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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 October 30, 1998.
[] 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.
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(Exact name of registrant as specified in its charter)
Delaware 94-2385342
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
443 North Varney Street, Burbank, California 91502
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(Address of principal executive offices) (Zip Code)
(818) 848-5555
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(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 December 10, 1998
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Common Stock, $.001 par value 6,365,628
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OROAMERICA, INC.
REPORT ON FORM 10-Q FOR THE
QUARTER ENDED OCTOBER 30, 1998
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets ........................................... 1
Consolidated Statements of Operations ................................. 2
Consolidated Statements of Cash Flows.................................. 3
Notes to Consolidated Financial Statements ........................... 4 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 8 -13
PART II - OTHER INFORMATION
Items 1 through 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K....................................... 14
SIGNATURES ....................................................................... 15
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OROAMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 30, JANUARY 30,
1998 1998
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ASSETS (Unaudited)
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Current assets:
Cash and cash equivalents $ 5,315 $ 30,351
Accounts receivable less allowance for returns
and doubtful accounts of $11,679 and $10,802 40,224 19,627
Other accounts and notes receivable (Note 2) 3,963 235
Inventories (Note 3) 14,122 12,772
Deferred income taxes 2,611 2,611
Prepaid income taxes 1,068 --
Prepaid items and other current assets 922 742
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Total current assets 68,225 66,338
Property and equipment, net 11,341 10,406
Excess of purchase price over net assets acquired, net (Note 6) 5,663 4,302
Patents, net 4,810 5,177
Other assets 442 442
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$ 90,481 $ 86,665
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 131 $ 347
Notes payable (Note 4) -- --
Accounts payable 8,955 7,426
Income taxes payable 3,339 1,443
Accrued expenses 7,981 8,911
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Total current liabilities 20,406 18,127
Long-term debt, less current portion -- 2,341
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Total liabilities 20,406 20,468
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Stockholders' equity:
Preferred stock, 500,000 shares authorized, $.001 par value;
none issued and outstanding -- --
Common stock, 10,000,000 shares authorized, $.001 par value;
6,365,628 and 6,254,378 shares issued and outstanding
at October 30, 1998 and January 30, 1998, respectively 6 6
Paid-in capital 43,548 42,979
Retained earnings 27,287 23,212
Note receivable from stock sales (190) --
Treasury stock, 95,000 shares and 0 shares at October 30, 1998
and January 30, 1998, respectively (Note 5) (576) --
-------- --------
Total stockholders' equity 70,075 66,197
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$ 90,481 $ 86,665
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</TABLE>
See accompanying notes to consolidated financial statements.
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OROAMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FOR THE
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------------- --------------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1998 1997 1998 1997
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Net sales $ 54,561 $ 46,373 $ 126,470 $ 106,608
Cost of goods sold, exclusive of depreciation 40,946 35,899 96,479 84,282
---------- ---------- ---------- ----------
Gross profit 13,615 10,474 29,991 22,326
Selling, general and administrative,
and other expenses (Note 7) 8,418 3,609 22,178 15,250
---------- ---------- ---------- ----------
Operating income 5,197 6,865 7,813 7,076
Interest expense 405 507 1,132 1,306
---------- ---------- ---------- ----------
Income before income taxes 4,792 6,358 6,681 5,770
Provision for income taxes 1,869 2,862 2,606 2,597
---------- ---------- ---------- ----------
Net income $ 2,923 $ 3,496 $ 4,075 $ 3,173
========== ========== ========== ==========
Basic net income per share (Note 1) $ 0.46 $ 0.56 $ 0.65 $ 0.51
========== ========== ========== ==========
Diluted net income per share (Note 1) $ 0.46 $ 0.56 $ 0.64 $ 0.51
========== ========== ========== ==========
Weighted average shares outstanding 6,365,378 6,254,378 6,303,600 6,254,156
Dilutive effect of stock options 46,334 16,858 46,334 16,858
---------- ---------- ---------- ----------
Weighted average shares outstanding
assuming dilution 6,411,712 6,271,236 6,349,934 6,271,014
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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OROAMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Increase (Decrease) in Cash
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<CAPTION>
FOR THE
THIRTY-NINE WEEKS ENDED
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OCTOBER 30, OCTOBER 31,
1998 1997
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Cash flows from operating activities:
