1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended September 30, 2000
----------------------------------------------------------
or
[ ] 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: 0-24176
-------------------------------------------------
Marisa Christina, Incorporated
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 11-3216809
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(201)-758-9800
- --------------------------------------------------------------------------------
(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
----- -----
The number of shares outstanding of the Company's Common Stock on November
13, 2000 was 7,761,769.
2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 1999
and September 30, 2000 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) -- Three and Nine Months Ended September 30, 1999
and 2000 (Unaudited) 3
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1999 and 2000 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3: Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 14
3
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1999(1) 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 346,006 $ 424,740
Accounts receivable, less allowance for doubtful
accounts of $253,264 in 1999 and $234,869 in 2000 8,624,566 12,986,471
Inventories 10,522,363 7,839,160
Income taxes recoverable 11,853 35,717
Prepaid expenses and other current assets 2,377,735 898,986
------------ ------------
Total current assets 21,882,523 22,185,074
Property and equipment, net 2,018,232 1,197,768
Goodwill, less accumulated amortization of $2,938,740 in 1999
and $3,367,175 in 2000 6,275,331 6,221,614
Other assets 355,614 228,954
------------ ------------
Total assets $ 30,531,700 $ 29,833,410
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable $ 4,500,000 $ 7,500,000
Accounts payable 3,075,394 2,674,499
Accrued expenses and other current liabilities 1,072,339 804,990
------------ ------------
Total current liabilities 8,647,733 10,979,489
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 15,000,000 shares authorized, 8,586,769
shares issued in 1999 and 2000 85,868 85,868
Additional paid-in capital 31,653,186 31,664,680
Accumulated other comprehensive loss (56,600) (55,600)
Accumulated deficit (6,166,052) (9,204,342)
Treasury stock, 821,000 common shares in 1999 and 825,000
common shares in 2000 at cost (3,632,435) (3,636,685)
------------ ------------
Total stockholders' equity 21,883,967 18,853,921
------------ ------------
Total liabilities and stockholders' equity $ 30,531,700 $ 29,833,410
============ ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1999.
See accompanying notes to consolidated financial statements.
2
4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Net sales $ 20,434,456 $ 18,955,283 $ 45,424,815 $ 45,735,237
Cost of goods sold 14,358,393 13,162,695 34,632,560 34,428,685
------------ ------------ ------------ ------------
Gross profit 6,076,063 5,792,588 10,792,255 11,306,552
Selling, general and administrative
expenses 5,354,884 4,272,307 15,352,952 12,773,495
Outlet store closing costs -- -- -- 1,005,417
------------ ------------ ------------ ------------
Operating earnings (loss) 721,179 1,520,281 (4,560,697) (2,472,360)
Other income, net 287,279 33,520 1,138,251 116,964
Gain on the sale of the Adrienne
Vittadini Division 645,899 -- 645,899 --
Interest expense, net (178,798) (185,043) (609,618) (456,894)
------------ ------------ ------------ ------------
Earnings (loss) before
income tax expense
(benefit) 1,475,559 1,368,758 (3,386,165) (2,812,290)
Income tax expense (benefit) 494,000 526,000 (1,134,000) 226,000
------------ ------------ ------------ ------------
Net earnings (loss) 981,559 842,758 (2,252,165) (3,038,290)
Other comprehensive income,
net of tax -- foreign currency
translation adjustment -- 1,000 5,300 1,000
------------ ------------ ------------ ------------
Comprehensive income
(loss) $ 981,559 $ 843,758 $ (2,246,865) $ (3,037,290)
============ ============ ============ ============
Net earnings (loss) per weighted
average common share:
Basic $ 0.13 $ 0.11 $ (0.29) $ (0.39)
Diluted $ 0.13 $ 0.11 $ (0.29) $ (0.39)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
1999 2000
----------- -----------
Cash flows from operating activities:
Net loss $(2,252,165) $(3,038,290)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,071,782 684,800
Write-off of outlet store property and equipment -- 654,005
Deferred income tax expense -- 226,000
Gain on the sale of the Adrienne Vittadini Division (645,899) --
Loss on other asset write-offs 13,801 --
Changes in assets and liabilities, net of effects from the sale
of the Adrienne Vittadini Division in 1999:
Accounts receivable (4,615,781) (4,361,905)
Inventories (896,750) 2,683,203
Income taxes recoverable 1,579,501 (23,864)
Prepaid expenses and other current assets (835,742) 601,180
Other assets 131,982 126,660
Accounts payable 2,045,820 (400,895)
Accrued expenses and other current liabilities 247,874 (267,349)
----------- -----------
Net cash used in operating activities (4,155,577) (3,116,455)
----------- -----------
Cash flows from investing activities:
Proceeds from the sale of the Adrienne Vittadini Division 8,373,484 --
Property and equipment additions (260,555) (89,906)
Receipt of amount due from the sale of the Adrienne Vittadini Division -- 651,569
Additions to goodwill related to product line acquisition -- (374,718)
----------- -----------
Net cash provided by investing activities 8,112,929 186,945
----------- -----------
Cash flows from financing activities:
Repayments of loan payable to bank, net (4,150,000) (4,500,000)
Borrowings from finance company, net -- 7,500,000
Other -- 8,244
----------- -----------
Net cash provided by (used in) financing activities (4,150,000) 3,008,244
----------- -----------
Net increase (decrease) in cash and cash equivalents (192,648) 78,734
Cash and cash equivalents at beginning of period 981,329 346,006
----------- -----------
Cash and cash equivalents at end of period $ 788,681 $ 424,740
=========== ===========
Supplemental information:
Cash paid during the period for:
Income taxes $ 59,347 $ 34,684
=========== ===========
Interest $ 616,962 $ 466,979
=========== ===========
See accompanying notes to consolidated financial statements.
4
6
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its wholly owned
subsidiaries (the "Company"). Significant intercompany accounts and
transactions are eliminated in consolidation.
The unaudited consolidated financial statements do not include all
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to the Company's
audited consolidated financial statements, included in its annual report
on Form 10-K for the year ended December 31, 1999.
In the opinion of management, the unaudited consolidated financial
statements include all necessary adjustments (consisting of normal,
recurring accruals), for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented.
The results of operations for the three months and nine months ended
September 30, 1999 and 2000 are not necessarily indicative of the
operating results to be expected for a full year.
(2) OUTLET STORE CLOSING
During the second quarter of 2000, the Company closed twelve of its
thirteen Flapdoodles outlet stores and recognized a nonrecurring
operating charge of approximately $1.0 million. The nonrecurring charge
consisted of $654.0 thousand for the write-off of store property and
equipment, $296.0 thousand for lease termination fees and other facility
closure costs and $50.0 thousand for severance and employee benefits
costs. As of September 30, 2000, all amounts accrued in conjunction with
the closures had been paid. In addition, in connection with the store
closures, the Company recognized inventory write-offs of approximately
$150.0 thousand, which are included in cost of goods sold.
(3) DISPOSITION OF THE ADRIENNE VITTADINI DIVISION
On September 2, 1999, the Company completed the sale of substantially all
the assets, properties and rights of its Adrienne Vittadini Division
("AVE") to de V & P, Inc. for $9.77 million in cash and the assumption of
certain liabilities of AVE. Cash proceeds received at closing of $8.1
million, net of transaction and related costs, were used by the Company
to pay down borrowings under its bank credit facility. A post-closing
adjustment of approximately $920.0 thousand was also included in the sale
price, for which approximately $650.0 thousand was reflected in prepaids
and other current assets at December 31, 1999 and subsequently collected
in 2000. The Company recognized a pre-tax gain of approximately $646.0
thousand on the sale.
