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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
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 0-22432
STYLESITE MARKETING, INC.
(Exact name of registrant as specified in its charter)
(Formerly Diplomat Direct Marketing Corporation)
Delaware 13-3727399
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 Alfred Avenue
Teaneck, New Jersey 07666
- ------------------- -----
(Address of principal executive offices) (Zip Code)
(201) 833-4450 (Registrant's telephone number, including area code)
--------------
Check 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, and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
The number of shares outstanding of the Registrant's Common Stock,
$.0001 Par Value, on September 27, 1999 was 17,046,414 shares.
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STYLESITE MARKETING, INC.
JUNE 30, 1999 QUARTERLY REPORT ON FORM 10-Q/A-1
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Page Number
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Item 1. Financial Statements ...........................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.....................................................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................24
Item 2. Changes in Securities and Use of Proceeds......................................................24
Item 3. Defaults Upon Senior Securities................................................................24
Item 4. Submission of Matters to a Vote of Security Holders............................................25
Item 5. Other Information..............................................................................26
Item 6. Exhibits and Reports on Form 8-K...............................................................26
</TABLE>
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AMENDMENT TO FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1999
We are amending Part I- Financial Information to our Form 10-Q for the
quarter ending June 30, 1999 to reflect the following transactions that,
although the transactions occurred in the quarter ending September 30, 1999, we
believe is more appropriately a charge in the prior quarter:
o Write off of $870,000 for a note receivable from Genesis Direct, Inc.
Genesis Direct, Inc. filed for bankruptcy in August 1999. Although some of
the note may be collectable, we believe that the note should be written
off.
o Write off of $1,496,000 of deferred tax credit. We have previously booked
a deferred tax credit to reflect the difference between income tax
accounting and financial statement accounting for certain transactions.
Although we may be able to realize that asset by generating profit in the
future, we believe that it is appropriate to write off the asset.
o Write off of approximately $9.7 million of goodwill relating to the
acquisitions of Lew Magram Ltd. and Brownstone Studio. When we originally
acquired Lew Magram and Brownstone Studio, the aggregate value to purchase
these businesses exceeded the value of the tangible assets and customer
lists by approximately $14.0 million, the difference being goodwill, which
is being amortized over 25 years. Since the acquisitions, we have not
realized the profit generated from the acquisitions and future operating
forecasts can not justify maintaining the current amount of the goodwill
assets on our balance sheet.
o Charge of $2 million for inventory and prepaid catalog reserves and
litigation reserves.
o Reflect the capital contribution in September 1999, contingent on
stockholder approval, by The Rubin Family Irrevocable Stock Trust, as a
footnote to the financial statements.
No substantive changes were made to Part II-Other Information by this
amendment.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
To the extent that the information presented in our Quarterly Report on
Form 10-Q/A-1 for the quarter ended June 30, 1999 discusses financial
projections, information or expectations about our products or markets, or
otherwise makes statements about future events, such statements are
forward-looking. We are making these forward-looking statements in reliance on
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Although we believe that the expectations reflected in these
forward-looking statements are based on reasonable assumptions, there are a
number of risks and uncertainties that could cause actual results to differ
materially from such forward-looking statements. These include, among others:
o availability of sufficient vendor credit to obtain timely shipment of
inventory to meet customer demand;
o maintain customer loyalty to continue demand for our merchandise;
o reduce order cancellations from 25% of demand to 10%, the industry
average;
o successful expansion of product lines in our catalogs;
o consumer acceptance of our new products;
o successful implementation and consumer acceptance of our e-commerce
websites;
o price pressures and other competitive factors leading to a decrease in
anticipated revenues and gross profit margins; and
o a downturn in general economic conditions.
In addition, we disclaim any obligations to update any forward-looking
statements to reflect events or circumstances after the date of this Quarterly
Report. When considering such forward-looking statements, you should keep in
mind the risks described above and the other cautionary statements in this
Quarterly Report.
