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, 1998
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
1, 1998 was 7,765,769.
2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income for the Three and Nine Months Ended September 30, 1997
and 1998 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURE 15
3
PART I: FINANCIAL INFORMATION
ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 (1) 1998
------ ------------ -------------
Current assets:
Cash and cash equivalents $ 1,007,153 $ 1,152,570
Accounts receivable, less allowance for doubtful
accounts of $200,104 in 1997 and $566,319 in 1998 9,174,602 13,774,924
Inventories 12,006,285 10,276,036
Prepaid expenses and other current assets 3,597,237 3,312,874
Income taxes recoverable 3,653,933 2,106,000
------------ ------------
Total current assets 29,439,210 30,622,404
Property and equipment, net 3,186,404 3,035,650
Goodwill, less accumulated amortization of $4,615,719
in 1997 and $4,489,045 in 1998 31,294,348 13,395,715
Other assets 1,276,819 1,242,254
Deferred tax assets -- 5,261,124
------------ ------------
Total assets $ 65,196,781 $ 53,557,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 6,500,000 $ 10,700,000
Accounts payable 7,578,832 5,745,340
Accrued expenses and other current liabilities 3,419,528 6,215,575
------------ ------------
Total current liabilities 17,498,360 22,660,915
Other liabilities 503,274 --
------------ ------------
Total liabilities 18,001,634 22,660,915
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 and outstanding
in 1997 and 1998 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Accumulated other comprehensive loss (57,924) (57,000)
Retained earnings 18,421,447 2,846,613
Treasury stock, 402,000 and 821,000 common shares
in 1997 and 1998 at cost (2,907,430) (3,632,435)
------------ ------------
Total stockholders' equity 47,195,147 30,896,232
------------ ------------
Total liabilities and stockholders' equity $ 65,196,781 $ 53,557,147
============ ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1997.
See accompanying notes to consolidated financial statements.
2
4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Net sales $ 28,375,373 $ 23,064,148 $ 73,545,760 $ 56,363,750
Cost of goods sold 19,975,115 16,699,481 51,096,887 41,113,878
------------ ------------ ------------ ------------
Gross profit 8,400,258 6,364,667 22,448,873 15,249,872
Selling, general and administrative
expenses 7,725,774 6,792,318 21,512,299 19,582,961
Restructuring charge -- 3,750,000 -- 3,750,000
Asset impairment charge -- 16,525,306 -- 16,525,306
------------ ------------ ------------ ------------
Operating earnings (loss) 674,484 (20,702,957) 936,574 (24,608,395)
Other income, net 484,520 786,831 1,982,197 1,662,908
Interest expense, net (111,537) (169,651) (276,579) (489,951)
------------ ------------ ------------ ------------
Earnings (loss) before
income tax expense
(benefit) 1,047,467 (20,085,777) 2,642,192 (23,435,438)
Income tax expense (benefit) 413,728 (6,899,204) 1,043,628 (7,860,604)
------------ ------------ ------------ ------------
Net earnings (loss) 633,739 (13,186,573) 1,598,564 (15,574,834)
Other comprehensive income,
net of tax - foreign currency
translation adjustment -- 410 -- 924
------------ ------------ ------------ ------------
Comprehensive income
(loss) $ 633,739 $(13,186,163) $ 1,598,564 (15,573,910)
============ ============ ============ ============
Net earnings (loss) per share:
Basic $ 0.08 $ (1.62) $ 0.19 (1.91)
Diluted $ 0.08 $ (1.62) $ 0.19 (1.91)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL LOSS EARNINGS STOCK TOTAL
--------- ------------ ------------ ------------- ------------ ------------ ------------
Balance at
December 31, 1997 8,586,769 $ 85,868 $ 31,653,186 $ (57,924) $ 18,421,447 $ (2,907,430) $ 47,195,147
Net loss -- -- -- -- (15,574,834) -- (15,574,834)
Other comprehensive
income -- -- -- 924 -- -- 924
Treasury stock -- -- -- -- -- (725,005) (725,005)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 1998 8,586,769 $ 85,868 $ 31,653,186 $ (57,000) $ 2,846,613 $ (3,632,435) $ 30,896,232
============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
6
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
1997 1998
------------ ------------
Cash flows from operating activities:
Net earnings (loss) $ 1,598,564 $(15,574,834)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 1,970,083 1,918,859
Restructuring charge -- 3,750,000
Asset impairment charge -- 16,525,306
Deferred tax provision -- (5,764,398)
Changes in assets and liabilities:
Accounts receivable (6,179,787) (4,600,322)
Inventories (1,959,163) 1,730,249
Prepaid expenses and other current assets (1,178,753) 284,363
Other assets (95,505) 34,565
Accounts payable 2,141,724 (1,832,568)
Accrued expenses and other current liabilities 79,581 (953,953)
Income taxes recoverable (619,136) 1,547,933
------------ ------------
Net cash used in operating activities (4,242,392) (2,934,800)
------------ ------------
Cash flows from investing activities:
Acquisitions of property and equipment (928,249) (394,778)
Other (180,212) --
------------ ------------
Net cash used in investing activities (1,108,461) (394,778)
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit facilities, net 5,300,000 4,200,000
Acquisition of treasury stock -- (725,005)
------------ ------------
Net cash provided by financing activities 5,300,000 3,474,995
------------ ------------
Net increase (decrease) in cash and cash equivalents (50,853) 145,417
Cash and cash equivalents at beginning of period 1,044,094 1,007,153
------------ ------------
Cash and cash equivalents at end of period $ 993,241 $ 1,152,570
============ ============
Supplemental information:
Cash paid during the period for:
Income taxes $ 1,586,564 $ 65,327
============ ============
Interest $ 298,231 $ 495,568
============ ============
See accompanying notes to consolidated financial statements.
5
7
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated (the "Company") and its wholly owned
subsidiaries. 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.
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, 1997 and 1998 are not
necessarily indicative of the operating results to be expected for a full year.
(2) RESTRUCTURING CHARGE
Effective September 30, 1998, the Company entered into an agreement (the
"Termination Agreement") to terminate the employment contracts of Adrienne and
Gianluigi Vittadini (the "Vittadinis"), the chairman and vice chairman,
respectively, of Adrienne Vittadini Enterprise, Inc. ("AVE"). Under such
employment agreements, entered into in January 1996 in connection with the
acquisition of AVE, the Company had agreed to provide certain base and bonus
compensation as well as certain benefits to the Vittadinis. The Termination
Agreement settles all amounts due under the employment agreements and amends
certain provisions of the January 1996 acquisition agreement. Other amounts
payable to the Vittadinis under the January 1996 acquisition agreement are
generally unaffected by the Termination Agreement, however, future payments are
likely to be limited to an .825% royalty on future licensee sales commencing in
January 2001. As a result of the Termination Agreement, the Company recognized a
restructuring charge of $3,750,000 in the consolidated statements of operations
for the three and nine months ended September 30, 1998, of which $3,150,000 was
paid to the Vittadinis in October 1998.
In connection with the restructuring described above, the Company plans to
discontinue a handbag joint venture between AVE and a third party and has
recorded a charge of $500,000 related to its investment and advances to the
joint venture partner which it deemed are no longer recoverable. The Company
expects to replace the joint venture with a new licensee.
(3) ASSET IMPAIRMENT CHARGE
As a result of the termination of the Vittadinis, operating losses of the AVE
division during 1997 and 1998 and the prospects for additional losses by the AVE
division for the foreseeable future, management of the Company has assessed the
recoverability of AVE's long-lived assets including goodwill. Based on
management's best estimate of future operating results for the AVE division,
management has concluded that it is not likely the Company can recover all of
AVE's long-lived
6
8
(3) CONTINUED
assets on an undiscounted cash flow basis. Accordingly, the Company has
recognized an asset impairment charge with respect to goodwill of $16,525,306 in
the three and nine months ended September 30, 1998. The charge was based upon
an independent appraisal of the fair value of the AVE division as of September
30, 1998.
(4) REPORTING COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income, as of January
1, 1998. SFAS No. 130 requires the reporting and display of comprehensive income
and its components and accumulated comprehensive income in a full set of
financial statements. Comprehensive income represents the Company's change in
equity during the periods presented from transactions and other events and
circumstances from nonowner sources. The impact of adoption was not material.
