<PAGE> 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 July 30, 1999.
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[ ] 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
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OROAMERICA, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 94-2385342
- -------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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:
<TABLE>
<CAPTION>
SHARES OUTSTANDING AS OF
CLASS September 8, 1999
----- ------------------------
<S> <C>
Common Stock, $.001 par value 6,035,878
</TABLE>
<PAGE> 2
OROAMERICA, INC.
REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JULY 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets ................................. 1
Consolidated Statements of Income ........................... 2
Consolidated Statements of Cash Flows........................ 3
Notes to Consolidated Financial Statements ................. 4 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9 -14
PART II - OTHER INFORMATION
Items 1 through 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K............................. 15
SIGNATURES .................................................................... 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OROAMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 30, JANUARY 29,
1999 1999
-------- ----------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 24,089 $ 30,263
Accounts receivable less allowance for returns
and doubtful accounts of $8,362 and $11,797 11,810 19,454
Other accounts and notes receivable 346 969
Inventories (Note 2) 18,123 13,694
Deferred income taxes 3,205 3,205
Prepaid income taxes 730 --
Prepaid items and other current assets 1,055 788
-------- --------
Total current assets 59,358 68,373
Property and equipment, net 13,378 11,342
Goodwill and other intangible assets, net 5,266 5,532
Patents, net 4,442 4,687
Other assets 439 169
-------- --------
$ 82,883 $ 90,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,295 $ 8,165
Income taxes payable 1,430 1,660
Accrued expenses 6,654 7,821
-------- --------
Current and total liabilities 12,379 17,646
-------- --------
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; 6,368,878 and
6,366,378 shares issued and outstanding
at July 30, 1999 and January 29, 1999, respectively 6 6
Paid-in capital 43,564 43,551
Note receivable from stock sales (190) (190)
Treasury stock, 300,000 and 95,000 shares at July 30, 1999
and January 29, 1999, respectively (Note 5) (2,340) (576)
Retained earnings 29,464 29,666
-------- --------
Total stockholders' equity 70,504 72,457
-------- --------
$ 82,883 $ 90,103
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
OROAMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
PERIODS ENDED JULY 30, 1999 AND JULY 31, 1998
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE FOR THE
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
----------------------------- -----------------------------
JULY 30, JULY 31, JULY 30, JULY 31,
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 30,091 $ 29,433 $ 69,368 $ 71,910
Cost of goods sold, exclusive of depreciation 22,087 22,505 52,584 55,534
----------- ---------- ----------- ----------
Gross profit 8,004 6,928 16,784 16,376
Selling, general and administrative expenses,
and other expenses 8,787 6,621 16,530 13,761
----------- ---------- ----------- ----------
Operating (loss) income (783) 307 254 2,615
Interest expense 295 306 590 727
----------- ---------- ----------- ----------
(Loss) income before income taxes (1,078) 1 (336) 1,888
(Benefit) provision for income taxes (431) -- (134) 736
----------- ---------- ----------- ----------
Net (loss) income $ (647) $ 1 $ (202) $ 1,152
=========== ========== =========== ==========
Basic net (loss) income per share (Note 1) $ (0.11) $ 0.00 $ (0.04) $ 0.18
=========== ========== =========== ==========
Diluted net (loss) income per share (Note 1) $ (0.11) $ 0.00 $ (0.04) $ 0.18
=========== ========== =========== ==========
Weighted average shares outstanding 6,068,878 6,290,711 6,170,545 6,272,711
Dilutive effect of stock options -- 100,657 -- 100,657
----------- ---------- ----------- ----------
Weighted average shares outstanding
assuming dilution 6,068,878 6,391,368 6,170,545 6,373,368
=========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
OROAMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
FOR THE
TWENTY-SIX WEEKS ENDED
------------------------
JULY 30, JULY 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (202) $ 1,152
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,423 1,238
Provision for losses on accounts receivable 330 330
Provision for estimated returns (3,430) (2,914)
Loss (gain) on disposal of property (Note 4) 585 (40)
Change in assets and liabilities, net of effects from
acquisition of a business:
Accounts receivable 10,844 9,207
Other accounts and notes receivable 523 (885)
Inventories (4,429) (6,301)
Prepaid income taxes and income taxes payable (960) (924)
Prepaid items and other current assets (267) (390)
Accounts payable, accrued expenses and deferred liabilities (5,037) (3,532)
-------- --------
Net cash used in operating activities (620) (3,059)
-------- --------
Cash flows from investing activities:
Capital expenditures (3,543) (1,098)
Acquisition of a business -- (280)
Purchase of an investment (270) --
Proceeds from sale of property 10 40
-------- --------
Net cash used in investing activities (3,803) (1,338)
-------- --------
Cash flows from financing activities:
Gross borrowings under line-of-credit agreement -- 400
Repayment of borrowings under line-of-credit -- (400)
Principal repayments of long-term debt -- (2,518)
Repurchase of treasury stock (1,764) --
Issuance of common stock 13 248
-------- --------
Net cash used in financing activities (1,751) (2,270)
-------- --------
Decrease in cash and cash equivalents (6,174) (6,667)
Cash and cash equivalents at beginning of period 30,263 30,351
-------- --------
Cash and cash equivalents at end of period $ 24,089 $ 23,684
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
OROAMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The 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 and twenty-six week periods ended July 30, 1999 and July 31,
1998. 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 29, 1999 audited
consolidated financial statements. The results of operations for the thirteen
and twenty-six week periods ended July 30, 1999 are not necessarily indicative
of the results for a full year.
