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, 2004 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. incorporation or organization) Employer 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__ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes__ No [X] The number of shares outstanding of the Company's Common Stock on November 11, 2004 were 7,295,065. MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets -- September 30, 2004 (Unaudited) and December 31, 2003 2 Consolidated Statements of Operations -- Three and Nine Months Ended September 30, 2004 and 2003 (Unaudited) 3 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 2004 and 2003 (Unaudited) 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 Item 4. Internal Controls and Procedures 12 PART II. OTHER INFORMATION Item 1: Legal Proceedings 13 Item 6: Exhibits 13 SIGNATURE 14 SECTION 302 CERTIFICATIONS 15 SECTION 906 CERTIFICATIONS 17 PART I FINANCIAL INFORMATION ITEM I CONSOLIDATED FINANCIAL STATEMENTS MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2004 DECEMBER 31, (UNAUDITED) 2003 (1) ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 484,763 4,845,410 Trade accounts receivable, less allowance for doubtful accounts of $196,677 in 2004 and $296,043 in 2003 6,107,318 1,678,686 Inventories 2,251,100 2,600,595 Deferred taxes -- 800,000 Prepaid expenses and other current assets 284,537 508,537 ------------- ------------ Total current assets 9,127,718 10,433,228 Property and equipment, net 267,877 235,547 Noncurrent deferred taxes -- 5,752,240 Other assets 92,516 55,133 ------------- ------------ Total assets $ 9,488,111 16,476,148 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 1,264,656 1,503,118 Accrued expenses and other current liabilities 245,785 205,307 ------------- ------------ Total current liabilities 1,510,441 1,708,425 ------------- ------------ Stockholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued -- -- Common stock, $.01 par value. Authorized 15,000,000 shares; 8,586,769 shares issued 85,868 85,868 Additional paid-in capital 31,664,680 31,664,680 Accumulated other comprehensive loss (57,004) (59,721) Accumulated deficit (19,611,598) (12,818,828) Treasury stock, 1,291,704 common shares (4,104,276) (4,104,276) ------------- ------------ Total stockholders' equity 7,977,670 14,767,723 Commitments and contingencies ------------- ------------ Total liabilities and stockholders' equity $ 9,488,111 $ 16,476,148 ============= ============ (1) Amounts were derived from the audited consolidated balance sheet as of December 31, 2003. See accompanying notes to consolidated financial statements. 2 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ------------------------- 2004 2003 2004 2003 ----------- ---------- ---------- ---------- Net sales $ 8,365,991 10,347,061 16,485,140 18,406,437 Cost of goods sold 5,055,570 6,422,548 11,514,008 12,299,991 ----------- ---------- ---------- ---------- Gross profit 3,310,421 3,924,513 4,971,132 6,106,446 Selling, general and administrative expenses 2,011,881 2,285,869 5,332,286 6,061,009 ----------- ---------- ---------- ---------- Operating earnings (loss) 1,298,540 1,638,644 (361,154) 45,437 Other income, net 8,205 14,779 101,802 90,543 Interest income, net 5,650 1,333 22,446 23,478 ----------- ---------- ---------- ---------- Earnings (loss) before income tax expense 1,312,395 1,654,756 (236,906) 159,458 Income tax expense 7,080,589 569,745 6,555,864 67,827 ----------- ---------- ---------- ---------- Net earnings (loss) $(5,768,194) 1,085,011 (6,792,770) 91,631 =========== ========== ========== ========== Net earnings (loss) per common share: Basic $ (0.79) 0.15 (0.93) 0.01 Diluted $ (0.79) 0.15 (0.93) 0.01 =========== ========== ========== ========== See accompanying notes to consolidated financial statements. 3 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED) 2004 2003 ----------- ---------- Cash flows from operating activities: Net earnings (loss) $(6,792,770) 91,631 Adjustments to reconcile net earnings (loss) to net cash used in operating activities: Depreciation and amortization 112,041 105,576 Bad debt expense 108,000 190,000 Deferred income tax expense, including change in deferred tax valuation allowance 6,552,240 36,000 Changes in operating assets and liabilities: Trade accounts receivable (4,536,632) (4,322,109) Inventories 349,495 (757,930) Prepaid expenses and other assets 186,617 (47,999) Trade accounts payable (238,462) 60,861 Accrued expenses and other current liabilities 43,259 (186,179) ----------- ---------- Net cash used in operating activities (4,216,212) (4,830,149) Cash flows used in investing activities for property and equipment additions (144,435) (32,420) Cash flows provided by financing activities for borrowings under credit facility, net -- 572,245 ----------- ---------- Net decrease in cash and cash equivalents (4,360,647) (4,290,324) Cash and cash equivalents at beginning of period 4,845,410 4,721,614 ----------- ---------- Cash and cash equivalents at end of period $ 484,763 431,290 =========== ========== Supplemental information: Cash paid during the period for: Income taxes $ 24,814 73,283 =========== ========== See accompanying notes to consolidated financial statements. 4 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 30, 2004 and 2003 (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 accounting principles generally accepted in the United States of America. 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, 2003. 