5 (Continued)
7
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
Pro forma consolidated net sales, net earnings (loss) and diluted net
earnings (loss) per common share for the three and nine months ended
September 30, 1999, assuming the disposition had occurred on January 1,
1999, are as follows (in thousands, except for per common share amount):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
-------- --------
Net sales $ 17,356 $ 37,386
Net earnings (loss) 554 (1,516)
Diluted net earnings (loss) per common share 0.07 (0.20)
======== ========
(4) INVENTORIES
Inventories at December 31, 1999 and September 30, 2000 consist of the
following:
1999 2000
----------- -----------
Piece goods $ 2,268,287 $ 959,904
Work in process 1,353,743 1,446,393
Finished goods 6,900,333 5,432,863
----------- -----------
$10,522,363 $ 7,839,160
=========== ===========
(5) LOAN PAYABLE
Effective June 14, 2000, the Company has a $17.5 million line of credit
facility with a finance company, which may be utilized for commercial
letters of credit, banker's acceptances, commercial loans and letters of
indemnity. Borrowings under the facility are secured by certain of the
Company's assets, primarily inventory and accounts receivable, and bear
interest at the prime rate plus .75%. In addition, the credit agreement
requires the Company to maintain certain levels of working capital and
tangible net worth. The arrangement expires on June 14, 2002.
As of September 30, 2000, $7.5 million of borrowings, bearing interest at
10.25% and $1.5 million of commercial letters of credit were outstanding
under the credit facility. Available borrowings at September 30, 2000
were $7.3 million. The Company expects to have sufficient financing to
meet its working capital needs through the expiration of the arrangement.
Prior to June 14, 2000, the Company had a $10.0 million line of credit
facility with a bank.
6 (Continued)
8
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
(6) NET EARNINGS (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Basic and diluted net earnings (loss) per weighed average common share is
based on the weighted average number of common shares outstanding, which
was 7,765,769 for the three and nine months ended September 30, 1999 and
7,765,899 and 7,765,812 for the three and nine months ended September 30,
2000. The effect of stock options outstanding during the three and nine
months ended September 30, 1999 and 2000 were not included in the
computation of diluted net earnings (loss) per weighted average common
share because the effect would have been antidilutive.
(7) SEGMENT REPORTING
The divisions of the Company include: Marisa Christina (MC), Flapdoodles
and Adrienne Vittadini (AVE), prior to its disposition in September 1999,
for which a summary of each follows:
- MC designs, manufactures and distributes "better" women's knitwear.
- Flapdoodles designs, manufactures and distributes children's
clothing. Flapdoodles also maintains licensees for footwear and
sleepwear.
- AVE designed and distributed sportswear for women and maintained
licensees for scarves, swimwear, eyewear, shoes, cosmetics, travel
bags and luggage.
7 (Continued)
9
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
The Company evaluates performance based on stand-alone division earnings
(loss) before income taxes. The following information is provided in
thousands:
MC FLAPDOODLES AVE ELIMINATIONS CONSOLIDATION
-------- ----------- ------- ------------ -------------
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $ 10,784 6,572 3,078 -- 20,434
Operating earnings (loss) 1,163 (370) (72) -- 721
Earnings (loss) before income
tax expense (benefit) 1,105 (672) 118 925 1,476
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales $ 14,276 4,679 -- -- 18,955
Operating earnings 1,487 33 -- -- 1,520
Earnings (loss) before income
tax expense (benefit) 1,335 (347) -- 381 1,369
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $ 21,912 15,474 8,039 -- 45,425
Operating loss (353) (1,982) (2,226) -- (4,561)
Earnings (loss) before income
tax expense (benefit) (545) (2,857) (3,303) 3,319 (3,386)
Total assets 17,410 16,010 1,034 3,322 37,776
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales $ 30,629 15,106 -- -- 45,735
Operating loss (196) (2,276) -- -- (2,472)
Earnings (loss) before income
tax expense (benefit) (537) (3,419) -- 1,144 (2,812)
Total assets 21,086 13,581 -- (4,834) 29,833
(8) LEGAL PROCEEDINGS
The Company is involved, from time to time, in litigation and proceedings
arising out of the ordinary course of business. There are no pending
material legal proceedings or environmental investigations to which the
Company is a party or to which the property of the Company is subject.
8
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
In order to reverse the trend of declining sales and profits the Company
undertook a number of initiatives over the past three years to reduce
overhead, replace certain sales and marketing personnel and exit
unprofitable product lines.