Net income $ 4,075 $ 3,173
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,804 1,782
Provision for losses on accounts receivable 170 647
Provision for estimated returns 678 (1,640)
Gain on sale of property (40) --
Change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (21,644) (12,990)
Other accounts and notes receivable (3,529) 236
Inventories (939) (620)
Prepaid income taxes and income taxes payable 828 1,199
Prepaid items and other current assets (180) (741)
Non-current accounts receivable -- 278
Accounts payable, accrued expenses and deferred liabilities 599 (426)
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Net cash used in operating activities (18,178) (9,102)
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Cash flows from investing activities:
Capital expenditures (1,903) (1,423)
Acquisitions, net of cash acquired (Note 6) (2,241) (4,506)
Proceeds from sale of property 40 --
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Net cash used in investing activities (4,104) (5,929)
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Cash flows from financing activities:
Gross borrowings under line-of-credit agreement 400 300
Repayment of borrowings under line-of-credit (400) (300)
Principal repayments of long-term debt (2,557) (767)
Purchase of treasury stock (Note 5) (576) --
Issuance of common stock 379 9
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Net cash used in financing activities (2,754) (758)
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Decrease in cash and cash equivalents (25,036) (15,789)
Cash and cash equivalents at beginning of period 30,351 22,381
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Cash and cash equivalents at end of period $ 5,315 $ 6,592
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</TABLE>
See accompanying notes to consolidated financial statements.
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OROAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of OroAmerica, Inc. (the
"Company"), 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 and thirty-nine week
periods ended October 30, 1998 and October 31, 1997. 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 consolidated statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's January 30, 1998 audited consolidated financial
statements. The results of operations for the thirteen and thirty-nine week
periods ended October 30, 1998 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 net income 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.
Statement of Cash Flows
For the purposes of reporting cash flows, cash and cash equivalents
include amounts held at financial institutions or highly liquid investments with
original maturities of ninety days or less when purchased. The fair value of
cash and cash equivalents approximates their carrying amount.
Supplemental cash flow information and non-cash investing and financing
activities are as follows:
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For the Thirty-nine Weeks Ended
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(in thousands) October 30, October 31,
1998 1997
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Cash paid during the year for:
Interest $ 1,086 $ 1,268
Income taxes 1,810 2,828
Non-cash investing and financing activities:
Note receivable from stock sales $ 190 $ --
Acquisitions
Fair value of assets acquired $ 2,241 $ 5,832
Liabilities assumed -- (942)
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Cash paid $ 2,241 $ 4,890
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</TABLE>
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NOTE 2 - INSURANCE RECEIVABLE
In late September 1998, OroAmerica incurred significant damage to its
cigar operations in the Dominican Republic as a result of destruction caused by
Hurricane Georges. The Company has estimated the damage to its cigar operations,
primarily to its tobacco inventories, at $2.4 million. The Company believes that
all damages incurred are fully covered by insurance. As a result, the Company
has written off the cost of damaged inventory and other assets and has recorded
a $2.4 million receivable for anticipated insurance recovery. The Company
expects payment from its insurance carrier during the first six months of 1999.
The Company has adequate cigar inventories at its other cigar
facilities to accommodate short-term demand of the Company's cigar products. As
a result, the Company does not anticipate any material loss of cigar revenues
due to damage caused by Hurricane Georges.
NOTE 3 - INVENTORIES
Inventories consist of the following (in thousands, except per ounce
data):
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October 30, January 30,
1998 1998
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(Unaudited)
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Gold and other raw materials $ 1,470 $ 4,093
Manufacturing costs and other 12,214 7,975
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Jewelry inventories 13,684 12,068
Tobacco inventories 2,155 2,801
Other inventories 259 310
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Subtotal 16,098 15,179
LIFO cost less than FIFO cost (1,296) (1,727)
Allowance for vendor advances (680) (680)
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$ 14,122 $ 12,772
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Gold price per ounce $ 292.30 $ 304.85
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</TABLE>
The Company values its jewelry inventories using the last-in,
first-out (LIFO) method. The Company values its tobacco and other inventories
using the first-in, first-out (FIFO) method.