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<TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1999 and September 30, 1998..........................6
Consolidated Statements of Operations
for the nine months and three months ended June 30, 1999 and 1998 ........................7
Consolidated Statements of Cash Flows
for the nine months ended June 30, 1999 and 1998 ..........................................8
Notes to Consolidated Financial Statements...................................................9-13
</TABLE>
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StyleSite Marketing, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
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June 30, 1999 September 30, 1998
ASSETS
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Current:
Cash and cash equivalents $815,081 $322,778
Accounts receivable, net 1,745,555 1,921,209
Inventories 11,658,574 11,066,380
Prepaid catalogs 3,111,176 8,051,651
Prepaid expenses 1,866,007 1,379,567
Other current assets 336,646 837,946
------------------------ -------------------------
Total current assets 19,533,039 23,579,531
------------------------ -------------------------
Property and equipment, net 3,740,505 4,176,903
------------------------ -------------------------
Other Assets:
Goodwill, net of amortization 4,500,000 14,587,358
Customer list, net of amortization 6,500,000 7,100,000
Note receivable -- 870,000
Other 1,044,090 645,091
------------------------ -------------------------
Total assets $35,317,634 $50,958,883
======================== =========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $14,011,570 $18,469,136
Loans payable-officers 15,000 225,000
Loans payable-bank 8,139,625 5,504,371
Open prepaid orders 709,588 1,211,165
Outstanding merchandise credit 2,048,516 1,892,148
Current maturities of long-term debt 1,811,758 939,816
------------------------ -------------------------
Total current liabilities 26,736,057 28,241,636
------------------------ -------------------------
Long term debt, less current maturities 9,127,847 6,383,585
------------------------ -------------------------
Stockholders' equity
Preferred stock, $.01 par value per share, shares
authorized 1,000,000; issued and outstanding 396,645
and 546,133 3,966 5,461
Common stock, $.0001 par value-shares authorized
50,000,000; issued and outstanding 17,046,414 and
11,162,372 1,700 1,112
Additional paid-in capital 31,838,557 25,835,445
Accumulated (deficit) (32,390,493) (9,508,356)
------------------------ -------------------------
Total stockholders' equity (deficit) (546,270) 16,333,662
------------------------ -------------------------
Total liabilities and stockholders' equity (deficit) $35,317,634 $50,958,883
======================== =========================
</TABLE>
See accompanying notes to consolidated financial statements.
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StyleSite Marketing, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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For the Nine For the Nine For the Three For the Three
Months Ended Months Ended Months Ended Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
<S> <C> <C> <C> <C>
Net sales $56,442,962 $57,118,755 $14,862,425 $20,603,127
Cost of goods sold 29,613,001 26,029,624 8,674,566 9,000,300
----------------- ------------------ ----------------- ------------------
Gross profit 26,829,961 31,089,131 6,187,859 11,602,827
Selling, general and administrative expenses 35,369,557 28,018,329 11,398,908 10,947,665
Write off of goodwill 9,716,343 -- 9,716,343 --
----------------- ------------------ ----------------- ------------------
Operating income (loss) (18,255,939) 3,070,805 (14,927,392) 655,162
Interest expense (1,701,432) (958,501) (651,273) (316,252)
----------------- ------------------ ----------------- ------------------
Income (loss) before income tax (expense)
benefit (19,957,371) 2,112,304 (15,578,665) 338,910
Income tax (expense) benefit (1,496,386) -- (1,496,386) --
----------------- ------------------ ----------------- ------------------
Income (loss) from continuing operations (21,453,757) 2,112,304 (17,075,051) 338,910
Loss on discontinued operations (870,000) (2,311,691) (870,000) (239,593)
----------------- ------------------ ----------------- ------------------
Net income (loss) (22,323,757) (199,387) (17,945,051) 99,317
Preferred stock dividends (558,380) (236,250) (128,630) (78,750)
================= ================== ================= ==================
Net income (loss) to common stockholders $(22,882,137) $(435,637) $(18,073,681) $20,567
================= ================== ================= ==================
Per common share-basic:
Net income (loss) from continuing
Operations $(1.60) $0.18 $(1.17) $0.02
Net income (loss) from discontinued
Operations (0.16) (0.22) (0.06) $(0.02)
----------------- ------------------- ------------------ ------------------
Net income (loss)-Basic $(1.76) $(0.04) $(1.23) $0.00
================= =================== ================== ==================
Per common share-Diluted:
Net income (loss) from continuing
Operations $(1.60) $0.13 $(1.12) $0.02
Net income (loss) from discontinued
Operations (0.16) (0.14) (0.06) (0.01)
------------------ ------------------- ------------------ ------------------
Net income (loss)-Diluted $(1.76) $(0.01) $(1.18) $0.01
================== =================== ================== ==================
Average number of shares used in
Computation
Basic 13,021,731 10,596,513 14,712,778 11,049,872
Diluted 13,021,731 15,886,916 15,267,778 15,693,317
</TABLE>
See accompanying notes to consolidated financial statements.
