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, 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 November
1, 1999 was 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 September 30, 1999 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) -- Three and Nine Months Ended September 30, 1998
and 1999 (Unaudited) 3
Consolidated Statement of Stockholders' Equity -- Nine Months
Ended September 30, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Nine Months
Ended September 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 11
Item 3: Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 16
Item 4: Submission of Matters to a Vote of Security Holders 16
Item 6: Exhibits and Reports on Form 8-K 16
SIGNATURE 17
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PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1998 (1) 1999
-------- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 981,329 $ 788,681
Accounts receivable, less allowance for doubtful
accounts of $379,581 in 1998 and $308,244 in 1999 8,694,364 10,701,773
Inventories 8,600,980 8,723,730
Prepaid expenses and other current assets 1,945,826 2,446,125
Income taxes recoverable 2,955,492 1,375,991
------------ ------------
Total current assets 23,177,991 24,036,300
Property and equipment, net 2,726,150 2,119,039
Goodwill, less accumulated amortization of $4,707,325 in 1998
and $2,808,503 in 1999 13,177,435 6,405,568
Other assets 487,596 355,614
Deferred tax assets 4,859,392 4,859,392
------------ ------------
Total assets $ 44,428,564 $ 37,775,913
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 9,850,000 $ 5,700,000
Accounts payable 3,204,799 2,990,181
Accrued expenses and other current liabilities 1,210,918 1,169,750
------------ ------------
Total current liabilities 14,265,717 9,859,931
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 1998 and 1999 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Accumulated other comprehensive loss (57,000) (51,700)
Retained earnings (accumulated deficit) 2,113,228 (138,937)
Treasury stock, 821,000 common shares
in 1998 and 1999 at cost (3,632,435) (3,632,435)
------------ ------------
Total stockholders' equity 30,162,847 27,915,982
------------ ------------
Total liabilities and stockholders' equity $ 44,428,564 $ 37,775,913
============ ============
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Net sales $ 23,064,148 $20,434,456 $ 56,363,750 $45,424,815
Cost of goods sold 16,699,481 14,358,393 41,113,878 34,632,560
------------ ----------- ------------ -----------
Gross profit 6,364,667 6,076,063 15,249,872 10,792,255
Selling, general and administrative
expenses 6,792,318 5,354,884 19,582,961 15,352,952
Restructuring charge 3,750,000 -- 3,750,000 --
Asset impairment charge 16,525,306 -- 16,525,306 --
------------ ----------- ------------ -----------
Operating earnings (loss) (20,702,957) 721,179 (24,608,395) (4,560,697)
Other income, net 786,831 287,279 1,662,908 1,138,251
Gain on the sale of the Adrienne
Vittadini Division -- 645,899 -- 645,899
Interest expense, net (169,651) (178,798) (489,951) (609,618)
------------ ----------- ------------ -----------
Earnings (loss) before
income tax expense
(benefit) (20,085,777) 1,475,559 (23,435,438) (3,386,165)
Income tax expense (benefit) (6,899,204) 494,000 (7,860,604) (1,134,000)
------------ ----------- ------------ -----------
Net earnings (loss) (13,186,573) 981,559 (15,574,834) (2,252,165)
Other comprehensive income,
net of tax -- foreign currency
translation adjustment 410 -- 924 5,300
------------ ----------- ------------ -----------
Comprehensive income
(loss) $(13,186,163) $ 981,559 $(15,573,910) $(2,246,865)
============ =========== ============ ===========
Net earnings (loss) per share:
Basic $ (1.62) $ 0.13 $ (1.91) $ (0.29)
Diluted $ (1.62) $ 0.13 $ (1.91) $ (0.29)
============ =========== ============ ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
ACCUMULATED RETAINED
ADDITIONAL OTHER EARNINGS
COMMON STOCK PAID-IN COMPREHENSIVE (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL LOSS DEFICIT) STOCK TOTAL
------ ------ ------- ---- -------- ----- -----
Balance at December 31, 1998 8,586,769 $85,868 $31,653,186 $(57,000) $ 2,113,228 $(3,632,435) $30,162,847
Net loss -- -- -- -- (2,252,165) -- (2,252,165)
Other comprehensive income -- -- -- 5,300 -- -- 5,300
--------- ------- ----------- -------- ----------- ----------- -----------
Balance at September 30, 1999 8,586,769 $85,868 $31,653,186 $(51,700) $ (138,937) $(3,632,435) $27,915,982
========= ======= =========== ======== =========== =========== ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
1998 1999
---- ----
Cash flows from operating activities:
Net loss $(15,574,834) $ (2,252,165)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,918,859 1,071,782