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 and nine month periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results to be expected for a full year. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) REVENUE AND RECEIVABLES Revenue is recognized when title and risk of ownership transfers to the customer, which is when the product is shipped to the customer. Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. As of September 30, 2004 and December 31, 2003, the Company's reserves for sales allowances were $866,500 and $1,328,000, respectively. Such amounts are recorded as reductions to trade accounts receivable. (b) STOCK OPTION PLAN The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. (Continued) 5 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 30, 2004 and 2003 (Unaudited) The following table illustrates the effect on net earnings (loss) if the fair-value-based method had been applied to all outstanding and unvested awards for the three and nine months ended September 30, 2004 and 2003: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------------------------ 2004 2003 2004 2003 ------------- ----------- ------------- ------------- Net earnings (loss), as reported $ (5,768,194) 1,085,011 (6,792,770) 91,631 Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (36,000) (36,000) (108,000) (94,000) -------------- ----------- ------------- ------------- Pro forma net earnings (loss) $ (5,804,194) 1,049,011 (6,900,770) (2,369) ============== =========== ============ ============= Diluted net earnings (loss) per weighted average common share: As reported $ (0.79) 0.15 (0.93) 0.01 Pro forma $ (0.80) 0.14 (0.95) -- ============= =========== ============= ============= (c) COMPREHENSIVE INCOME (LOSS) Comprehensive loss was ($5,768,566) and ($6,790,053) for the three and nine months ended September 30, 2004, respectively. Comprehensive income was $1,085,011 and $91,631 for the three and nine months ended September 30, 2003, respectively. Comprehensive income (loss) includes the Company's net earnings (loss) and the change in the foreign currency translation adjustment. (3) INVENTORIES Inventories at September 30, 2004 and December 31, 2003 consist of the following: 2004 2003 ----------- --------- Piece goods $ 33,800 86,495 Finished goods 2,217,300 2,514,100 ----------- --------- $ 2,251,100 2,600,595 =========== ========= (4) BORROWINGS UNDER CREDIT FACILITY 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 trade accounts receivable, and bear interest at the prime rate plus 0.75%. The Company is required to pay an annual commitment fee of approximately $50,000. The credit facility contains various covenants that require minimum levels of working capital and net tangible worth. (Continued) 6 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended September 30, 2004 and 2003 (Unaudited) As of September 30, 2004, there were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility. Available borrowings at September 30, 2004 were $7.3 million. The arrangement expires on June 14, 2006 and is cancelable by either party with 90 days' written notice. The Company expects to have sufficient financing to meet its working capital needs throughout the next twelve months. As of December 31, 2003, there were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility. (5) NET EARNINGS (LOSS) PER COMMON SHARE Basic and diluted net earnings (loss) per common share are based on the weighted average number of common shares outstanding, which was 7,295,065 for the three and nine months ended September 30, 2004 and 2003. The effect of stock options outstanding during the three and nine months ended September 30, 2004 and 2003 was not included in the computation of diluted loss per common share because the effect would have been antidilutive. (6) DEFERRED TAX ASSETS The Company deferred tax assets relate principally to net operating loss carry forwards of approximately $30 million that expire in various amounts through 2023. During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its' assessment, management determined that expected operating results for the three-year period ending December 31, 2004 will not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.6 million to $11.5 million at September 30, 2004. The Company, as of September 30, 2004, has a full valuation allowance for its deferred tax assets. (7) 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. 7 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Marisa Christina's consolidated financial statements. FORWARD-LOOKING STATEMENTS This report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Marisa Christina in this document that are not historical in nature, particularly those that utilize terminology such as "may," "will," "should," "likely," "expects," "anticipates," "estimates," "believes" or "plans," or comparable terminology are forward-looking statements based on current expectations about future events, which Marisa Christina has derived from information currently available. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied in such forward-looking statements. Those risks include, among others, risks associated with the apparel industry, the dependence on senior management maintaining sufficient working capital financing, 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. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. The Company's most critical accounting policies relate to estimates related to allowances for uncollectible receivables, customer sales allowances, valuation of inventories and valuation of deferred tax assets. Receivables Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. Events or changes in market conditions that adversely impact our customers or the Company's ability to generate sales, could impact management's estimates of uncollectible receivables or require the Company to offer greater sales incentives, which could negatively impact sales or profits in the future. As of September 30, 2004, the Company has allowances for bad debts of approximately $197,000 and reserves for sales allowances of approximately $866,500. Inventories Inventories are stated at the lower of cost, by the first-in, first-out method or market. In assessing the market value of its inventories, particularly those with slower turnover, the Company considers the estimated sales value less costs to dispose and a reasonable profit margin and assesses the likelihood of realizing the recorded amounts of inventory. Changes in market conditions could impact the Company's ability to achieve sales at the estimated selling prices and could negatively impact the carrying value of the Company's inventory. 8 Valuations of Deferred Tax Assets Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Management makes an assessment of the realizability of the Company's deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income of the Company in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax assets to its net realizable value. The Company's deferred tax assets related primarily to a U.S. net operating loss carryforward of approximately $30 million which can be utilized over the next twenty years. During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its' assessment, management determined that operating results for the three-year period ending December 31, 2004 will not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.6 million to $11.5 million at September 30, 2004. The Company, as of September 30, 2004, has a full valuation allowance for its deferred tax assets. If the Company is able to realize taxable income in the future, the valuation allowance could be reduced. OVERVIEW In order to reverse the trend of continuing losses, the Company undertook a number of initiatives over the past few years to reduce overhead, replace certain sales and marketing personnel and exit unprofitable product lines. The Company returned to profitability in 2001 and 2002 primarily as a result of these initiatives and focusing on its core business. The Company's operations are seasonal and year to date seasonal fluctuations are in line with historical trends. Due to sales volume not meeting expectations, management believes that the Company will have a loss before income tax expense of less than $500,000 for 2004. There can be no assurance that the loss will not be greater. The following table sets forth information with respect to the percentage relationship to net sales of certain items of the consolidated statements of operations of the Company for the three and nine months ended September 30, 2004 and 2003. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ------------------ 2004 2003 2004 2003 ------ ------ ------ ------ Net sales 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Gross profit 39.6 37.9 30.1 33.2 Selling, general and administrative expenses 24.0 22.1 32.3 32.9 ------ ------ ------ ------ Operating earnings (loss) 15.6 15.8 (2.2) 0.3 Other income, net -- 0.1 0.6 0.5 Interest income, net -- -- 0.1 0.1 Income tax expense 84.6 5.5 39.8 0.4 ------ ------ ------ ------ Net earnings (loss) (69.0)% 10.4% (41.3)% 0.5% ====== ====== ====== ====== 9 THREE MONTHS ENDED SEPTEMBER 30, 2004 (2004) COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2003 (2003) Net sales. Net sales decreased 19.1% from $10.3 million in 2003 to $8.4 million in 2004, primarily as a result of lower sales to a large private label account. Gross profit. Gross profit decreased 15.6% from $3.9 million in 2003 to $3.3 million in 2004 due to lower sales volume. As a percentage of net sales, gross profit increased from 37.9% in 2003 to 39.6% in 2004, primarily as a result of lower markdowns and discounts. Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 12.0% from $2.3 million in 2003 to $2.0 million in 2004 as a result of continuous cost reduction initiatives including reduced salaries and a variety of other savings. As a percentage of net sales, SG&A increased from 22.1% in 2003 to 24.0% in 2004 due to the lower sales volume. Other income, net. Other income, net, which consists of royalty and licensing income, was $14.8 thousand and $8.2 thousand in 2003 and 2004, respectively. Interest income, net. Interest income, net increased from $1.3 thousand in 2003 to $5.7 thousand in 2004, as a result of higher invested balances. Income tax expense. Income tax expense changed from $569 thousand in 2003 to $7.1 million in 2004. During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its' assessment, management determined that operating results for the three-year period ending December 31, 2004 will not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.6 million to $11.5 million at September 30, 2004. The Company, as of September 30, 2004, has a full valuation allowance for its deferred tax assets. Income tax expense for 2004 also includes tax expense of approximately $500 thousand related to the pre-tax profit for the quarter. Net income (loss). Net income (loss) changed from $1.1 million earnings in 2003 to $5.8 million loss in 2004 as a result of the matters discussed above. NINE MONTHS ENDED SEPTEMBER 30, 2004 (2004) COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2003 (2003) Net sales. Net sales decreased 10.4% from $18.4 million in 2003 to $16.5 million in 2004, primarily as a result of lower sales to a large private label account. Gross profit. Gross profit decreased 18.6% from $6.1 million in 2003 to $5.0 million in 2004 due to lower sales volume. As a percentage of net sales, gross profit decreased from 33.2% in 2003 to 30.1% in 2004. Gross profit as a percentage of net sales was adversely impacted by price compression including deeper discounts to the major department stores without a corresponding decrease in the cost of goods sold and the sale of a higher percentage of products from older seasons, which were sold at lower margins in the early part of 2004. Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 12.0% from $6.1 million in 2003 to $5.3 million in 2004 as a result of continuous cost reduction initiatives including reduced salaries and a variety of other savings. As a percentage of net sales, SG&A decreased from 32.9% in 2003 to 32.3% in 2004. 10 Other income, net. Other income, net, which consists of royalty and licensing income, was $90.5 thousand in 2003 and $101.8 thousand in 2004. Interest income, net. Interest income, net decreased from $23.5 thousand in 2003 to $22.4 thousand in 2004, principally as the result of lower invested balances and lower interest rates. Income tax expense. Income tax expense changed from $68 thousand in 2003 to $6.6 million in 2004. The change is a result of the increase in the deferred tax valuation allowance discussed above. Net income (loss). Net income (loss) changed from $91.6 thousand earnings in 2003 to $6.8 million loss in 2004 due to factors discussed above. 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 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 season. Merchandise from the Fall collection, the Company's largest selling season, 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 Resort, Spring/Summer and Early Fall collections average 5% to 10% 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 trade accounts receivable, and bear interest at the prime rate plus 0.75%. The arrangement expires on June 14, 2006. The Company is required to pay an annual commitment fee of approximately $50,000. The credit facility contains various covenants that require minimum levels of working capital and net tangible worth. As of September 30, 2004, there were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility. Available borrowings at September 30, 2004 were $7.3 million. During the nine months ended September 30, 2004, the Company had capital expenditures of approximately $148,000, primarily for upgrading computer systems. Capital expenditures for the remainder of 2004 are expected to be approximately $16,000. These capital expenditures will be funded by internally generated funds and, if necessary, borrowings under the Company's credit facility. The Company's contractual cash obligations related to operating leases as of September 30, 2004 include approximately $130,000 for the remainder of 2004; $529,061 in 2005; $546,344 in 2006; $547,912 in 2007, $526,491 in 2008; and $2,737,930 thereafter. EXCHANGE RATES Although it is Company 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 a significant 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. 11 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 expense of the Company throughout 2004. The Company has implemented management monitoring processes designed to minimize the impact of sudden and sustained changes in interest rates. The Company's floating rate debt is based on the prime rate; however, there were no borrowings outstanding at September 30, 2004. 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 United States dollars and the Company's investment in its foreign subsidiary was $140,000 at September 30, 2004. ITEM 4: CONTROLS AND PROCEDURES As of September 30, 2004, the Company carried out, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive Offer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information which is required to be included in the periodic reports that the Company must file with the Securities and Exchange Commission. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 12 PART II. OTHER INFORMATION ITEM 1: 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 party or to which the property of the Company is subject. ITEM 6: EXHIBITS (a) Exhibits 31.1 Section 302(a) certification of Michael H. Lerner, Chairman of the Board of Directors, Chief Executive Officer and President of the Company, dated November 11, 2004. 31.2 Section 302(a) certification of S. E. Melvin Hecht, Vice Chairman of the Board of Directors, Chief Financial Officer and Treasurer of the Company, dated November 11, 2004. 32.1 Section 906 certification of Michael H. Lerner, Chairman of the Board of Directors, Chief Executive Officer and President of the Company. 32.2 Section 906 certification of S. E. Melvin Hecht, Vice Chairman of the Board of Directors, Chief Financial Officer and Treasurer of the Company. 13 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 11, 2004 /s/ S. E. Melvin Hecht ------------------------------------- S. E. Melvin Hecht Vice Chairman, Chief Financial Officer and Treasurer 14