Net income (loss) per share
Basic net income (loss) per share excludes all dilution and is computed
by dividing net income (loss) 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. For the thirteen and twenty-six week
periods ended July 30, 1999, the assumed exercise of stock options would have
been anti-dilutive and, therefore, was not considered in the computation of
diluted net loss per share. For the thirteen and twenty-six week periods ended
July 31, 1998, 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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<PAGE> 7
<TABLE>
<CAPTION>
For the Twenty-Six Weeks Ended
------------------------------
(in thousands) July 30, 1999 July 31, 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $529 $ 752
Income taxes 826 1,696
Non-cash investing and financing activities
Acquisition of a business:
Fair value of assets acquired $ -- $ 280
Liabilities assumed -- --
--------------------
Cash paid $ -- $ 280
====================
</TABLE>
NOTE 2 - INVENTORIES
Inventories consist of the following (in thousands, except per ounce
data):
<TABLE>
<CAPTION>
July 30, January 29,
1999 1999
-------- -----------
(Unaudited)
<S> <C> <C>
Gold and other raw materials $ 3,519 $ 2,401
Manufacturing costs and other 12,304 10,304
-------- --------
Jewelry inventories 15,823 12,705
Tobacco inventories 2,981 2,541
Other inventories -- 116
-------- --------
Subtotal 18,804 15,362
LIFO cost less than FIFO cost (1) (988)
Allowance for vendor advances (680) (680)
-------- --------
$ 18,123 $ 13,694
======== ========
Gold price per ounce $ 255.60 $ 285.40
======== ========
</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 276,900 fine troy ounces. In
accordance with the consignment agreements, title remains with the gold
consignors until purchased by the Company.
At July 30, 1999 and January 29, 1999, respectively, the Company held
approximately 257,100 and 191,100 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
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<PAGE> 8
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 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) limit the repurchase of treasury
stock, (e) prohibit the Company from engaging in mergers and acquisitions
without prior approval, (f) 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, (g) 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 (h) 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 July 30, 1999,
the Company was in compliance with all of the requirements of its consignment
agreements.
The Company has encountered a number of disputes with its former
Indonesian partner. In connection with this, the Company has been prevented
access to its Indonesian tobacco inventories, which approximate $1.4 million at
July 30, 1999. The Company is focused on resolving these disputes and does not
anticipate any material impact on the results of operations, financial position
or cash flows from the ultimate resolution of these disputes.
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 80% 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%. 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 July 30, 1999 or January 29, 1999. No
short-term advances were outstanding at July 30, 1999 or January 29, 1999.
Stand-by letters of credit outstanding at July 30, 1999 and at January 29, 1999
totaled $1,500,000 and 1,500,000, respectively.
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<PAGE> 9
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 July 30, 1999, the Company was in compliance with all of the
requirements of the revolving credit agreement.