Gain on the sale of the Adrienne Vittadini Division -- (645,899)
Restructuring charge 3,750,000 --
Asset impairment charge 16,525,306 --
Deferred tax provision (5,764,398) --
Loss on other asset write-offs -- 13,801
Changes in assets and liabilities, net of effects from the sale of
the Adrienne Vittadini Division:
Accounts receivable (4,600,322) (4,615,781)
Inventories 1,730,249 (896,750)
Prepaid expenses and other current assets 284,363 (835,742)
Other assets 34,565 131,982
Accounts payable (1,832,568) 2,045,820
Accrued expenses and other current liabilities (953,953) 247,874
Income taxes recoverable 1,547,933 1,579,501
------------ ------------
Net cash used in operating activities (2,934,800) (4,155,577)
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of the Adrienne Vittadini Division -- 8,373,484
Acquisitions of property and equipment (394,778) (260,555)
------------ ------------
Net cash provided by (used in) investing activities (394,778) 8,112,929
------------ ------------
Cash flows from financing activities:
Borrowings (repayments) under bank credit facilities, net 4,200,000 (4,150,000)
Acquisition of treasury stock (725,005) --
------------ ------------
Net cash provided by (used in) financing activities 3,474,995 (4,150,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 145,417 (192,648)
Cash and cash equivalents at beginning of period 1,007,153 981,329
------------ ------------
Cash and cash equivalents at end of period $ 1,152,570 $ 788,681
============ ============
Supplemental information:
Cash paid during the period for:
Income taxes $ 65,327 $ 59,347
============ ============
Interest $ 495,568 $ 616,962
============ ============
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 (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, 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 nine months ended September 30, 1998 and 1999 are not
necessarily indicative of the operating results to be expected for a full year.
(2) DISPOSITION OF ADRIENNE VITTADINI DIVISION
On September 2, 1999, the Company completed the sale of substantially all the
assets, properties and rights of its Adrienne Vittadini Division ("AVE") to de V
& P, Inc. for $9.5 million in cash plus a post-closing adjustment estimated to
be $900 thousand and the assignment of certain liabilities of AVE. Cash
proceeds of $8.1 million net of transaction and related costs were used by the
Company to pay down borrowings under its bank credit facilities. The Company
recognized a pre-tax gain of approximately $646 thousand on the sale.
The aggregate sale price for the AVE assets sold is as follows:
Cash received $ 9,500,000
Amount due from the Buyer 919,534
Liabilities assigned to the Buyer 1,898,281
Transaction and related costs (1,400,151)
------------
Net proceeds $ 10,917,664
============
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
The pre-tax gain recognized by the Company based on asset values at September 1,
1999 is as follows:
Net proceeds $ 10,917,664
Less:
Accounts receivable (2,608,372)
Inventories (774,000)
Prepaid expenses and other current assets (335,443)
Equipment and leasehold improvements (399,361)
Goodwill (6,154,589)
------------
Pre-tax gain $ 645,899
============
Pro forma consolidated net sales, net earnings (loss) and diluted earnings
(loss) per share for the three and nine months ended September 30, 1998 and
1999, assuming the disposition had occurred on January 1, 1998, are as follows
in thousands:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Net sales $17,611 17,356 $41,738 37,386
Net earnings (loss) 698 554 696 (1,516)
Diluted earnings (loss) per share 0.09 0.07 0.08 (0.20)
======= ======= ======= =======
(3) INVENTORIES
Inventories at December 31, 1998 and September 30, 1999 consist of the
following:
1998 1999
---- ----
Piece goods $2,378,619 $1,668,904
Work in process 1,001,196 811,439
Finished goods 5,221,165 6,243,387
---------- ----------
$8,600,980 $8,723,730
========== ==========
(4) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating $11.0
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 rates plus 0.25% to 1.0%. The arrangements expire on December
31, 1999. As of September 30, 1999, $5.7 million of borrowings, bearing interest
at an average rate of 8.88%, and $3.4 million of commercial letters of credit
were outstanding under the credit facilities.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
(5) EARNINGS PER SHARE
Basic and diluted weighted average number of common shares outstanding for the
three and nine months ended September 30, 1998 were 8,125,508 and 8,148,904,
respectively. Basic and diluted weighted average number of common shares
outstanding for the three and nine months ended September 30, 1999 were
7,765,769.