During the second quarter of 2000, the Company closed twelve of its
thirteen Flapdoodles outlet stores and recognized a nonrecurring
operating charge of approximately $1.0 million. The nonrecurring charge
consisted of $654.0 thousand for the write-off of store property and
equipment, $296.0 thousand for lease termination fees and other facility
closure costs and $50.0 thousand for severance and employee benefits
costs. As of September 30, 2000, all amounts have been paid. In addition,
in connection with the store closures, the Company recognized inventory
write-offs of approximately $150.0 thousand, which are included in cost
of goods sold.
On September 2, 1999, the Company completed the sale of substantially all
of the assets, properties and rights of AVE to de V & P, Inc. for $9.77
million in cash and the assumption of certain liabilities of AVE. Cash
proceeds received at closing of $8.1 million, net of transaction and
related costs, were used by the Company to pay down borrowings under its
bank credit facility. A post-closing adjustment of approximately $920.0
thousand was also in the sale price. The Company recognized a pre-tax
gain of approximately $646.0 thousand on the sale.
Management believes that the Company's prospects for improved operating
results for the remainder of 2000 are better due to the improving outlook
of MC and the closing of Flapdoodles' outlet stores. Failure of
Flapdoodles to achieve profitability could negatively impact the
recoverability of the carrying value of assets, including goodwill.
The following table sets forth information with respect to the percentage
relationship to net sales of certain items of the Company's consolidated
statements of operations for the three and nine months ended September
30, 1999 and 2000.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1999 2000 1999 2000
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Gross profit 29.7 30.6 23.8 24.7
Selling, general and administrative
expenses 26.2 22.5 33.8 27.9
Outlet store closing costs -- -- -- 2.2
----- ----- ----- -----
Operating earnings (loss) 3.5 8.1 (10.0) (5.4)
Other income, net 1.4 0.2 2.5 0.3
Gain on sale of Adrienne Vittadini Division 3.2 -- 1.4 --
Interest expense, net (0.9) (1.0) (1.3) (1.0)
Income tax expense (benefit) 2.4 2.8 (2.5) 0.5
----- ----- ----- -----
Net earnings (loss) 4.8% 4.5% (4.9)% (6.6)%
===== ===== ===== =====
9
11
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2000
Net sales. Net sales decreased 7.2%, from $20.4 million in 1999 to $19.0 million
in 2000. Higher sales were achieved at MC. Net sales of MC increased 32.4% from
$10.8 million in 1999 to $14.3 million in 2000. MC introduced a new line this
year that contributed about 84% of the MC sales increase in this quarter. Net
sales of Flapdoodles declined 28.8% from $6.6 million in 1999 to $4.7 million in
2000. Flapdoodles' sales declined due to the closing of its outlet stores in
April 2000. Net sales of AVE were $3.1 million in 1999. Excluding net sales of
AVE, net sales increased 9.2% from 1999 to 2000.
Gross profit. Gross profit decreased 4.7%, from $6.1 million in 1999 to $5.8
million in 2000 primarily as a result of lower net sales due primarily to the
sale of AVE. As a percentage of net sales, gross profit increased from 29.7% in
1999 to 30.6% in 2000. Gross profit as a percentage of net sales was positively
impacted by the desposition of AVE.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 20.2%, from $5.4 million in 1999 to
$4.3 million in 2000. As a percentage of net sales, SG&A decreased from 26.2% in
1999 to 22.5% in 2000. The decrease in dollar amount is attributable to the
disposition of AVE and the closing of Flapdoodles' outlet stores, partially
offset by higher variable expense at MC related to the higher sales volume. The
decline as a percentage of net sales is attributed to a reduction in certain
fixed costs. SG&A of MC increased 30.4% from $2.3 million in 1999 to $3.0
million in 2000. SG&A of Flapdoodles decreased 38.1% from $2.1 million in 1999
to $1.3 million in 2000.
Other income, net. Other income, net, which consists of royalty, licensing and
copyright infringement income, decreased 88.3% from $287.3 thousand in 1999 to
$33.5 thousand in 2000. The decrease is attributed to the decline in licensing
income as a result of the sale of AVE, which contributed $254.0 thousand of
licensing income in the 1999 period.
