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 June 30, 1999
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 August 1,
1999 were 7,765,769.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 1998
and June 30, 1999 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) -- Three and Six Months Ended June 30, 1998
and 1999 (Unaudited) 3
Consolidated Statement of Stockholders' Equity -- Six Months
Ended June 30, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1998 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
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 15
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PART I: FINANCIAL INFORMATION
ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1998 (1) 1999
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 981,329 $ 495,271
Accounts receivable, less allowance for doubtful
accounts of $379,581 in 1998 and $288,335 in 1999 8,694,364 5,571,056
Inventories 8,600,980 7,696,943
Income taxes recoverable 2,955,492 1,866,454
Prepaid expenses and other current assets 1,945,826 1,748,977
------------ ------------
Total current assets 23,177,991 17,378,701
Property and equipment, net 2,726,150 2,592,706
Goodwill, less accumulated amortization of $4,707,325 in 1998
and $5,143,884 in 1999 13,177,435 12,740,876
Other assets 487,596 508,073
Deferred tax assets 4,859,392 4,859,392
------------ ------------
Total assets $ 44,428,564 $ 38,079,748
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 9,850,000 $ 7,650,000
Accounts payable 3,204,799 2,788,164
Accrued expenses and other current liabilities 1,210,918 707,161
------------ ------------
Total current liabilities 14,265,717 11,145,325
------------ ------------
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 1998 and 1999 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Retained earnings (accumulated deficit) 2,113,228 (1,120,496)
Accumulated other comprehensive loss (57,000) (51,700)
Treasury stock, 821,000 common shares in 1998 and 1999 at
cost (3,632,435) (3,632,435)
------------ ------------
Total stockholders' equity 30,162,847 26,934,423
------------ ------------
Total liabilities and stockholders' equity $ 44,428,564 $ 38,079,748
============ ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1998.
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
Net sales $ 13,279,958 $ 10,726,118 $ 33,299,602 $ 24,990,359
Cost of goods sold 10,143,155 8,849,971 24,414,397 20,274,167
------------ ------------ ------------ ------------
Gross profit 3,136,803 1,876,147 8,885,205 4,716,192
Selling, general and administrative
expenses 5,734,335 4,753,243 12,790,643 9,998,068
------------ ------------ ------------ ------------
Operating loss (2,597,532) (2,877,096) (3,905,438) (5,281,876)
Other income, net 558,075 428,294 876,077 850,972
Interest expense, net (156,783) (232,932) (320,300) (430,820)
------------ ------------ ------------ ------------
Loss before income tax
benefit (2,196,240) (2,681,734) (3,349,661) (4,861,724)
Income tax benefit (630,400) (898,000) (961,400) (1,628,000)
------------ ------------ ------------ ------------
Net loss (1,565,840) (1,783,734) (2,388,261) (3,233,724)
Other comprehensive income (loss),
net of tax - foreign currency
translation adjustment (9,431) (3,461) 514 5,300
------------ ------------ ------------ ------------
Comprehensive loss $ (1,575,271) $ (1,787,195) $ (2,387,747) $ (3,228,424)
============ ============ ============ ============
Net loss per share:
Basic $ (0.19) $ (0.23) $ (0.29) $ (0.42)
Diluted $ (0.19) $ (0.23) $ (0.29) $ (0.42)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 1999
(Unaudited)
Retained Accumulated
Common stock Additional earnings other
-------------------- paid-in (accumulated comprehensive Treasury
Shares Amount capital deficit) loss stock Total
--------- ------- ------------ ------------- ------------- ----------- ------------
Balance at December 31,
1998 8,586,769 $85,868 $ 31,653,186 $ 2,113,228 $(57,000) $(3,632,435) $ 30,162,847
Net loss -- -- -- (3,233,724) -- -- (3,233,724)
Other comprehensive
income -- -- -- -- 5,300 -- 5,300
--------- ------- ------------ ------------ -------- ----------- ------------
Balance at June 30, 1999 8,586,769 $85,868 $ 31,653,186 $ (1,120,496) $(51,700) $(3,632,435) $ 26,934,423
========= ======= ============ ============ ======== =========== ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1999
(Unaudited)
1998 1999
----------- -----------
Cash flows from operating activities:
Net loss $(2,388,261) $(3,233,724)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,279,240 742,684
Write off of property and equipment -- 2,315
Changes in assets and liabilities:
Accounts receivable 3,494,670 3,123,308
Inventories 519,999 904,037
Prepaid expenses and other current assets 474,321 196,849
Other assets 37,065 (20,477)
Income taxes recoverable (170,046) 1,089,038
Accounts payable (3,448,553) (411,335)
Accrued expenses and other current liabilities (1,026,386) (503,757)
----------- -----------
Net cash provided by (used in) operating activities (1,227,951) 1,888,938
----------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment (141,866) (174,996)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under line of credit facilities, net 1,200,000 (2,200,000)
Acquisition of treasury stock (109,380) --
----------- -----------
Net cash provided by (used in) financing activities 1,090,620 (2,200,000)
----------- -----------
Net decrease in cash and cash equivalents (279,197) (486,058)
Cash and cash equivalents at beginning of period 1,007,153 981,329
----------- -----------
Cash and cash equivalents at end of period $ 727,956 $ 495,271
=========== ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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, 1998.