The effect of stock options outstanding during the three and nine months ended
September 30, 1998 and 1999 were not included in the computation of diluted loss
per common share because the effect would have been antidilutive.
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.
(6) 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. AVE was sold on September 2, 1999.
- Flapdoodles designs, manufactures and distributes children's
clothing. Flapdoodles also maintains licensees for footwear
and sleepwear.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(Unaudited)
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
SEPTEMBER 30, 1999
Net sales $ 10,784 3,078 6,572 -- 20,434
Operating earnings (loss) 1,163 (72) (370) -- 721
Earnings (loss) before income
taxes (benefit) 1,105 118 (672) 925 1,476
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales $ 10,019 5,453 7,592 -- 23,064
Operating earnings (loss) 683 (21,601) 215 -- (20,703)
Earnings (loss) before income
taxes (benefit) 607 (21,745) (92) 1,144 (20,086)
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
Net sales $ 21,912 8,039 15,474 -- 45,425
Operating loss (353) (2,226) (1,982) -- (4,561)
Earnings (loss) before income
taxes (benefit) (545) (3,303) (2,857) 3,319 (3,386)
Total assets 17,410 1,034 16,010 3,322 37,776
AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998
Net sales $ 18,326 14,626 23,412 -- 56,364
Operating earnings (loss) (1,140) (25,066) 1,598 -- (24,608)
Earnings (loss) before income
taxes (benefit) (1,300) (26,124) 852 3,137 (23,435)
Total assets 19,961 14,071 19,521 4 53,557
======== ======== ======== ======== ========
(7) 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 former chairman and vice chairman,
respectively, of AVE. As a result of the Termination Agreement, the Company
recognized a restructuring charge of $3.75 million in the consolidated
statements of operations for the three and nine months ended September 30, 1998.
As of September 30, 1999, obligations have been fully paid.
Additionally, the Company discontinued a handbag joint venture between AVE and a
third party and recorded a charge of $500 thousand related to its investment and
advances to the joint venture partner which it deemed are no longer recoverable.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(8) ASSET IMPAIRMENT CHARGE
As a result of the termination of the Vittadinis, operating losses of AVE during
1997 and 1998 and the prospects for additional losses by AVE for the foreseeable
future, management of the Company assessed the recoverability of AVE's
long-lived assets including goodwill. Based on management's best estimate of
future operating results for AVE as of September 30, 1998, management concluded
that it was not likely the Company could recover all of AVE's long-lived assets
on an undiscounted cash flow basis. Accordingly, the Company recognized an asset
impairment charge with respect to goodwill of approximately $16.5 million in the
three and nine months ended September 30, 1998.
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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 nine months of 1999 exclusive of the restructuring and
asset impairment charges were below historical levels. The Company's results
were adversely impacted by weaker sales and customer demand at Adrienne
Vittadini (AVE) and Flapdoodles as anticipated. The Marisa Christina Division
(MC) showed improvements over last year in net sales and operating earnings.
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.
On September 2, 1999, the Company completed the sale of substantially all the
assets, properties and rights of AVE to de V & P, Inc. for $9.5 million in cash
plus a post-closing adjustment estimated to be $900 thousand and the assignment
of certain liabilities of AVE. Cash proceeds of $8.1 million net of transaction
and related costs were used by the Company to pay down borrowings under its
bank credit facilities. The Company recognized a pre-tax gain of approximately
$646 thousand on the sale.
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, 1998 and 1999.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1998 1999
---- ---- ---- ----
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
----- ----- ----- -----
Gross profit 27.6 29.7 27.1 23.8
Selling, general and administrative
expenses 29.5 26.2 34.8 33.8
Restructuring charge 16.3 -- 6.7 --
Asset impairment charge 71.6 -- 29.3 --
----- ----- ----- -----
Operating earnings (loss) (89.8) 3.5 (43.7) (10.0)
Other income, net 3.4 1.4 3.0 2.5
Gains on sale of AVE -- 3.2 -- 1.4
Interest expense, net (0.7) (0.9) (0.9) (1.3)
Income tax expense (benefit) (29.9) 2.4 (14.0) (2.5)
----- ----- ----- -----
Net earnings (loss) (57.2)% 4.8 % (27.6)% (4.9)%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales. Net sales decreased 11.4%, from $23.1 million in 1998 to $20.4
million in 1999. The decrease is attributable to a decline in sales at the AVE
and Flapdoodles divisions. The sales declines were offset to some extent by
higher sales at the MC division. Net sales of AVE declined 43.6% from $5.5
million in 1998 to $3.1 million in 1999. Net sales of Flapdoodles declined 13.4%
from $7.6 million in 1998 to $6.6 million in 1999. Net sales of MC increased
7.6% from $10.0 million in 1998 to $10.8 million in 1999. 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 to
certain low margin accounts. MC's sales improved due to new customers and
increased distribution.