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StyleSite Marketing, Inc. and Subsidiaries
Consolidated Statements of Cash Flow
(unaudited)
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<CAPTION>
For the Nine Months For the Nine
Ended Months Ended
June 30, 1999 June 30, 1998
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Cash flows from operating activities:
Net income (loss) $(22,323,757) $(199,385)
Adjustments to reconcile net income to net
cash used in operating activities:
Amortization 971,015 841,569
Depreciation 583,019 566,495
Write off of note receivable 870,000 --
Write off of goodwill 9,716,343 3,659,245
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 175,654 (532,484)
(Increase) decrease in inventories (592,194) (4,202,862)
(Increase) decrease in prepaid expenses (486,440) (3,001,261)
(Increase) decrease in prepaid catalogs 4,940,475 (3,217,538)
(Increase) decrease in other current assets 501,300 478,311
(Increase) decrease in other assets (601,001) (6,076,819)
(Increase) decrease in assets held for sale -- (3,143,235)
Increase (decrease) in accounts payable and accrued expenses (4,457,565) 7,481,115
Increase (decrease) in outstanding merchandise credits 156,368 1,118,170
Increase (decrease) in prepaid orders (501,577) 1,131,351
------------------------ -------------------------
Net cash used in operating activities (9,846,358) (5,097,328)
------------------------ -------------------------
Cash flows from investing activities:
Proceeds from sale of Biobottoms -- 1,000,000
Acquisition of subsidiary assets -- (5,181,596)
Purchase of trademark -- (741,853)
Purchase of property and equipment (146,622) --
------------------------ -------------------------
Net cash from investing activities (146,622) (4,923,449)
------------------------ -------------------------
Cash flows from financing activities:
Proceeds of loans -- 5,000,000
Increase (decrease) in long term debt and loans payable 4,000,000 --
Revolving credit loans 2,635,254 (233,173)
Preferred stock dividends paid (558,380) (284,140)
Issuance of preferred and common stock 5,002,206 5,893,794
Repayment of long-term debt and loan payables (593,796) (236,197)
------------------------ -------------------------
Net cash provided by financing activities 10,485,284 10,140,284
------------------------ -------------------------
Net increase (decrease) in cash 492,304 119,507
Cash at beginning of period 322,778 51,877
======================== =========================
Cash at end of period $815,081 $171,384
======================== =========================
</TABLE>
See accompanying notes to consolidated financial statements.
8
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StyleSite Marketing, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization, Liquidity Considerations and Management's Planned Actions
StyleSite Marketing, Inc. (the "Company") is engaged in two continuing
lines of business and, accordingly, its operations are classified into two
business segments: mail order catalog retail operations, and the manufacturing,
marketing and distribution of infants' accessories principally to mass
merchandisers. In 1998, the Company sold the Biobottoms subsidiary. The
operations of that company have been accounted for as discontinued operations.
Certain conditions and events have occurred that, when considered in
the aggregate, have caused significant operational and liquidity problems at the
Company. The conditions and events include the following:
o The Company has experienced operating losses in the past and may not be
able to operate profitably in the future.
o The Company's inadequate working capital has caused, and may continue to
cause, inadequate availability of credit from vendors, cash reserves to
be held by their credit card processors for merchandise refunds, and the
delays in printing and delivering catalogs.
o The Company may continue to be affected by its substantial debt and
restrictions under loan covenants.
Management has formulated certain planned actions and taken various
steps toward mitigating the effect of the consolidated working capital and
stockholders deficit at June 30, 1999 as well as attaining profitable operations
and improving the cash flows of the consolidated group. The plans and steps
taken include, among other things, the following:
o The Company anticipated improving its credit availability from its vendors
with the proceeds of its proposed public offering (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Introduction"), thereby timely delivering merchandise and reducing order
cancellations.
o Management implemented a cost containment program in 1998. Management
anticipates approximately $2.65 million in annual savings by reducing
selling, general and administrative expenses.
o In September 1999, the Company issued to a major stockholder 28.5 million
shares of common stock for the transfer to First Source of certain pledged
assets to pay down approximately $5 million of the loan facility. In
addition, the Company issued 6 million shares to the major stockholder for
$1 million.
o The Company is in the process of building and testing branded e-commerce
sites for each of Lew Magram and Brownstone Studio with its strategic
partner, Tadeo Holdings, Inc. The Company believes that Internet commerce
will ultimately allow it to significantly reduce the largest
non-merchandise expenses such as catalog printing costs, postage and
customer communications.
o In addition, if the Company does not complete a public offering, the
Company's chairman of the board intends to provide the Company limited
financial support for a period of one year from the date hereof to the
extent cash generated internally and cash available under the First Source
loan facility are not sufficient to provide the capital required for such
purposes and to fund future operations.