NOTE 4 - SEGMENT INFORMATION
The Company's operating structure includes two reportable operating
segments: Jewelry and Cigar. The segments were determined based upon the types
of products produced and markets served by each segment. The Jewelry segment
manufactures and distributes gold jewelry products to large retailers, including
mass merchandisers, department stores and national jewelry chains. The Cigar
segment manufactures and distributes premium cigars to medium-to-small cigar
retailers. Financial information regarding the Company's operating segments is
shown below (dollars in thousands):
<TABLE>
<CAPTION>
Twenty-six weeks ended July 30, 1999 Jewelry Cigar Consolidated
- ------------------------------------ ------- ------- ------------
<S> <C> <C> <C>
Net sales $68,493 $ 875 $ 69,368
Operating income (loss) 1,422 (1,168) 254
Interest expense 589 1 590
Depreciation and amortization expense 1,332 91 1,423
Income (loss) before taxes 833 (1,169) (336)
Provision (benefit) for income taxes 334 (468) (134)
Net income (loss) 499 (701) (202)
Identifiable operating assets 79,223 3,660 82,883
Twenty-six weeks ended July 31, 1998 Jewelry Cigar Consolidated
- ------------------------------------ ------- ------- ------------
Net sales $71,671 $ 239 $ 71,910
Operating income (loss) 3,464 (849) 2,615
Interest expense 727 -- 727
Depreciation and amortization expense 1,238 -- 1,238
Income (loss) before taxes 2,737 (849) 1,888
Provision (benefit) for income taxes 1,067 (331) 736
Net income (loss) 1,670 (518) 1,152
Identifiable operating assets 77,074 5,085 82,159
</TABLE>
In June 1999 the Cigar segment closed it flagship Cigar store located in Beverly
Hills, California. The Company wrote off approximately $585,000 of leasehold
improvements and other property in connection with this closure.
-7-
<PAGE> 10
NOTE 5 - 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 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. In June 1999, the
Company's Board of Directors authorized the repurchase of an additional 300,000
shares of the Company's common stock. During the twenty-six weeks ended July 30,
1999, the Company repurchased 205,000 shares for an aggregate price of
approximately $1.8 million.
NOTE 6 - NEW ACCOUNTING STANDARDS
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, 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 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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<PAGE> 11
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 second 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.
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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<PAGE> 12
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
----------------------------
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
JULY 30, JULY 31, JULY 30, JULY 31,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 73.4 76.5 75.8 77.2
----- ----- ----- -----
Gross profit 26.6 23.5 24.2 22.8
Selling, general and administrative,
and other expenses 29.2 22.5 23.8 19.2
----- ----- ----- -----
Operating (loss) income (2.6) 1.0 0.4 3.6
Interest expense 1.0 1.0 0.9 1.0
----- ----- ----- -----
(Loss) income before income taxes (3.6) -- (0.5) 2.6
(Benefit) provision for income taxes (1.4) -- (0.2) 1.0
----- ----- ----- -----
Net (loss) income (2.2)% --% (0.3)% 1.6%
===== ===== ===== =====
</TABLE>
THIRTEEN WEEKS ENDED JULY 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED JULY 31,
1998.
Net sales for the thirteen weeks ended July 30, 1999 increased by
$658,000, or 2.2%, 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 and offset by decreases in sales prices due to a reduction in the
average market price of gold.
Gross profit for the thirteen weeks ended July 30, 1999 increased by
$1.1 million, or 15.5%, from the comparable period of the prior year. As a
percentage of net sales, gross profit increased from 23.5% for the thirteen
weeks ended July 31, 1998, to 26.6% for the current period. In the thirteen
weeks ended July 30, 1999, there was a decrease in cost of sales of $703,000,
which was attributable to a LIFO reserve adjustment of $982,000 offset by a
$279,000 decrease in the carrying value of inventory due to gold price
fluctuations. In the thirteen weeks ended July 31, 1998, there was a decrease in
the cost of sales of $201,000, which was attributable to a LIFO reserve
adjustment of $554,000 offset by a $353,000 decrease in the carrying value of
inventory due to gold price fluctuations. Absent these factors, the gross profit
margin in the thirteen weeks ended July 30, 1999 and July 31, 1998 would have
been 24.3% and 22.9%, respectively. The increase on a comparable basis was due
to changes in sales product mix. The gold prices used to cost inventory at July
30, 1999, April 30, 1999, July 31, 1998, and May 1, 1998 were $255.60, $286.60,
$288.85, and $306.90, 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 July
30, 1999 increased by $2.2 million, or 32.7%, from the comparable period of the
prior year. The increase in the amount of selling, general and administrative,
and other expenses is primarily attributable to increased personnel costs of
$291,000, increased selling and product expense of $683,000, and a decrease in
other income of $882,000. Personnel costs have risen due to increased headcount.
The increase in selling and product expenses results
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<PAGE> 13
primarily from expanded cooperative advertising agreements with certain
customers. Personnel and advertising expenses have increased due to more
extensive customer support services required to service existing customers.