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Gross profit. Gross profit decreased 4.5%, from $6.4 million in 1998 to $6.1
million in 1999 as a result of lower sales. As a percentage of net sales, gross
profit increased from 27.6% in 1998 to 29.7% in 1999. The increase in the gross
profit percentage for the 1999 three months was attributable primarily to
improved retail sell through.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 21.2%, from $6.8 million in 1998 to
$5.4 million in 1999. As a percentage of net sales, SG&A increased from 29.5% in
1998 to 26.2% in 1999. The decrease in dollar amount is attributable to the
Company's ongoing efforts to control operating expenses. SG&A of AVE declined
63.4% from $2.5 million in 1998 to $1.0 million in 1999. SG&A of Flapdoodles
was constant at $2.1 million in 1998 and 1999. SG&A of MC increased 7.4% from
$2.2 million in 1998 to $2.3 million in 1999.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis recorded in September 1998.
Asset impairment charge. Asset impairment charge relates to the writedown of
goodwill associated with the AVE division recorded in September 1998.
Other income, net. Other income, net, which consists of royalty, licensing and
copyright infringement income, decreased 63.5% from $787 thousand in 1998 to
$287 thousand in 1999. The decrease is attributed to the decline in licensing
income and the sale of the AVE division described above. Licensing income is
expected to decline significantly in future periods as the result of the sale of
AVE.
Gain on sale of the Adrienne Vittadini Division. The gain on the sale of the
Adrienne Vittadini division represents the pretax gain recognized on the sale
of AVE described above.
Interest expense, net. Interest expense, net increased 5.4%, from $170 thousand
in 1998 to $179 thousand in 1999, primarily as the result of higher average
outstanding borrowings and higher interest rates being charged on the Company's
bank credit facilities.
Income tax expense (benefit). Income tax benefit was $6.9 million in 1998
compared with $500 thousand income tax expense in 1999. The change is a result
of the earnings before income taxes in 1999. The Company's effective income tax
rates for the three months ended September 30, 1998 and 1999 were 34.3% and
33.5%, respectively. The change in the Company's effective tax rate is
attributable to the effect of state taxes payable in certain jurisdictions.
Net earnings (loss). Net earnings (loss) changed from ($13.2) million in 1998 to
$1.0 million in 1999 as a result of the aforementioned items.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1999
Net sales. Net sales decreased 19.4%, from $56.4 million in 1998 to $45.4
million in 1999. The decrease is attributable to a decline in sales at the AVE
and Flapdoodles divisions. The sales declines were offset to some extent by
higher sales at the MC division. Net sales of AVE declined 45.0% from $14.6
million in 1998 to $8.0 million in 1999. Net sales of Flapdoodles declined 33.9%
from $23.4 million in 1998 to $15.5 million in 1999. Net sales of MC increased
19.6% from $18.3 million in 1998 to $21.9 million in 1999. 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 to
certain low margin accounts. MC's sales improved due to new customers and
increased distribution.
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Gross profit. Gross profit decreased 29.2%, from $15.2 million in 1998 to $10.8
million in 1999 as a result of lower sales. As a percentage of net sales, gross
profit decreased from 27.1% in 1998 to 23.8% in 1999. The decline in the gross
profit percentage for the 1999 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 expenses. Selling, general and
administrative expenses (SG&A) decreased 21.6%, from $19.6 million in 1998 to
$15.4 million in 1999. As a percentage of net sales, SG&A expenses decreased
from 34.8% in 1998 to 33.8% in 1999. The decrease in dollar amount and as a
percentage of net sales is primarily attributable to the Company's ongoing
efforts to control operating expenses. SG&A of AVE declined 57.5% from $7.8
million in 1998 to $3.3 million in 1999. SG&A of Flapdoodles declined 2.7% from
$6.1 million in 1998 to $6.0 million in 1999. SG&A of MC increased 7.8% from
$5.6 million in 1998 to $6.1 million in 1999.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis recorded in September 1998.