2. Summary of Significant Accounting Policies
(a) The consolidated financial statements include the accounts of the
Company and its
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wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(b) Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
(c) Property and equipment are stated at cost. Depreciation is provided
using primarily the straight-line method and accelerated methods (for machinery
and equipment) over the expected useful lives of the assets, which range from
31.5 years for the building and real property to between five and ten years for
machinery, furniture and equipment.
(d) The Company follows Statement of Financial Accounting Standards
("SFAS") No. 109. Pursuant to SFAS No. 109, for income taxes, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured by applying
enacted tax rates and laws to taxable years in which such differences are
expected to reverse.
(e) For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
(f) The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(g) Statement of Financial Accounting Standards No. 128, "Earnings per
Share." ("SFAS No. 128") is effective for financial statements for fiscal
periods ending after December 15, 1997. The new standard establishes standards
for computing and presenting earnings per share. The effect of adopting SFAS No.
128 is not expected to be material.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," established standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards are components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of and enterprises about which separate financial information is
available that is evaluated regularly by management in deciding how to allocate
resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of these standards is not
expected to have a material effect on the Company's financial position or
results of operations. The Company is currently reviewing SFAS No. 131 and has
of yet been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures.
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Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" establishes accounting and
reporting standards for derivative instruments. The Company has not in the past
or does it anticipate that it will engage in transactions involving derivative
instruments which will impact the financial statements.
(h) Long-lived assets, primarily property and equipment, goodwill and
customer lists are periodically reviewed by management to determine if there has
been a permanent impairment in their value by evaluating various factors,
including current and projected operating results. Based on this assessment,
management concluded that at June 30, 1999 and September 30, 1998, the Company's
long-lived assets were fully realizable.
(i) The carrying amounts reported in the balance sheet for cash, trade
receivables, accounts payable and accrued expenses approximate fair value based
on the short-term maturity of these instruments.
(j) The Company accounts for stock transactions with employees in
accordance with APB No. 25, "Accounting for Stock Issued to Employees." In
accordance with SFAS No. 123, "Accounting for Stock Based Compensation," the
Company has adopted the pro forma disclosure requirements contained therein.
(k) Direct response advertising costs, consisting primarily of catalog
preparation, printing and postage expenditures, are amortized over the period in
which related revenues are expected to be realized, generally three to six
months. Advertising costs, principally the amortization of such prepaid catalog
costs attributable to continuing operations, included in the accompanying
statement of operations were $21,184,000 for the nine months ended June 30, 1999
and $6,684,000 for the three months ended June 30, 1999. Included in current
assets at June 30, 1999, is $3,111,000 and at September 30, 1998, $8,052,000 of
prepaid catalog costs.
(l) Revenue is recognized at the time merchandise is shipped to
customers. Proceeds received for merchandise not yet shipped are reflected as
"prepaid orders," a current liability.
(m) The Company issues merchandise credits for certain returns of
merchandise sold with substantial discounts. Because of Lew Magram's policy of
writing off unused credits issued with the return of sale merchandise, it may be
liable for future claims on such amounts previously written off.
3. Acquisition of Lew Magram
On February 19, 1998, the Company (through its wholly owned subsidiary,
Magram Acquisition Corp.) closed on the acquisition of Lew Magram, Ltd. ("Lew
Magram"), a New York corporation with a place of business in Teaneck, New
Jersey, which is in the business of mail order catalog sales of women's
clothing. For accounting purposes, the acquisition was effected as of July 1,
1997, the date that the Company assumed effective control of Lew Magram. The
acquisition was accounted for as a purchase and the consideration consisted of
the issuance of 95,000 shares of the Company's $.01 par value, Series D
Preferred Stock, convertible into 3,166,667 shares of the Company's common stock
(which assumes a market value of $4.00 per share). The preferred stock does not
pay any dividends, but participates with common in any Company distributions.
The preferred stock has a liquidation preference of $100 per share. An
additional 250,000 shares of common stock were also given as consideration to
the sellers. The fair market value of the consideration was approximately $8.7
million and acquisition costs were approximately $646,000. The Company recorded
the carryover basis for certain selling
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stockholders of Lew Magram who are also principal stockholders of the Company.