Other income decreased primarily due to the $585,000 write-off of net assets
related to the Company's Beverly Hills Cigar store, which was closed at the end
of June 1999. Selling, general and administrative, and other expenses for the
Company's Cigar operations were $1.1 million and $322,000 for the quarters ended
July 30, 1999 and July 31, 1998, respectively.
Interest expense for the thirteen weeks ended July 30, 1999 decreased
approximately $11,000, or 3.6%, from the comparable period of the prior year.
Interest expense declined due to reduced borrowings under mortgage and gold
consignment agreements.
The effective tax rate in the thirteen weeks ended June 30, 1999 was a
40% tax rate benefit as compared to a 39% tax expense rate in the comparable
period of the prior year.
TWENTY-SIX WEEKS ENDED JULY 30, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED JULY
31, 1998.
Net sales for the twenty-six weeks ended July 30, 1999 decreased by
$2.5 million, or 3.5%, from the comparable period of the prior year. This
decrease was primarily attributable to a decrease in the amount of gold jewelry
(by weight) sold and to decreases in sales prices due to a reduction in the
average market price of gold.
Gross profit for the twenty-six weeks ended July 30, 1999 increased by
$408,000, or 2.5%, from the comparable period of the prior year. As a percentage
of net sales, gross profit increased from 22.8% for the twenty-six weeks ended
July 31, 1998, to 24.2% for the current period. In the twenty-six weeks ended
July 30, 1999, there was a decrease in cost of sales of $818,000, which was
attributable to a LIFO reserve adjustment of $987,000, offset by a $169,000
decrease in the carrying value of inventory due to gold price fluctuations. In
the twenty-six weeks ended July 31, 1998, there was a decrease in the cost of
sales of $443,000, which was attributable to a LIFO reserve adjustment of
$756,000 offset by a $313,000 decrease in the carrying value of inventory due to
gold price fluctuations. Absent these factors, the gross profit margin in the
twenty-six week periods ended June 30, 1999 and July 31, 1998 would have been
23.0% and 22.2%, respectively. The increase on a comparable basis was due to
changes in sales product mix. The gold prices used to cost inventory at July 30,
1999, January 29, 1999, July 31, 1998, and January 30, 1998 were $255.60,
$285.40, $288.85, and $304.85, 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 twenty-six weeks ended
July 30, 1999 increased by $2.8 million, or 20.1%, from the comparable period of
the prior year. The increase in the amount of selling, general and
administrative, and other expenses is primarily attributable to increased
selling and product
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<PAGE> 14
expense of $915,000 million, increased personnel costs of $478,000 million and a
decrease in other income of $1.1 million. Personnel costs have risen due to
increased headcount. The increase in selling and product expenses results
primarily from expanded cooperative advertising agreements with certain
customers. Personnel and advertising expenses have increased due to more
extensive customer support services required to service existing customers.
Other income has decreased due to the $585,000 write-off of net assets related
to the closure of the Company's Beverly Hills Cigar store and to non-recurring
miscellaneous income. Selling, general and administrative, and other expenses
for the Company's Cigar operations were $1.6 million and $638,000 for the
twenty-six week periods ended July 30, 1999 and July 31, 1998, respectively.
Interest expense for the twenty-six weeks ended July 30, 1999 decreased
approximately $137,000, or 18.8%, from the comparable period of the prior year.
Interest expense declined due to reduced borrowings under mortgage and gold
consignment agreements.
The effective tax rate in the twenty-six weeks ended July 30, 1999 was
a 40% tax rate benefit compared to a 39% tax expense rate 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 276,900 ounces at July 30, 1999 and is subject to
fluctuations based on changes in the market value of gold. At July 30, 1999, the
Company held approximately 257,100 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 29, 1999 audited consolidated financial
statements.
Net accounts receivable decreased from $19.5 million at January 29,
1999 to $11.8
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<PAGE> 15
million at July 30, 1999. The decrease in net accounts receivable results
primarily from seasonal fluctuations in sales. The allowance for returns and
doubtful accounts decreased from $11.8 million at January 29, 1999 to $8.4
million at July 30, 1999. The decrease in the amount of the allowance at July
30, 1999 is primarily attributable to seasonal adjustments in the reserve for
returns.
Inventories increased from $13.7 million at January 29, 1999 to $18.1
million at July 30, 1999. This increase is primarily attributable to the
seasonal build up of jewelry inventories of approximately $3.1 million. At July
30, 1999, 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 decreased from $8.2 million at January 29, 1999 to
$4.3 million at July 30, 1999. This decrease is primarily attributable to
seasonal gold purchases and the timing of payments. Accrued expenses decreased
from $7.8 million at January 29, 1999 to $6.7 million at July 30, 1999. This
decrease is primarily due to the payment of payroll liabilities and decrease in
advertising accruals.