(5) INVENTORIES
Inventories at December 31, 1997 and September 30, 1998 consist of the
following:
1997 1998
----------- -----------
Piece goods $ 2,959,703 $ 2,731,743
Work in process 2,863,727 1,255,940
Finished goods 6,182,855 6,288,353
----------- -----------
$12,006,285 $10,276,036
=========== ===========
(6) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating
$23,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
arrangements are secured by certain of the Company's assets and bear interest at
the banks' prime rate plus 0.25% to 1.0% or Libor plus 2.5%, at the Company's
option. The arrangements expire on June 30, 1999. As of September 30, 1998,
$10,700,000 of borrowings, bearing interest at an average rate of 6.97%, and
$3,596,905 of commercial letters of credit were outstanding under the credit
facilities.
(7) EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 Earnings Per Share, as of December 31, 1997, and accordingly,
has restated all prior periods in accordance with the pronouncement. The impact
on adoption was not material. Basic and diluted net earnings (loss) per common
share is based on the weighted average number of common shares outstanding
which were 8,384,769 and 8,125,508 and 8,384,769 and 8,148,904 for the three
months and nine months ended September 30, 1997 and 1998, respectively.
7
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results for the first nine months of 1998 were below historical levels. The
Company's results were adversely impacted by weaker sales and customer demand at
all three of the Company's operating divisions; Marisa Christina (MC), Adrienne
Vittadini (AVE) and Flapdoodles. Management attributes the decline in operating
results primarily to the change in consumer habits and a shift in the buying
patterns of major department stores to favor a smaller number of suppliers with
very large name brands. Sales were also negatively impacted by a conscious
decision to reduce sales to discounters, as well as unfavorable year to date
sales by retail customers. The Company expects this trend to continue.
Effective September 30, 1998, the Company entered into an agreement (the
"Termination Agreement") to terminate the employment contracts of Adrienne and
Gianluigi Vittadini (the "Vittadinis"), the chairman and vice chairman,
respectively, of Adrienne Vittadini Enterprise, Inc. ("AVE"). Under such
employment agreements, entered into in January 1996 in connection with the
acquisition of AVE, the Company had agreed to provide certain base and bonus
compensation as well as certain benefits to the Vittadinis. The Termination
Agreement settles all amounts due under the employment agreements and amends
certain provisions of the January 1996 acquisition agreement. Other amounts
payable to the Vittadinis under the January 1996 acquisition agreement are
generally unaffected by the Termination Agreement, however, future payments are
likely to be limited to an .825% royalty on future licensee sales commencing in
January 2001. As a result of the Termination Agreement, the Company recognized a
restructuring charge of $3,750,000 in the consolidated statements of operations
for the three and nine months ended September 30, 1998, of which $3,150,000 was
paid to the Vittadinis in October 1998.
As a result of the termination of the Vittadinis, operating losses of the AVE
division during 1997 and 1998 and the prospects for additional losses by the AVE
division for the foreseeable future, management of the Company has assessed the
recoverability of AVE's long-lived assets including goodwill. Based on
management's best estimate of future operating results for the AVE division,
management has concluded that it is not likely the Company can recover all of
AVE's long-lived assets on an undiscounted cash flow basis. Accordingly, the
Company has recognized an asset impairment charge with respect to goodwill of
$16,525,306 in the three months ended September 30, 1998. Such charge was based
upon an independent appraisal of the fair value of the AVE division as of
September 30, 1998.
In connection with the restructuring described above, the Company plans to
discontinue a handbag joint venture between AVE and a third party. In connection
with the reorganization, the Company has recorded a charge of $500,000 related
to its investment and advances to the joint venture partner which it deemed are
no longer recoverable.
8
10
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-month and nine- month periods ended
September 30, 1997 and 1998.
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1997 1998 1997 1998
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Gross profit 29.6 27.6 30.5 27.1
Selling, general and administrative
expenses 27.2 29.5 29.2 34.8
Restructuring charge -- 16.3 -- 6.7
Asset impairment charge -- 71.6 -- 29.3
----- ----- ----- -----
Operating earnings (loss) 2.4 (89.8) 1.3 (43.7)
Other income, net 1.8 3.4 2.7 3.0
Interest expense, net (0.4) (0.7) (0.4) (0.9)
Income tax expense (benefit) 1.5 (29.9) 1.4 (14.0)
----- ----- ----- -----
Net earnings (loss) 2.3% (57.2%) 2.2% (27.6%)
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net sales. Net sales decreased 18.7%, from $28.4 million in 1997 to $23.1
million in 1998. The decrease is attributable primarily to a decline in sales at
the AVE and the Flapdoodles divisions. The sales declines were offset to some
extent by higher sales at the MC division. The decline in sales at the
Flapdoodles division was principally the result of lower sales to department
stores as the result of management's decision to no longer sell certain low
margin accounts.