The net fair market value of identifiable assets acquired was
approximately $6.9 million, and included customer lists valued at $5 million.
The customer lists are being amortized over a period of 10 years. Cost in excess
of net assets acquired amounted to approximately $10 million and is being
amortized over 25 years.
4. Acquisition of Brownstone
On October 30, 1997, the Company acquired out of bankruptcy all the
assets of Jean Grayson's Brownstone Studios, Inc., a mail order catalog company
for the assumption of approximately $10,000,000 in liabilities and an option to
the owners of Jean Grayson's Brownstone Studios, Inc. to purchase 200,000 shares
of common stock at $3.9375 (market value) for a period of three years. The
acquisition was accounted for as a purchase, accordingly, the operating results
include the operations of Brownstone for the period November 1, 1997, through
October 30, 1998. The purchase price was allocated to assets acquired based on
their estimated fair value, including customer lists valued at $3,000,000 which
will be amortized on a straight line basis over ten years. This treatment
results in approximately $4,000,000 in cost in excess of net assets acquired
which will be amortized on a straight line basis over twenty-five years. As a
result of this acquisition, the scope of the Company's business has expanded
into the mature women's apparel and accessories markets primarily through direct
mail catalogs. Since Brownstone was in bankruptcy prior to its acquisition in
October 1997, presentation of financial information as if it had been acquired
on October 1, 1996 was not available and would not be meaningful.
5. Sale of Biobottoms
On April 17, 1998, the Company entered into an Asset Purchase Agreement
(the "Agreement") with Genesis Direct Thirty Four, LLC ("Buyer") in which the
Buyer purchased substantially all of the assets and assumed certain of the
liabilities of Biobottoms. The Buyer paid $2,270,000 in cash and a note and
assumed $5,749,000 in liabilities. The note is subject to reduction depending on
the net assets acquired as determined in a closing date balance sheet. The
amount of the reduction of the note is in dispute. The Company, however,
believes that the reduction will not be material. If the amount of the net value
of acquired assets is less than negative $778,000 or the accrued expenses and
customer liabilities included in the assumed liabilities exceed $828,877, the
greater of such deficiencies will reduce the amount of the note. In June 1999,
the Company wrote off the balance of the note of $870,000 as uncollectible.
The Company shall retain all claims for tax refunds, tax loss
carryforwards or carrybacks of tax credits of any kind applicable to the
business of Biobottoms prior to the closing of the asset sale. The Agreement
further specifies that certain intercompany and affiliated person liabilities
will not be assumed by the Buyer.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Financial Statements and Notes thereto appearing elsewhere in this
Quarterly Report. Certain statements in this Quarterly Report which are not
statements of historical fact are forward-looking statements. See "Special Note
Regarding Forward-Looking Information" on Page 2.
Introduction
We are a prominent specialty retailer of quality women's fashion
apparel and accessories sold through mail order catalogs and we recently
commenced sales on the Internet. Currently, we target niche markets through our
two distinctive catalogs, Lew Magram, designed to appeal to fashion-oriented
women, and Brownstone Studio, designed to appeal to a broad range of fashions
for the affluent and mature woman. We recently acquired the Lew Magram and
Brownstone Studio catalogs. We acquired out of bankruptcy all of the assets of
Jean Grayson's Brownstone Studios, Inc. on October 30, 1997. We effectively took
control over Lew Magram in July 1997 and completed the acquisition on February
19, 1998.
We also manufacture and distribute, primarily to major mass
merchandisers, cloth diapers, diaper covers, layettes, infant and child travel
products and other infant accessories marketed primarily under the Ecology Kids
name. On April 17, 1998, we sold substantially all of the assets of our wholly
owned subsidiary Biobottoms, Inc.
We are currently experiencing significant delays in fulfilling
merchandise orders. This is a result of our difficulty in obtaining timely
shipment of inventory from our vendors to meet customer demand. Some of our
vendors and their lending institutions have been reluctant to extend credit to
us in such amounts and upon such terms as to support timely delivery of
inventory as needed to meet orders. This reluctance is principally a result of
our working capital being insufficient.
Our inability to timely deliver merchandise has resulted in increased
order cancellations, which, for the last 18 months have been approximately 25%
of demand compared to 10% as the industry standard. For the nine months ended
June 30, 1999, order cancellations remained high at 25% of demand. As a result,
we have recognized increased charges in both the second quarter and third
quarter of fiscal 1999 for the write off of catalog expenditures
disproportionate to the net sales realized.