The Company expects to incur capital expenditures of $1.0 million
during the balance of fiscal 2000, principally for the acquisition of
manufacturing facilities and equipment, 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 1999, the Company completed its assessment of 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 fiscal 1999, the Company began
upgrading its primary business application software to the latest version, which
is Year 2000 compliant. The Company completed this conversion during August
1999. The Company's distribution and electronic data interchange software
applications and equipment are Year 2000 compliant. All remaining business
applications were upgraded or replaced by the end of the second quarter of
fiscal 2000. 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
$300,000, of which $175,000 was expended through July 30, 1999. 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 cost of implementing the Company's primary business
software upgrade totals $1.5 million and is not included in the Year 2000
project cost estimate. The software upgrade was initiated to meet future
business and industry requirements and the related cost will be capitalized in
accordance with generally accepted
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<PAGE> 16
accounting principles. The costs associated with the Company's Year 2000
compliance efforts and software upgrade are being funded with cash flows from
operations.
The Company is 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 address their own Year 2000 issues. 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
second half of fiscal 2000.
The discussion of the Company's efforts, and management expectations,
relating to Year 2000 compliance are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. 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, each of which is subject to uncertainty. 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> 17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on June 14,
1999. At the Annual Meeting, Guy Benhamou, David Rousso, Bertram K. Massing,
Ronald A. Katz and Shiu Shao were elected as directors of the Company. Of the
5,878,431 shares of common stock represented in person or by proxy at the Annual
Meeting, Messrs. Benhamou, Rousso, Katz, and Shao each received 5,741,241 votes
in favor of election. Mr. Massing received 5,615,541 in favor of election.
At the Annual Meeting, Stockholders approved the proposal to amend the
OroAmerica, Inc. 1998 Incentive Stock Option Plan to (a) permit the grant of
stock options with exercise prices lower than the current market price on the
date of grant and (b) increase the number of shares subject to stock options
that may be granted to any individual during a calendar year from 50,000 to
100,000. This proposal received 5,041,991 votes for approval and 833,010 votes
against approval, with 3,430 votes abstaining.
At the Annual meeting, Stockholders approved the proposal to amend the
1994 Chief Executive Officer Bonus Plan to change the bonus formula under such
plan. This proposal received 5,287,032 votes for approval and 575,372 votes
against approval, with 16,027 votes abstaining.
At the Annual Meeting, the stockholders also approved the proposal to
ratify the selection of PricewaterhouseCoopers LLP as independent accountants
for fiscal 2000, such proposal receiving 5,874,147 votes for approval and 4,284
votes against approval.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
On July 20, 1999, the Company filed a report on Form 8-K disclosing,
under Item 5, that OroAmerica, Inc. had issued a press release on July
16, 1999, announcing that the Company's Board of Directors had approved
the repurchase of up to an additional 300,000 shares of the Company's
outstanding common stock.
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<PAGE> 18
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: September 8, 1999 By: SHIU SHAO
----------------- ----------------------------------
SHIU SHAO,
Director,
Chief Operating Officer,
Chief Financial Officer,
and Vice President
Date: September 8, 1999 By: BETTY SOU
----------------- ----------------------------------
BETTY SOU, Controller
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM OROAMERICA,
INC.'S CONSOLIDATED BALANCE SHEET AT JULY 30, 1999 (UNAUDITED) AND CONSOLIDATED
STATEMENT OF INCOME FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 1999 (UNAUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-28-2000
<PERIOD-END> JUL-30-1999
<CASH> 24,089
<SECURITIES> 0
<RECEIVABLES> 20,172
<ALLOWANCES> 8,362
<INVENTORY> 18,123
<CURRENT-ASSETS> 59,358
<PP&E> 27,699
<DEPRECIATION> 14,321
<TOTAL-ASSETS> 82,883
<CURRENT-LIABILITIES> 12,379
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 70,498
<TOTAL-LIABILITY-AND-EQUITY> 82,883
<SALES> 69,368
<TOTAL-REVENUES> 69,368
<CGS> 52,584
<TOTAL-COSTS> 52,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 330
<INTEREST-EXPENSE> 590
<INCOME-PRETAX> (336)
<INCOME-TAX> (134)
<INCOME-CONTINUING> (202)
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