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 six months ended June
30, 1998 and 1999 are not necessarily indicative of the operating results
to be expected for a full year.
(2) INVENTORIES
Inventories at December 31, 1998 and June 30, 1999 consist of the
following:
1998 1999
----------- ------------
Piece goods $ 2,378,619 $ 1,659,642
Work in process 1,001,196 1,266,235
Finished goods 5,221,165 4,771,066
----------- ------------
$ 8,600,980 $ 7,696,943
=========== ============
(3) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating $23
million, 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 facilities expire on August 30, 1999. As of
June 30, 1999, $7.65 million of borrowings, bearing interest at an
average rate of 8.10%, and $4.6 million of commercial letters of credit
were outstanding under the credit facilities. Available borrowings at
June 30, 1999 were approximately $10.8 million. The Company expects the
banks to renew the facilities before expiration.
(Continued)
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
(4) EARNINGS PER SHARE
Basic net loss per common share is based on the weighted average number
of common shares outstanding. Diluted net loss per common share is based
on weighted average number of common shares outstanding and diluted
securities outstanding. Basic and diluted weighted average number of
common shares outstanding for the three and six months ended June 30,
1998 and 1999 were 8,160,602 and 7,765,769, respectively. The effect of
stock options outstanding during the six months ended June 30, 1998 and
1999 were not included in the computation of diluted loss per common
share because the effect would have been antidilutive.
(Continued)
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
(5) SEGMENT REPORTING
The divisions of the Company include: Marisa Christina (MC), Adrienne
Vittadini (AVE) and Flapdoodles, for which a summary of each follows:
- MC designs, manufactures and distributes "better" women's
knitwear.
- AVE designs and distributes sportswear for women and
maintains licensees for scarves, swimwear, eyewear, shoes,
cosmetics, travel bags and luggage.
- Flapdoodles designs, manufactures and distributes
children's clothing. Flapdoodles also maintains licensees
for footwear and sleepwear.
The Company evaluates performance based on stand-alone division earnings
(loss) before income taxes. The following information is provided in
thousands:
MC AVE Flapdoodles Elimination Consolidation
------- ------- ----------- ------------ -------------
THREE MONTHS ENDED
JUNE 30, 1999
Net sales..................... $ 4,560 2,328 3,838 -- 10,726
Operating loss................ (1,164) (701) (1,012) -- (2,827)
Earnings (loss) before taxes.. (879) (1,368) (1,291) 856 (2,682)
THREE MONTHS ENDED
JUNE 30, 1998
Net sales..................... $ 3,601 3,249 6,430 -- 13,280
Operating earnings (loss)..... (796) (1,978) 176 -- (2,598)
Earnings (loss) before taxes.. (1,043) (2,342) (28) 1,217 (2,196)
SIX MONTHS ENDED
JUNE 30, 1999
Net sales..................... $11,128 4,961 8,901 -- 24,990
Operating loss................ (1,717) (2,153) (1,412) -- (5,282)
Earnings (loss) before taxes.. (1,544) (3,420) (1,986) 2,088 (4,862)
Total assets.................. $15,313 8,137 16,158 (1,528) 38,080
SIX MONTHS ENDED
JUNE 30, 1998
Net sales..................... $ 8,306 9,173 15,821 -- 33,300
Operating earnings (loss)..... (1,824) (3,465) 1,384 -- (3,905)
Earnings (loss) before taxes.. (1,632) (4,380) 944 1,718 (3,350)
Total assets.................. $16,203 28,300 21,917 (6,996) 59,424
(Continued)
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results for the first half of 1999 were below historical levels. First
half results were adversely impacted by weaker sales and customer demand
at the Adrienne Vittadini (AVE) and Flapdoodles divisions as anticipated.