We are taking steps to improve our working capital. In May 1999, we
restructured our asset based credit facility to improve our working capital
position. From March 1999 through September 1999, we have obtained approximately
$11 million in equity investments. To raise additional equity capital, we plan
to sell in a public offering 2 million shares of our common stock after giving
effect to a 1-for-13 reverse stock split. We plan to close the offering in
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October 1999. The public offering will be made only by means of a prospectus. We
anticipate that our restructured debt and additional equity, along with the
proceeds of the proposed public offering, will strengthen our ability to obtain
improved credit availability on more favorable terms, timely deliver merchandise
to our customers, reduce order cancellations, and improve initial customer
response. It is too early, however, to determine whether such additional capital
will yield such results. We can not determine at this time whether the public
offering will be completed or that net proceeds obtained from a public offering,
if completed, will be sufficient to obtain necessary vendor credit.
Results of Operations
Comparison of Our Nine Months Ended June 30, 1999 to Our Nine Months
Ended June 30, 1998
Net Sales
Consolidated net sales from continuing operations for the nine months
ended June 30, 1999, decreased slightly by 1% to $56.4 million from $57.1
million for the nine months ended June 30, 1998. Net sales for Brownstone
increased from $15.7 to $22.5 primarily because we owned Brownstone for less
than nine months for the nine month period ended June 30, 1998. Net sales for
Lew Magram decreased from $35.9 to $30.0 during this period. This is primarily
due to increased order cancellations and sellouts as a result of our inability
to timely ship merchandise in this period. Net sales for Ecology Kids decreased
from $5.6 million to $3.9 million also due to our inability to ship merchandise
in a timely fashion to our customers.
Gross Profit
Consolidated gross profit from continuing operations decreased by 11%
from $31.1 million for the nine months ended June 30, 1998 to $26.8 million for
the nine months ended June 30, 1999. Gross profit from continuing operations as
a percentage of net sales decreased from 54% for the nine months ended June 30,
1998 to 48% for the nine months ended June 30, 1999 due to a decrease in margins
on goods sold. This decrease was primarily a result of a higher proportion of
clearance merchandise sales due to an increase in returns of late delivered
merchandise resulting from our inability to obtain vendor credit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations
as a percentage of net sales increased from 49% for the nine months ended June
30, 1998 to 63% for the nine months ended June 30, 1999. The increase in
expenses is attributable to the increase in catalog production costs which are
typically written off over the sales life of the catalog. The life of the
catalog in this period was reduced as a result of our inability to mail books
over a normal catalog schedule. For the nine months ended June 30, 1999, these
costs were $21.2 million as compared
14
<PAGE>
to $15.7 million for the nine months ended June 30, 1998.
Interest expense as a percent of net sales increased from 2% for the
nine months ended June 30, 1998 as compared to 3% for the nine months ended June
30, 1999. This increase is due primarily to the interest expense attributable to
the Finova debentures.
During the nine months ended June 30, 1999, there was a write off of
goodwill of approximately $9.7 million relating to the acquisitions of Lew
Magram and Brownstone Studio. Since the acquisitions, we have not realized the
profit generated from the acquisitions and future operating forecasts cannot
justify maintaining the current amount of the goodwill assets on the balance
sheet.
Income (Loss) from Continuing Operations
Loss from continuing operations before income taxes for the nine months
ended June 30, 1999 was approximately $21.5 million as compared to income from
continuing operations of $2.1 million for the nine months ended June 30, 1998
primarily due to the write off of approximately $9.7 million of the goodwill
attributable to the Lew Magram and Brownstone acquisitions, write off of
deferred tax assets of approximately $1.2 million as well as an increase in
catalog production costs chargeable to that period and to lower margins
attributable to unshipped backorders.
Net Income (Loss)
Net loss for the nine months ended June 30, 1999 was approximately
$22.3 million, as compared to net loss for the nine months ended June 30, 1998
of $0.2 million. This increase in net loss is principally due to the write off
of goodwill as well as the decrease in net revenues and the increase in catalog
production costs, discussed above.