The Company has several consignment agreements with gold consignors
providing for a maximum aggregate consignment of 290,000 fine troy ounces. In
accordance with the consignment agreements, title remains with the gold
consignors until purchased by the Company.
At October 30, 1998 and January 30, 1998, the Company held
approximately 220,500 and 155,400 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
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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 4)
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 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 October 30, 1998, the Company was in compliance with all of the
requirements of its consignment agreements.
NOTE 4 - 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 80% of eligible accounts receivable minus a
reserve amount, as provided for under the credit facility. No advances were
outstanding under the credit facility at October 30, 1998 or January 30, 1998.
For further information regarding the Company's revolving credit facilities, see
the Company's January 30, 1998 audited consolidated financial statements.
NOTE 5 - STOCK REPURCHASE PROGRAM
In September 1998, the Company's Board of Directors approved a stock
repurchase program pursuant to which the Company is authorized to purchase up to
300,000 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 October 30, 1998, the Company repurchased 95,000 shares for an aggregate
price of approximately $576,000.
NOTE 6 - ACQUISITIONS
In June 1998, the Company acquired Eclipse Design, Inc. ("Eclipse"), a
privately-held company engaged in the design, manufacture and sale of gold
earrings. Under the terms of the purchase agreement, the Company acquired all of
the operating assets of Eclipse. In September
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1998, the Company consummated an Asset Purchase-Sale Agreement with Jewelmont
Corporation, a privately-held company engaged in the distribution and sale of
gold jewelry. Under the terms of the agreement, the Company acquired primarily
inventory and customer lists of Jewelmont. Both acquisitions were accounted for
using the purchase method of accounting. The pro forma combined results of
operations of the Company and the acquired companies as if the acquisitions had
taken place at the beginning of the year are immaterial and are not presented.
NOTE 7 - LITIGATION SETTLEMENT AWARD
In September 1997, the Company recovered approximately $4.7 million,
net of attorney fees, from settlement of litigation involving the insurers for
two former gold jewelry manufacturers. The settlement award was accounted for as
a reduction of selling, general and administrative, and other expenses for the
thirteen and thirty-nine weeks ended October 31, 1997.
NOTE 8 - NEW ACCOUNTING STANDARDS
At the beginning of fiscal 1999, the Company adopted Statement of
Financial Accounting Standard No. 130,"Reporting Comprehensive Income", ("SFAS
130"). SFAS 130 established standards for the reporting and disclosure of the
components of comprehensive income in the financial statements. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by and distributions to the Company's shareholders. The
adoption had no effect on the Company's consolidated results of operations,
financial position or cash flows. The Company's comprehensive income equals net
income for each of the thirty-nine week periods ended October 30, 1998 and
October 31, 1997.
In 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), which is required to be adopted for the Company's fiscal year
ending January 29, 1999. SFAS 130 requires that certain financial information
regarding operating segments be publicly reported on the same basis as used
internally by management to evaluate segment performance. The adoption of SFAS
131 will have no impact on the Company's consolidated results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS 133"), which
is required to be adopted in fiscal years beginning after June 15, 1999. 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 has not yet determined what the effect of adoption of SFAS 133 will
be on the earnings and financial position of the Company.
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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. The third and fourth quarters of the Company's fiscal year, which
include the Christmas shopping season, historically 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 fourth quarter
generally produces 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 build up 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 build up in customer receivables
in the fourth quarter that must be funded by increased borrowings. Consequently,
the results of third quarter operations are not necessarily indicative of the
Company's performance for an entire year.
Prices for the Company's products generally are determined by reference
to the current market price of gold. Consequently, the Company's sales could be
affected by significant 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.
The Company entered into the premium cigar business during fiscal 1998.
