopping season, have accounted for approximately 60% of the Company's annual net sales and a somewhat higher percentage of the Company's income before taxes. While the third and fourth quarters generally produce the strongest results, the relative strengths of the third and fourth quarters are subject to variation from year to year based on a number of factors, including the purchasing patterns of the Company's customers. The seasonality of the Company's business places a significant demand on working capital resources to provide for a buildup of inventory in the third quarter (which is primarily satisfied by an increase in the amount of gold held under consignment) and, in turn, has led to a seasonal buildup in customer receivables in the fourth quarter that must be funded by increased borrowings. Consequently, the results of first quarter operations are not necessarily indicative of the Company's performance for an entire year. Prices for the Company's jewelry products generally are determined by reference to the current market price of gold. Consequently, the Company's sales could be affected by increases, decreases or volatility in the price of gold. The Company accounts for its jewelry inventories at the lower of cost or market, using the last-in, first-out (LIFO) method to determine cost, less the allowance for vendor advances. As a result, the Company's gross profit margin can be affected by changes in LIFO reserves and the allowance for vendor advances, as well as by changes in the amount of gold owned at each period end and fluctuations in the price of gold. Results of Operations The following table sets forth, for the periods indicated, the percentage of net sales represented by certain items included in the consolidated statements of income. 7 10
As a Percentage of Net Sales ---------------------------- Thirteen Weeks Ended April 28, April 30, 2000 1999 --------- --------- Net sales 100.0% 100.0% Cost of goods sold 82.1 84.7 -------- -------- Gross profit 17.9 15.3 Selling, general and administrative, and other expenses 13.8 11.6 -------- -------- Operating income 4.1 3.7 Interest expense 1.1 0.8 -------- -------- Income before income taxes 3.0 2.9 Provision for income taxes 1.1 1.2 -------- -------- Net income from continuing operations 1.9 1.7 Net income (loss)from discontinued operations 0.0 (0.5) -------- -------- Net income 1.9% 1.2% ======== ========
THIRTEEN WEEKS ENDED APRIL 28, 2000 COMPARED TO THIRTEEN WEEKS ENDED APRIL 30, 1999 Net sales for the thirteen weeks ended April 28, 2000 increased by $12,000, or 0.03%, from the comparable period of the prior year. Gross profit for the thirteen-week period ended April 28, 2000 increased by $992,000 or 17.2%, from the comparable period of the prior year. As a percentage of net sales, gross profit increased from 15.3% for the thirteen-week period ended April 30, 1999 to 17.9% for the current period. Excluding the effects of gold price fluctuations and LIFO reserve adjustments on the cost of goods sold, the gross margin for the thirteen-week periods ended April 28, 2000 and April 30, 1999 would have been 18.0% and 15.3% of sales, respectively. The increase on a comparable basis was due to reduced internal production and purchasing costs. The gold prices used to cost inventory at January 28, 2000, April 28, 2000, January 29, 1999 and April 30, 1999, were $286.75, $275.05, $285.40 and $286.60, respectively. Selling, general and administrative, and other expenses include bad debt expense, depreciation and amortization expense, and other income or other expense, in addition to selling, general and administrative expenses. Selling, general and administrative, and other expenses for the thirteen weeks ended April 28, 2000, increased by $852,000, or 19.5%, from the comparable period of the prior year. As a percentage of net sales, these expenses increased from 11.6% in the thirteen weeks ended April 30, 1999 to 13.8% in the thirteen weeks ended April 28, 2000. The increase in the dollar amount of selling, general and administrative, and other expenses is primarily attributable to increased personnel costs of $429,000, increased consulting and professional expenses of $380,000, and increased depreciation and amortization expense of $242,000, offset by decreased bad debt expense of $104,000. Personnel costs have increased primarily due to expanded sales efforts related to new and existing customers and to increased product development activities. Consulting and professional services have increased due to expanded use of computer consultants and increased legal fees related to certain ongoing litigation. The effective tax rate in the thirteen weeks ended April 28, 2000 was 37.0% as compared to 40.0% in the comparable period of the prior year. LIQUIDITY AND CAPITAL RESOURCES The Company has satisfied its working capital requirements through internally generated funds, a gold consignment program, and borrowings under its revolving credit facilities. A substantial portion of the Company's gold 8 11 supply needs have been satisfied through gold consignment arrangements with various banks and bullion dealers. Under the consignment arrangements, the Company may defer the purchase of gold used in the manufacturing process and held in inventory until the time of sale of finished goods to customers. Financing costs under the consignment arrangements currently are approximately 3% per annum of the market value of the gold held under consignment, computed daily. The gold consignment agreements contain covenants restricting the amount of consigned gold the Company may reconsign or otherwise have outside its possession at any one time. The aggregate amount of gold that the Company may acquire under its consignment arrangements was approximately 365,000 ounces at April 28, 2000 and is subject to fluctuations based on changes in the market value of gold. As of April 28, 2000, the Company held approximately 202,900 ounces of gold on consignment. The Company has a $10 million revolving credit facility with Bank of America NT & SA, which expires August 1, 2000. Available borrowings may not exceed the lessor of $10 million or 75% of eligible accounts receivable minus a reserve amount, as provided for under the credit facility. For further information regarding the Company's gold consignment agreements and revolving credit facilities, see Notes to Condensed Consolidated Financial Statements. Net accounts receivable increased from $15.3 million at January 28, 2000 to $20.6 million at April 28, 2000. The allowance for returns and doubtful accounts decreased from $11.8 million at January 28, 2000 to $8.8 million at April 28, 2000. The decrease in the amount of the allowance at April 28, 1999 is primarily attributable to seasonal adjustments in the reserve for returns. Total inventories decreased from $15.8 million at January 28, 2000 to $13.4 million at April 28, 2000. The decrease is primarily attributable to the decrease in the manufacturing cost component of the Company's jewelry inventories. At April 28, 2000, a substantial portion of the gold included in the Company's finished goods and work-in-process consisted of gold acquired pursuant to the Company's consignment program. Consigned gold is not included in inventory. Accounts payable increased from $5.7 million at January 28, 2000 to $7.8 million at April 28, 2000. This increase is primarily attributable to seasonal gold purchases and the timing of payments thereon. Accrued expenses decreased from $8.7 million at January 28, 2000 to $8.0 million at April 28, 2000. This decrease is primarily due to the payment of payroll liabilities and decreased advertising accruals, offset by an increase in customer warehouse allowance accruals. The Company incurred capital expenditures of approximately $224,000 for the quarter ended April 28, 2000, principally related to computer equipment and facility improvements. The Company expects to incur capital expenditures of approximately $1.3 million during the balance of fiscal 2001, principally for the acquisition of computerized distribution systems, and manufacturing and computer equipment. The Company believes that funds generated from operations, the gold consignment program and the borrowing capacity under its revolving credit facility will be sufficient to finance its working capital and capital expenditure requirements for the next 12 months. 9 12 PART II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule (b) Reports on Form 8-K: None 10 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OROAMERICA, INC. Date: June 6, 2000 By: SHIU SHAO ------------ --------------------------------------- SHIU SHAO, Chief Operating Officer, Chief Financial Officer, Vice President and Director Date: June 6, 2000 By: BETTY SOU ------------ --------------------------------------- BETTY SOU, Controller 11