Gain on sale of the Adrienne Vittadini Division. The gain on the sale of the
Adrienne Vittadini division represents the pretax gain recognized on the sale of
AVE described above.
Interest expense, net. Interest expense, net increased 3.5%, from $178.8
thousand in 1999 to $185.0 thousand in 2000, primarily as a result of lower
average outstanding borrowings partially offset by higher interest rates.
Income tax expense (benefit). Income tax expense (benefit) was $494.0 thousand
in 1999 compared with $526.0 thousand in 2000. The Company's effective income
tax rate increased from 33.5% in 1999 to 38.4% for 2000 because of a reduction
in gross deferred tax assets in 2000.
Net earnings (loss). Net earnings (loss) changed from $981.6 thousand in 1999 to
$842.8 thousand in 2000 as a result of the aforementioned items.
10
12
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
Net sales. Net sales increased 0.7%, from $45.4 million in 1999 to $45.7 million
in 2000. Higher sales were achieved at MC. Net sales of MC increased 39.8% from
$21.9 million in 1999 to $30.6 million in 2000. During the first quarter of
2000, MC introduced a new line, which contributed about 65% of the MC sales
increase. MC's sales have also improved due to increased distribution. Net sales
of Flapdoodles declined 2.4% from $15.5 million in 1999 to $15.1 million in
2000. Net sales of AVE were $8.0 million in 1999. Excluding net sales of AVE,
net sales increased 22.3% from 1999 to 2000.
Gross profit. Gross profit increased 4.8%, from $10.8 million in 1999 to $11.3
million in 2000. As a percentage of net sales, gross profit increased from
23.8% in 1999 to 24.7% in 2000. Gross profit was positively impacted by the
disposition of AVE.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 16.8%, from $15.4 million in 1999 to
$12.8 million in 2000. As a percentage of net sales, SG&A expenses decreased
from 33.8% in 1999 to 27.9% in 2000, primarily as a result of higher sales. The
decrease in dollar amount is attributable to the disposition of AVE, partially
offset by higher variable expense at MC related to the higher sales volume. SG&A
of MC increased 32.8% from $6.1 million in 1999 to $8.1 million in 2000. SG&A of
Flapdoodles declined 21.7% from $6.0 million in 1999 to $4.7 million in 2000.
Outlet store closing costs. Outlet store closing costs relate to the closing of
twelve of Flapdoodles' thirteen retail outlets, as described in the overview.
Other income, net. Other income, net, which consists of royalty, licensing and
copyright infringement income, decreased 89.7% from $1.1 million in 1999 to
$117.0 thousand in 2000. The decrease is attributed to the decline in licensing
income as a result of the sale of AVE, which contributed $1.0 million of
licensing income in 1999.
Gain on sale of the Adrienne Vittadini Division. The gain on the sale of the
Adrienne Vittadini division represents the pretax gain recognized on the sale of
AVE described above.
Interest expense, net. Interest expense, net decreased 25.1% from $609.6
thousand in 1999 to $456.9 thousand in 2000, primarily as the result of lower
average outstanding borrowings partially offset by higher interest rates.
Income tax expense (benefit). Income tax expense (benefit) increased from ($1.1
million) in 1999 to $226.0 thousand in 2000. The change in the Company's
effective income tax rate from (33.5%) in 1999 to 8.0% in 2000 was because of
a reduction in gross deferred tax assets in 2000.
Net earnings (loss). Net earnings (loss) increased from ($2.3 million) in 1999
to ($3.0 million) in 2000 as a result of the aforementioned items.