The Marisa Christina division showed an improvement over last year.
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.
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 six month periods ended
June 30, 1998 and 1999.
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
1998 1999 1998 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Gross profit 23.6 17.5 26.7 18.9
Selling, general and administrative 43.2 44.3 38.4 40.0
expenses ----- ----- ----- -----
Operating loss (19.6) (26.8) (11.7) (21.1)
Other income, net 4.2 4.0 2.6 3.4
Interest expense, net (1.2) (2.2) (1.0) (1.7)
Income tax benefit (4.8) (8.4) (2.9) (6.5)
----- ----- ----- -----
Net loss (11.8)% (16.6)% (7.2)% (12.9)%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales. Net sales decreased 19.2% from $13.3 million in 1998 to $10.7
million in 1999. The decrease is attributable primarily to a decline in
the sales of the AVE and Flapdoodles divisions. Net sales of AVE declined
28.4% from $3.2 million in 1998 to $2.3 million in 1999. Net sales of
Flapdoodles declined 40.3% from $6.4 million in 1998 to $3.8 million in
1999. Net sales of MC increased 26.6% from $3.6 million in 1998 to $4.6
million in 1999. AVE's sales were hurt by continued softness in the
bridge market and by its policy to minimize sales to discounters.
Flapdoodles' sales declined due to a reduction in the number of its
specialty store accounts as well as a decline in sales to department
stores. MC's sales improved due to new customers and increased
distribution.
Gross profit. Gross profit decreased 40.2% from $3.1 million in 1998 to
$1.9 million in 1999. As a percentage of net sales, gross profit
decreased from 23.6% in 1998 to 17.5% in 1999. Gross profit was
negatively impacted by the fact that certain fixed costs associated with
design and production represented a higher percentage of net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 17.1% from $5.7 million in 1998
to $4.8 million in 1999. The overall decline is primarily attributable to
the Company's lower sales and ongoing efforts to reduce operating
expenses. As a percentage of net sales, SG&A increased from 43.2% in 1998
to 44.3% in 1999. SG&A of AVE declined from $2.2 million in 1998 to $1.1
million in 1999. SG&A of Flapdoodles remained consistent
(Continued)
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at $2.0 million in 1998 and 1999. SG&A of MC increased from $1.6 million
in 1998 to $1.7 million in 1999.
Other Income, Net. Other income, net consists of royalty and licensing
income.
Interest Expense, Net. Interest expense, net increased from $157 thousand
in 1998 to $233 thousand in 1999, principally as the result of higher
average outstanding borrowings and higher interest rates being charged in
the Company's bank credit facilities.
Income Tax Benefit. Income tax benefit increased from $630 thousand in
1998 to $898 thousand in 1999 as the result of the increase in loss
before income taxes. The Company's effective income tax rates for 1998
and 1999 were 28.7% and 33.5%, respectively. The change in the Company's
effective income tax rate is attributable to the effect of state taxes
payable in certain jurisdictions.
Net Loss. Net loss increased from $1.6 million in 1998 to $1.8 million in
1999 as a result of the aforementioned items.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales. Net sales decreased 25.0% from $33.3 million in 1998 to $25.0
million in 1999. The decrease is attributable primarily to a decline in
the sales of the AVE and Flapdoodles divisions. Net sales of AVE declined
45.9% from $9.2 million in 1998 to $5.0 million in 1999. Net sales of
Flapdoodles declined 43.7% from $15.8 million in 1998 to $8.9 million in
1999. Net sales of MC increased 34.0% from $8.3 million in 1998 to $11.1
million in 1999. AVE's sales were hurt by continued softness in the
bridge market and by its policy to minimize sales to discounters.