Three Months Ended June 30, 1999 Compared to Three Months Ended June
30, 1998
Net Sales
Consolidated net sales from continuing operations for the three months
ended June 30, 1999, decreased by 28% to $14.9 million from $20.6 million for
three months ended June 30, 1998. Financial constraints have caused reductions
and delays to printing and distributing catalogs during the quarter ended June
30, 1999. Our sales historically vary proportionate to the catalogs mailed. We
distributed 8 million Lew Magram and Brownstone catalogs during the third
quarter of fiscal 1999 as compared to 14 million catalogs during the same
quarter of fiscal 1998. Net revenues also declined as a result of an increase in
order cancellations and sellouts as a result of our inability to timely ship
merchandise in this period.
15
<PAGE>
Gross Margin
Consolidated gross profit from continuing operations decreased by 47%
from $11.6 million for the three months ended June 30, 1998 to $6.2 million for
the three months ended June 30, 1999. Gross profit from continuing operations as
a percentage of net sales decreased from 56% for the three months ended June 30,
1998 to 42% for the three months ended June 30, 1999 due to a decrease in
margins on goods sold. This decrease was primarily a result of a higher
proportion of clearance merchandise sales due to an increase in returns of late
delivered merchandise resulting from our inability to obtain vendor credit.
Selling, General and Administrative Expenses
Selling, general and administrative expenses from continuing operations
as a percentage of net sales increased from 53% for the three months ended June
30, 1998 to 77% for the three months ended June 30, 1999. The increase is
attributable to the catalog production costs for the third quarter of fiscal
1999 remaining substantially the same as the third quarter of fiscal 1998, even
though net sales substantially declined between the same periods. For the three
months ended June 30, 1999, these costs were $6.7 million as compared to $6.1
million for the three months ended June 30, 1998.
Interest expense as a percent of net sales increased from 2% for the
three months ended June 30, 1998 as compared to 4% for the three months ended
June 30, 1999. This increase is due to the decline in revenues and the increase
in interest expense attributable to the Finova debentures.
Income from Continuing Operations
Loss from continuing operations before income taxes for the three
months ended June 30, 1999 was approximately $15.6 million as compared to income
from continuing operations of approximately $0.3 million for the three months
ended June 30, 1998 primarily due to the write off of goodwill and deferred tax
credit, and the decline in net revenues.
Net Income (Loss)
Net loss for the three months ended June 30, 1999 was approximately
$17.9 million, as compared to net income for the three months ended June 30,
1998 of $0.1 million. This increase in net loss is primarily due to the write
off of goodwill and deferred tax assets and the decrease in net revenues, as
discussed above.
Liquidity and Capital Resources
Our principal source of working capital has historically been asset
based loan facilities provided by Congress Financial Corporation. On May 12,
1999, we entered into a Secured Credit
16
<PAGE>
Agreement with First Source Financial LLP providing us with a $17 million asset
based loan facility replacing our existing asset based loan facilities provided
by Congress.
The First Source loan facility provides us with a $13 million revolving
loan with an interest rate at prime plus 1 1/2%, a $3 million three year term
loan with an interest rate at prime plus 2% and a $1 million three year term
loan with an interest rate at prime plus 2% increasing to prime plus 3% on
November 15, 1999. We may convert any or all of the loans to a LIBOR (London
interbank offer rate)-based rate. The revolving loan may be converted to LIBOR
plus 3 1/4%, the $3 million term loan may be converted to LIBOR plus 4% and the
$1 million term loan may be converted to LIBOR plus 4% increasing to LIBOR plus
5% on November 15, 1999.
The loan facility is secured by substantially all of our assets, a
personal guarantee by Robert M. Rubin, our Chairman of the Board, up to $1
million and an additional $1 million cash collateral deposit by Mr. Rubin.
The amount of funds available for us to borrow under the revolving loan
is based on a percentage of our inventory and qualified receivables plus 100% of
Mr. Rubin's cash collateral. As of September 27, 1999, the aggregate
availability under the revolving loan was approximately $9.2 million, of which
there was no unused availability.
We have amended the Secured Credit Agreement to allow for an additional
$2.0 million in additional funds available under the loan facility and to waive
certain financial and other covenant defaults. The additional availability was
secured by a pledge by the Rubin Family Irrevocable Stock Trust of 900,000
shares of Tadeo Holdings, Inc. common stock.
In September 1999, our Chairman, Robert M. Rubin, and our majority
stockholder, the Rubin Family Irrevocable Stock Trust, transferred to First
Source $1 million cash collateral, approximately $825,000 in marketable
securities and 900,000 shares of Tadeo Holdings, Inc. common stock initially
pledged to secure a portion of the First Source loan facility. These assets,
when liquidated by First Source, will pay down the First Source loan facility.