Asset impairment charge. Asset impairment charge relates to the writedown of
goodwill associated with the AVE division recorded in September 1998.
Other income, net. Other income, net, which consists of royalty, licensing and
copyright infringement income, decreased 31.6% from $1.7 million in 1998 to $1.1
million in 1999. The decrease is attributed to the decline in licensing income
and the sale of the AVE division described above. Licensing income is expected
to decline significantly in future periods as the result of the sale of AVE.
Gain on sale of the Adrienne Vittadini Division. The gain on the sale of the
Adrienne Vittadini division represents the pretax gain recognized on the sale of
AVE described above.
Interest expense, net. Interest expense, net increased 24.4% from $490 thousand
in 1998 to $610 thousand in 1999, primarily as the result of higher average
outstanding borrowings and higher interest rates being charged on the Company's
bank line facilities.
Income tax expense (benefit). Income tax benefit decreased from $7.9 million in
1998 to $1.1 million 1999. The Company's effective income tax rates for the nine
months ended September 30, 1998 and 1999 were 33.5% for both periods.
Net earnings (loss). Net loss decreased from $15.6 million in 1998 to $2.3
million in 1999 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.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has line of credit facilities with two banks, aggregating $11.0
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 rates plus 0.25% to 1.0%. The arrangements expire on December
31, 1999. As of September 30, 1999, $5.7 million of borrowings, bearing interest
at an average rate of 8.88%, and $3.4 million of commercial letters of credit
were outstanding under the credit facilities.
During 1999, the Company has planned capital expenditures of approximately $500
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 nine months ended September 30, 1999 were
approximately $261 thousand.
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.
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
operating divisions. Information systems at all the Company's divisions have
been remediated, tested and have been determined by management to be Year 2000
compliant.
Non-Information Systems - The Company has completed its assessment of the Year
2000 issue with respect to critical non-information systems.
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Customer and Supplier Systems - The Company has had 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 abilities 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 $82.0 thousand to remediate its Year 2000 information systems issues.
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However,
interest expense has not been and is not expected to be a material operating
expense of the Company. The Company has implemented management monitoring
processes designed to minimize the impact of sudden and sustained changes in
interest rates. As of September 30, 1999, the Company's floating rate debt is
based on prime rate. The fair market value of the Company's bank debt
approximates its fair value. If the Company's interest rates changed by 100
basis points during the three months and nine months ended September 30, 1999,
interest expense would have changed by approximately $25 thousand and $75
thousand, respectively.
Currently, the Company does not use foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
All purchases from foreign contractors are made in US dollars and the Company's
investment in its foreign subsidiary was $140 thousand at September 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 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.
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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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following are the results of the balloting at the Registrant's Annual
Meeting of Stockholders' held on May 14, 1999:
1. ELECTION OF DIRECTORS: FOR WITHHELD
--- --------
Michael H. Lerner 6,260,864 13,366
Christine M. Carlucci 6,260,864 8,915
Brett J. Meyer 6,265,315 13,366
Marc Ham 6,260,864 13,366
Lawrence D. Glaubinger 6,260,864 13,366
G. Michael Dees 6,260,864 13,366
Barry S. Rosenstein 6,260,864 13,366
Robert Davidoff 6,260,864 13,366
David W. Zalaznick 6,260,864 13,366
S. E. Melvin Hecht 6,260,864 13,366
Zachary Solomon 6,260,864 13,366
2. Ratification of the appointment of KPMG LLP as the
independent public accountants of the company for the year
ending December 31, 1999.
For Against Abstain
--- ------- -------
6,270,330 1,900 2,000
3. In their discretion, the proxies are authorized to vote
such other matters as may properly come before this annual
meeting of shareholders.
For Against Abstain
--- ------- -------
6,122,696 141,734 9,800
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedule
Exhibit 28. Press release dated November 4, 1999
Reports on Form 8-K - On September 17, 1999, the Company filed Form 8-K dated
September 3, 1999 providing pro forma financial information required with
respect to the sale of the assets of its Adrienne Vittadini Division.
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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: November 12, 1999 /s/ S. E. Melvin Hecht
----------------- ----------------------------------------
S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
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