In February 1998, sales of cigar products began. In June 1998, the Company's
flagship cigar store opened on Rodeo Drive in Beverly Hills, California. Net
loss from cigar operations for the thirteen and thirty-nine week periods ended
October 30, 1998, totaled $222,000 and $740,000, respectively.
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.
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<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
--------------------------------------------------------------
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1998 1997 1998 1997
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Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 75.0 77.4 76.3 79.1
------ ------ ------ ------
Gross profit 25.0 22.6 23.7 20.9
Selling, general and administrative,
and other expenses 15.4 7.8 17.5 14.3
------ ------ ------ ------
Operating income 9.6 14.8 6.2 6.6
Interest expense 0.8 1.1 0.9 1.2
------ ------ ------ ------
Income before income taxes 8.8 13.7 5.3 5.4
Provision for income taxes 3.4 6.2 2.1 2.4
------ ------ ------ ------
Net income 5.4% 7.5% 3.2% 3.0%
====== ====== ====== ======
</TABLE>
THIRTEEN WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
31, 1997.
Net sales for the thirteen weeks ended October 30, 1998 increased by
$8.2 million, or 17.7%, from the comparable period of the prior year. This
increase was primarily attributable to an increase in the amount of gold jewelry
(by weight) sold, offset by decreases in sales prices due to a reduction in the
average market price of gold. The Company attributes the volume increase to
recent acquisitions and to new products introduced during the year.
Gross profit for the thirteen weeks ended October 30, 1998 increased by
$3.1 million, or 30.0 %, from the comparable period of the prior year. As a
percentage of net sales, gross profit increased from 22.6% for the thirteen
weeks ended October 31, 1997, to 25.0% for the current period. Excluding the
effects of gold price fluctuations and LIFO reserve adjustments on cost of goods
sold, the gross profit margin in the thirteen weeks ended October 30, 1998 and
October 31, 1997 would have been 25.5% and 22.7%, respectively. The increase on
a comparable basis was due to changes in sales product mix. The gold prices used
to cost inventory at October 30, 1998, July 31, 1998, October 31, 1997 and
August 1, 1997 were $292.30, $288.85, $311.40 and $324.10, 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
October 30, 1998 increased by $4.8 million, or 133.3%, from the comparable
period of the prior year. Selling, general and administrative, and other
expenses for the thirteen weeks ended October 31, 1997, reflect a one-time
litigation settlement award of $4.7 million, which was accounted for as a
reduction of selling, general and administrative, and other expenses. Excluding
this award, selling, general and administrative, and other expenses for the
quarter ended October 30, 1998, increased $149,000, or 1.8%, from the comparable
period of the prior year. The increase in selling, general and administrative,
and other expenses, excluding the award, results primarily from increased
personnel costs of $315,000, increased consulting,
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professional and outside service expense of $268,000, and increased selling and
product expense of $243,000. These increases were offset by a decrease in bad
debt expense of $450,000, and an increase in other income of $349,000. Selling,
general and administrative, and other expenses for the thirteen weeks ended
October 30, 1998, includes approximately $510,000 of expense from the Company's
cigar operations.
Interest expense for the thirteen weeks ended October 30, 1998
decreased approximately $102,000, or 20.1%, from the comparable period of the
prior year. Interest expense declined primarily due to the pay down of
mortgages.
The effective tax rate in the thirteen weeks ended October 30, 1998 was
39.0%, compared to 45.0% in the comparable period of the prior year.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 31, 1997.
Net sales for the thirty-nine weeks ended October 30, 1998 increased by
$19.9 million, or 18.6%, from the comparable period of the prior year. This
increase was primarily attributable to an increase in the amount of gold jewelry
(by weight) sold, offset by decreases in sales prices due to a reduction in the
average market price of gold. The Company attributes the volume increase to
recent acquisitions and to new products introduced during the year.