11
13
SEASONALITY
The Company's business is seasonal, with a substantial portion of its revenues
and earnings occurring during the second half of the year as a result of the
Back-to-School, Fall and Holiday selling seasons. This is due to both a larger
volume of unit sales in these seasons and traditionally higher prices for fall
and holiday season garments, which generally require more costly materials than
the Spring/Summer and Resort seasons. Merchandise from Back-to-School and Fall
collections, the Company's largest selling seasons, and Holiday, the Company's
next largest season, are shipped in the last two fiscal quarters. Merchandise
for Resort, Spring/Summer and Early Fall, the Company's lower volume seasons, is
shipped primarily in the first two quarters. In addition, prices of products in
the Resort, Spring/Summer and Early Fall collections average 5% to 50% lower
than in other selling seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17.5 million line of credit facility with a finance company,
which may be utilized for commercial letters of credit, banker's acceptances,
commercial loans and letters of indemnity. Borrowings under the facility are
secured by certain of the Company's assets, primarily inventory and accounts
receivable, and bear interest at the prime rate plus .75%. The arrangement
expires on June 14, 2002. As of September 30, 2000, $7.5 million of borrowings,
bearing interest at 10.25% and $1.5 million of commercial letters of credit were
outstanding under the credit facility. Available borrowings at September 30,
2000 were $7.3 million. The Company expects to have sufficient financing to meet
its working capital needs through the expiration of the arrangement.
During the first nine months of 2000, the Company had capital expenditures of
approximately $90.0 thousand, primarily to upgrade computer systems. Capital
expenditures for the remainder of 2000 are expected to be $260.0 thousand. These
capital expenditures will be funded by internally generated funds and, if
necessary, borrowings under the Company's line of credit facility. During the
first quarter of 2000, the Company also acquired the name of a small ladies' and
men's apparel company for approximately $375.0 thousand, including transaction
costs.
EXCHANGE RATES
Although it is the Company's policy to contract for the purchase of imported
merchandise in United States dollars, reductions in the value of the dollar
could result in the Company paying higher prices for its products. During the
last three fiscal years, however, currency fluctuations have not had an impact
on the Company's cost of merchandise. The Company does not engage in hedging
activities with respect to such exchange rate risk.
IMPACT OF INFLATION
The Company has historically been able to adjust prices, and therefore,
inflation has not had, nor is it expected to have, a significant effect on the
operations of the Company.
CHANGES IN ACCOUNTING PRINCIPLES
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company expects to adopt SFAS No. 133, in accordance with the pronouncement
as amended, and currently does not believe the impact, if any, during 2001 will
be material on its consolidated financial statements.
12
14
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes
certain of the SEC staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. Management believes
that SAB 101 will have no impact on its consolidated financial statements.
During March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation. Interpretation No. 44 clarifies certain issues, related to the
application of APB Opinion No. 25, Accounting for Stock Issued to Employees,
including the accounting consequence of various modifications to the terms of
previously fixed stock options. The Company adopted Interpretation No. 44 during
the third quarter of 2000, in accordance with the interpretation, however, the
adoption had no impact on the Company's consolidated financial statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However,
interest expense has not been and is not expected to be a material operating
expense of the Company. The Company has implemented management monitoring
processes designed to minimize the impact of sudden and sustained changes in
interest rates. As of September 30, 2000, the Company's floating rate debt is
based on the Prime rate. The fair market value of the Company's debt
approximates its book value. If the Company's interest rates increased or
decreased by 100 basis points during the nine months ended September 30, 2000,
interest expense and cash flows would have increased or decreased by
approximately $60.0 thousand.
Currently, the Company does not use foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
All purchases from foreign contractors are made in US dollars and the Company's
investment in its foreign subsidiary was $140.0 thousand at September 30, 2000.
FORWARD LOOKING INFORMATION
Except for historical information contained herein, the statements in this form
are forward looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements involve known and unknown risks and uncertainties which may
cause the Company's actual results in future periods to differ materially from
forecasted results. Those risks include, among others, risks associated with the
success of future advertising and marketing programs, the receipt and timing of
future customer orders, price pressures and other competitive factors and a
softening of retailer or consumer acceptance of the Company's products leading
to a decrease in anticipated revenues and gross profit margins. These and other
risks are described in the Company's filings with the Securities and Exchange
Commission (SEC), copies of which are available from the SEC or may be obtained
upon request from the Company.
13
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings required to be disclosed in response to Item 103
of Regulation S-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedule
Reports on Form 8-K - No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
SIGNATURE
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.
Date: November 13, 2000 /s/ S. E. Melvin Hecht
---------------------- -------------------------------------
S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
14