Gross profit. Gross profit decreased 23.8%, from $8.4 million in 1997 to $6.4
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 29.6% in 1997 to 27.6% in 1998. The
decline in the gross profit percentage for the 1998 three months was
attributable primarily to the impact that certain fixed costs associated with
design and production had on a significantly lower sales volume.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 11.7%, from $7.7 million in 1997 to $6.8
million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 27.2% in 1997 to 29.5% in 1998. The
decrease in dollar amount is primarily attributable to variable expenses related
to lower sales volume and also to the Company's ongoing efforts to control
operating expenses. The percentage of net sales increase was attributable to
certain fixed costs on a lower sales volume.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis described above.
Asset impairment charge. Asset impairment charge relates to the writedown
of goodwill associated with the AVE division described above.
Other income, net. Other income, net consists of royalty, licensing and
copyright infringement income. The amount has increased as a result of higher
sales by Adrienne Vittadini licensees for the three months.
9
11
Interest expense, net. Interest expense, net increased 51.8%, from $112 thousand
in 1997 to $170 thousand in 1998, primarily as the result of higher average
outstanding borrowings.
Income tax expense (benefit). Income tax expense (benefit) was $414 thousand
expense in 1997 and ($6.9) million benefit in 1998 as a result of the loss
incurred in 1998. The Company's effective income tax rates for the three months
ended September 30, 1997 and 1998 were 39.5% and (34.3%), respectively. The
lower effective tax rate in 1998 is the result of valuation allowances
established for operating losses in certain states.
The net operating loss for 1998 will be carried back to 1996 to recover federal
taxes paid in that year. However, the Company's write-down of the AVE goodwill
will not be deductible for income tax purposes in the current period. Rather,
the Company will continue to deduct the amount over its remaining tax life of
approximately 12 years. Management estimates that the Company will be able to
recover the deferred federal income tax benefit of such goodwill deductions
through earnings generated by the MC and Flapdoodles divisions in future years.
The Company has established a valuation allowance of approximately $1 million
for state net operating loss carryforwards generated by the AVE division since
these net operating losses will only be available to reduce future taxable
income of the AVE division.
Net earnings (loss). Net earnings (loss) declined from net earnings of $634
thousand in 1997 to net loss of ($13.2) million in 1998 as a result of the
aforementioned items.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net sales. Net sales decreased 23.4%, from $73.6 million in 1997 to $56.4
million in 1998. The decrease is attributable primarily to a decline in sales at
all three of the Company's operating divisions.
Gross profit. Gross profit decreased 32.1%, from $22.4 million in 1997 to $15.2
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 30.5% in 1997 to 27.1% in 1998. The
decline in the gross profit percentage for the 1998 nine months was attributable
primarily to the impact that certain fixed costs, associated with design and
production, had on lower sales volume.
Selling, general and administrative expense. Selling, general and administrative
expenses decreased 8.8%, from $21.5 million in 1997 to $19.6 million in 1998. As
a percentage of net sales of the Company, selling, general and administrative
expenses increased from 29.2% in 1997 to 34.8% in 1998, as a result of the lower
sales volume. The decrease in dollar amount is attributable to variable expenses
related to lower sales volume and also to the Company's ongoing efforts to
control operating expenses.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis described above.
Asset impairment charge. Asset impairment charge relates to the writedown of
goodwill associated with the AVE division described above.
Other income, net. Other income, net consists of royalty, licensing and
copyright infringement income. The amount has declined as a result of lower
sales by Adrienne Vittadini licensees for the nine months.
Interest expense, net. Interest expense, net increased 76.9% from $277 thousand
in 1997 to $490 thousand in 1998, primarily as the result of higher average
outstanding borrowings.
10
12
Income tax expense (benefit). Income tax expense (benefit) changed from $1.0
million expense in 1997 to ($7.9) million benefit in 1998 as the result of the
loss incurred in 1998. The Company's effective income tax rates for the nine
months ended September 30, 1997 and 1998 were 39.5% and (33.5)%, respectively.