Flapdoodles' sales declined due to a reduction in the number of its
specialty store accounts as well as a decline in sales to department
stores. MC's sales improved due to new customers and increased
distribution.
Gross profit. Gross profit decreased 46.9% from $8.9 million in 1998 to
$4.7 million in 1999. As a percentage of net sales, gross profit
decreased from 26.7% in 1998 to 18.9% in 1999. Gross profit was
negatively impacted by the fact that certain fixed costs associated with
design and production represented a higher percentage of net sales.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 21.8% from $12.8 million in 1998
to $10.0 million in 1999. The decrease is primarily attributable to the
Company's lower sales and ongoing efforts to reduce operating expenses.
As a percentage of net sales, SG&A increased from 38.4% in 1998 to 40.0%
in 1999. SG&A of AVE declined 54.7% from $5.3 million in 1998 to $2.4
million in 1999. SG&A of Flapdoodles declined 4.9% from $4.1 million in
1998 to $3.9 million in 1999. SG&A of MC increased 8.8% from $3.4 million
in 1998 to $3.7 million in 1999.
Other Income, Net. Other income, net consists of royalty and licensing
income.
Interest Expense, Net. Interest expense, net increased from $320 thousand
in 1998 to $431 thousand in 1999, principally as the result of higher
average outstanding borrowings and higher interest rates being charged in
the Company's bank credit facilities.
Income Tax Benefit. Income tax benefit increased from $961 thousand in
1998 to $1.6 million in 1999 as the result of the increase in loss before
income taxes. The Company's effective income tax rates for the six months
ended June 30, 1998 and 1999 were 28.7% and 33.5%, respectively. The
change in the Company's effective income tax rate is attributable to the
effect of state taxes payable in certain jurisdictions.
Net Loss. Net loss increased from $2.4 million in 1998 to $3.2 million in
1999 as a result of the aforementioned items.
(Continued)
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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 the 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
million, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under
the facilities 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 facilities expire on August 30, 1999. As of
June 30, 1999, $7.65 million of borrowings bearing interest at an average
rate of 8.10% and $4.6 million of commercial letters of credit were
outstanding under the credit facilities. Available borrowings at June 30,
1999 were approximately $10.8 million. The Company expects the banks to
renew the facilities before expiration.
During 1999, the Company has planned capital expenditures of
approximately $400 thousand, 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 six
months ended June 30, 1999 were approximately $175 thousand.
The Company believes that funds generated by operations, if any, and the
line of credit facilities 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 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 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 on
January 1, 2001, in accordance with the pronouncement as amended, and is
currently evaluating the impact, if any, that SFAS No. 133 will have on
its consolidated financial statements.
(Continued)
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During 1998, the American Institute of Certified Public Accountants
issued Statements of Position ("SOP") No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, and No.
98-5, Reporting on the Costs of Start-Up Activities. Sop No. 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. SOP No. 98-5 requires that costs
incurred during a start-up activity be expensed as incurred and that the
initial application of the SOP, as of the beginning of the year in which
the SOP is adopted, be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP No. 98-1 and 98-5 on
January 1, 1999, but the adoptions had no impact on its consolidated
financial statements.
YEAR 2000
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 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 September of 1999.
Non-Information Systems -- The Company is in the process of completing
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. Remediation
required, if any, is expected to be completed by September of 1999.
Customer and Supplier Systems -- The Company is in the process of
completing 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 is making 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 $82 thousand to remediate its Year 2000 information systems
issues and expects to incur an additional $18 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 operations, 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.
(Continued)
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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 June 30, 1999, the
Company's floating rate debt is based on LIBOR. The fair market value of
the Company's bank debt approximates its face value. If the Company's
interest rates increased or decreased by 100 basis points during the six
months ended June 30, 1999, interest expense and cash flows would have
increased or decreased, respectively, by approximately $50 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 U.S. dollars
and the Company's investment in its foreign subsidiary was $140 thousand
at June 30, 1999.
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
included, 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.
(Continued)
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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
Exhibit 28. Press release dated August 16, 1999.
Reports on Form 8-K -- no reports on Form 8-K were filed during the
quarter ended June 30, 1999.
(Continued)
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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: August 16, 1999 /s/ S. E. Melvin Hecht
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S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
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