Gross profit for the thirty-nine weeks ended October 30, 1998 increased
by $7.7 million, or 34.3%, from the comparable period of the prior year. As a
percentage of net sales, gross profit increased from 20.9% for the thirty-nine
weeks ended October 31, 1997, to 23.7% for the current period. Excluding the
effects of gold price fluctuations and LIFO reserve adjustments on cost of goods
sold, the gross profit margin in the thirty-nine week periods ended October 30,
1998 and October 31, 1997 would have been 23.4% and 20.9%, respectively. The
increase on a comparable basis was due to changes in sales product mix. The gold
prices used to cost inventory at October 30, 1998, January 30, 1998, October 31,
1997 and January 31, 1997 were $292.30, $304.85, $311.40, and $345.50,
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 thirty-nine weeks ended
October 30, 1998 increased by $6.9 million, or 45.4%, from the comparable period
of the prior year. Selling, general and administrative, and other expenses for
the thirty-nine weeks ended October 31, 1997, reflect a one-time litigation
settlement award of $4.7 million, which was accounted for as a reduction of
selling, general and administrative, and other expenses. Excluding this award,
selling, general and administrative, and other expenses for the thirty-nine
weeks ended October 30, 1998, increased $2.3 million, or 11.4%, from the
comparable period of the prior year. The increase in selling, general and
administrative, and other expenses, excluding the award, results primarily from
increased personnel costs of $1.3 million, increased selling and product expense
of $1.3 million, and increased consulting, professional and outside service
expense of $627,000. These increases were offset by a decrease in bad debt
expense of $476,000 and an increase other income of $867,000. Selling, general
and
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administrative, and other expenses for the thirty-nine weeks ended October 30,
1998, includes approximately $1.1 million of expense from the Company's cigar
operations.
Interest expense for the thirty-nine weeks ended October 30, 1998
decreased approximately $174,000, or 13.3%, from the comparable period of the
prior year. Interest expense declined due to the pay down of mortgages.
The effective tax rate in the thirty-nine weeks ended October 30, 1998
was 39.0%, compared to a 45.0% 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 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 290,000 ounces at October 30, 1998 and is subject
to fluctuations based on changes in the market value of gold. At October 30,
1998, the Company held approximately 220,500 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 80% 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 Consolidated Financial
Statements and the Company's January 30, 1998 audited consolidated financial
statements.
Net accounts receivable increased from $19.6 million at January 30,
1998 to $40.2 million at October 30, 1998. The increase in net accounts
receivable results primarily from seasonal fluctuations in sales. The allowance
for returns and doubtful accounts increased from $10.8 million at January 30,
1998 to $11.7 million at October 30, 1998. The increase in the amount of the
allowance at October 30, 1998 is primarily attributable to seasonal adjustments
in the reserve for returns.
Inventories increased from $12.8 million at January 30, 1998 to $14.1
million at October 30, 1998. This increase is primarily attributable to the
seasonal build up of jewelry inventories of approximately $1.6 million, offset
by a decrease in tobacco and other inventories of $700,000.
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<PAGE> 14
Tobacco inventories declined as a result of inventory write-downs due to damage
caused by Hurricane Georges. At October 30, 1998, 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 $7.4 million at January 30, 1998 to
$9.0 million at October 30, 1998. This increase is primarily attributable to
seasonal gold purchases and the timing of payments. Accrued expenses decreased
from $8.9 million at January 30, 1998 to $8.0 million at October 30, 1998. This
decrease primarily results from reduced amounts accrued for payroll and gold
price adjustments due to the timing of payments thereon.
The Company expects to incur capital expenditures related to its
jewelry business of approximately $500,000 during the balance of fiscal 1999,
principally for improvement of manufacturing facilities and the purchase of
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 at least the next 12 months.
YEAR 2000
The Year 2000 issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year. When
the millennium date change occurs, date-sensitive systems may recognize the year
2000 as the year 1900, or not at all. This inability to recognize or properly
treat the Year 2000 may result in system failures or cause systems to process
critical financial and operational information incorrectly.
During fiscal 1998, the Company began to assess the potential impact of
the Year 2000 issue on the Company's internal computerized information systems.