The lower effective tax rate in 1998 is the result of valuation allowances
established for operating losses in certain states.
Net earnings (loss). Net earnings (loss) declined from net earnings of $1.6
million in 1997 to net loss of ($15.6) million in 1998 as a result of the
aforementioned items.
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 these
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 10% lower than in
other selling seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company has line of credit facilities with two banks, aggregating
$23,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
arrangements are secured by certain of the Company's assets and bear interest at
the banks' prime rate plus 0.25% to 1.0% or Libor plus 2.5%, at the Company's
option. The arrangements expire on June 30, 1999. As of September 30, 1998,
$10,700,000 of borrowings and $3,596,905 of commercial letters of credit were
outstanding under the credit facilities.
During 1998, the Company has planned capital expenditures of approximately
$500,000, primarily to upgrade computer systems and open new outlet stores.
These capital expenditures will be funded by internally generated funds and, if
necessary, bank borrowings under the Company's line of credit facilities.
Capital expenditures during the nine months ended September 30, 1998 were
approximately $395,000.
The Company believes that funds generated by operations, if any, and the
expected renegotiated line of credit facility will provide financial resources
sufficient to meet all of its working capital and letter of credit requirements
for at least the next twelve months.
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.
11
13
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.
INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year. The
inability of computer programs to recognize a year that begins with "20" could
result in system failures, miscalculations or errors causing disruptions of
operations or other business activities.
The Company has undertaken a program to address the Year 2000 issue with respect
to (i) the Company's information systems, (ii) the Company's non-information
systems, and (iii) certain systems of the Company's major customers and
suppliers. As described below, the Company's Year 2000 program includes (i)
assessment of the problem, (ii) development of remedies, (iii) testing of such
remedies and (iv) the preparation of contingency plans to deal with the worst
case scenarios.
Information Systems - The Company maintains information systems at each of its
three operating divisions. Information systems at the Company's MC and AVE
divisions have been remediated, tested and have been determined by management to
be Year 2000 compliant. The Company is in the process of remediating information
systems at the Flapdoodles division. The Company expects to have this system
remediated and tested by March 1999.
Non-Information Systems - The Company has not completed its assessment of the
Year 2000 issue with respect to critical non-information systems. However,
management believes that such issues, if any, would be limited to the Company's
telephone systems. The Company expects to complete this assessment by December
1998. Remediation required, if any, will be completed by March 1999.
Customer and Supplier Systems - The Company has begun informal discussions with
major customers and suppliers with respect to the Year 2000 issue. The Company
currently has limited electronic interfaces with customers and vendors and,
accordingly, is focused on its customers, and vendors, ability to operate
following January 1, 2000. The Company intends to make formal inquiries of its
key customers and suppliers during 1999 to complete this assessment and
establish contingency plans as necessary.
Costs Related to the Year 2000 Issue - To date the Company has incurred less
than $50 thousand to remediate its Year 2000 information systems issues and
expects to incur an additional $100 thousand to complete the remediation and
testing of the Flapdoodles information systems. Costs, if any, to remediate the
non-information systems are not expected to be material.
Risk Related to the Year 2000 Issue - Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's operation, the actual effects of the issue cannot be known until the
Year 2000. Failure of the Company and its major customers and suppliers to
appropriately remediate the Year 2000 issue could have a material adverse effect
on the Company's financial condition and results of operations.
12
14
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. Those 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 10.22. Termination Agreement dated September 30, 1998 by and among
Adrienne Vittadini, Gianluigi Vittadini and Marisa Christina,
Incorporated.
Exhibit 27. Financial Data Schedules
Exhibit 28. Press release dated November 11, 1998
Reports on Form 8-K - no reports on Form 8-K were filed during the quarter ended
September 30, 1998.
14
16
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, 1998 /s/ S. E. Melvin Hecht
----------------- -------------------------------------
S. E. Melvin Hecht
Chief Financial Officer and Treasurer
15
17
EXHIBIT INDEX
-------------
Exhibit 10.22. Termination Agreement dated September 30, 1998 by and among
Adrienne Vittadini, Gianluigi Vittadini and Marisa Christina,
Incorporated.
Exhibit 27. Financial Data Schedules
Exhibit 28. Press release dated November 11, 1998