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be modified, upgraded or replaced to become
Year 2000 compliant. In connection with this, the Company is currently upgrading
its primary business application software to the latest version, which is Year
2000 compliant. The Company expects to complete this conversion by the end of
the second quarter of calendar year 1999. The Company's distribution and
electronic data interchange software applications and equipment are already year
2000 compliant. All remaining business applications will be upgraded or replaced
by June 1999. In addition, the Company's non-information technology systems and
equipment, such as its security and communications systems, are already year
2000 compliant or are currently being upgraded or replaced.
The total estimated cost of the Company's Year 2000 compliance is
$400,000, of which $100,000 was expended through October 30, 1998. The cost of
the Year 2000 project is being expensed as incurred and is not expected to have
a material adverse effect on the Company's results of operations, liquidity or
capital resources. The estimated cost of implementing the Company's primary
business software upgrade is approximately $800,000 and is not included in the
Year 2000 project cost estimate. The software upgrade was initiated to meet
future industry
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<PAGE> 15
requirements and the related cost will be capitalized. The costs
associated with the Company's Year 2000 compliance efforts and software upgrade
are being funded with cash flows from operations.
The Company has recently begun examining its relationships with certain
key customers and suppliers to determine the extent to which the Company is
vulnerable to failure of those third parties to remedy their own Year 2000
issues. The Company depends upon its customers for sales and cash flow. Year
2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. The Company
does not currently have any formal information concerning the Year 2000
compliance of its customers but has received indications that its larger
customers are working on Year 2000 compliance. If a significant portion of the
Company's customers do not successfully and timely achieve Year 2000 compliance,
the Company's business operations could be adversely affected. Management does
not believe that the Company's relationship with any individual inventory
supplier is material to the Company's operations and therefore, does not
believe that the failure of any inventory vendor to be Year 2000 compliant would
have a material adverse effect on the Company.
To date, the Company has not established a contingency plan for
possible Year 2000 issues. Where needed, the Company will develop such
contingency plans based upon the results of its primary business software
conversion and final assessment of risks associated with third parties. The
major efforts related to contingency planning are expected to occur in the first
half of 1999.
The discussion of the Company's efforts, and management expectations,
relating to Year 2000 compliance are forward-looking statements. The cost of the
project and the date by which the Company plans to complete its Year 2000
compliance efforts are based on management's estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of personnel trained in this area, third party modification plans,
and other factors. Nevertheless, there can be no guarantee that these estimates
will be achieved, and actual results could differ materially from these
estimates.
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<PAGE> 16
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:
On October 7, 1998, the Company filed a report on Form 8-K disclosing,
under Item 5, that OroAmerica, Inc. had issued a press release on
September 30, 1998, announcing that the Company's Board of Directors
had authorized a stock repurchase program, under which the Company may
purchase up to 300,000 shares of its Common Stock.
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<PAGE> 17
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: December 11, 1998 By: SHIU SHAO
----------------- -------------------------------------
SHIU SHAO, Director, Chief Operating
Officer, Chief Financial Officer, and
Vice President
Date: December 11, 1998 By: BETTY SOU
----------------- -------------------------------------
BETTY SOU, Controller
-15-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OROAMERICA,
INC.'S CONSOLIDATED BALANCE SHEET AT OCTOBER 30, 1998 (UNAUDITED) AND
CONSOLIDATED STATEMENT OF INCOME FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 30,
1998 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-1999
<PERIOD-END> OCT-30-1998
<CASH> 5,315
<SECURITIES> 0
<RECEIVABLES> 51,903
<ALLOWANCES> 11,679
<INVENTORY> 14,122
<CURRENT-ASSETS> 68,225
<PP&E> 24,743
<DEPRECIATION> 13,402
<TOTAL-ASSETS> 90,481
<CURRENT-LIABILITIES> 20,406
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 70,069
<TOTAL-LIABILITY-AND-EQUITY> 90,481
<SALES> 126,470
<TOTAL-REVENUES> 126,470
<CGS> 96,479
<TOTAL-COSTS> 96,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 170
<INTEREST-EXPENSE> 1,132
<INCOME-PRETAX> 6,681
<INCOME-TAX> 2,606
<INCOME-CONTINUING> 4,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,075
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.64
</TABLE>