Because Tadeo Holdings common stock is thinly traded, the Tadeo Holdings common
stock may not be sold immediately and may not be completely liquidated until
November 1999. Any decline in Tadeo Holdings' stock price would reduce the
amount the First Source loan facility would be paid down. Conversely, we would
benefit from any price increase prior to the liquidation of the Tadeo Holdings
stock. In addition, we will only obtain approximately $1.1 million in additional
availability under the revolving loan as a result of the pay down, assuming
Tadeo Holding's stock price is $3.25 per share. The $1 million cash collateral
will pay off a $1 million term loan and we had received availability under the
revolving loan of 100% of the value of the pledged marketable securities. We had
received availability from First Source under the revolving loan of 60% of the
value of the Tadeo Holdings common stock.
Under the Secured Credit Agreement, we are obligated to comply with
numerous covenants including (i) providing current information to First Source;
(ii) maintaining corporate
17
<PAGE>
status, books and records and minimum insurance; (iii) complying with tax and
other laws and regulations; (iv) maintaining our real estate; (v) maintaining a
minimum net worth of $14 million increasing periodically to $16.5 million; (vi)
maintaining an interest coverage ratio of 2 to 1; and (vii) maintaining a fixed
charge coverage ratio of 1.1 to 1.
We are also prohibited, except under certain circumstances, to (i)
redeem any of our outstanding common or preferred stock; (ii) prepay any
subsidiary's debt; (iii) pay dividends on our common stock; (iv) make
investments in other companies; (v) acquire other companies; (vi) amend our
charter; (vii) engage in other types of businesses; (viii) engage in
transactions with our officers, directors, control persons and other affiliates;
(ix) incur debt other than debt in the ordinary course of business and purchase
money debt of more than $1 million; (x) create any liens against our property
with certain exceptions; (xi) move our assets; (xii) sell our assets other than
in the ordinary course of business; (xiii) hire management consultants; (xiv)
make capital expenditures in excess of $500,000 per year; or (xv) incur lease
obligations in excess of $1.5 million per year.
The loan facility will terminate and the loans become due and payable
in the event of a default. Events of default include, with limited exceptions,
(i) failure to pay any of the loans when due, (ii) failure to pay any other
debts when due; (iii) breach of certain material agreements; (iv) insolvency;
(v) breach of any guaranty under the loan facility; (vi) breach of a covenant in
the loan facility; (vii) breach of a representation in the loan facility; (viii)
change to our pension plan; (ix) breach of any of the other agreements delivered
in connection with the loan facility; (x) suffering judgments or levies of more
than $50,000; (xi) destruction of our assets representing more than 15% of our
revenues; (xii) any event resulting in any lien securing the loan facility to
cease to have a first priority position; or (xiii) a change in control. A change
in control includes (i) more than one-half of our voting stock is transferred;
(ii) two-thirds of our board is removed or not re-elected; or (iii) any two of
Warren H. Golden, Mark McSweeney or Irving Magram resigns or is terminated
without cause.
On June 29, 1998, we issued $5,000,000 principal amount of our 12%
subordinated secured debentures to Finova Mezzanine Capital, formerly known as
Sirrom Capital Corporation, d/b/a Tandem Capital. The debentures are due June
29, 2003, and bear interest at 12%, payable quarterly. The debentures are
secured by all of our personal property and include certain restrictive
covenants, including restrictions on dividends and distributions, additional
debt financing and transactions between us and our affiliates. We also issued
warrants in connection with the issuance of the debentures. At the time of the
loan, we issued a warrant to purchase up to 208,300 shares of our common stock
exercisable at $2.35 per share for five years. The exercise price is to be
adjusted downward if our common stock price is below this exercise price to an
exercise price equal to the greater of 80% of the market price on June 29, 1999
or $2.00 per share. On June 29, 1999, the warrants were repriced to $2.00 per
share. Because the debentures were outstanding on February 28, 1999, we issued
an additional warrant to purchase 416,600 shares of common stock exercisable at
$1.59 per share for five years. Because the debentures were outstanding on June
29, 1999, we issued to Finova an additional warrant to purchase
18
<PAGE>
200,000 shares of common stock exercisable at $2.00 per share. Finova will also
receive 200,000 warrants each June 29 commencing in 2000 while the debentures
remain outstanding.
We have also relied on equity investment for our working capital. In
March 1999, we raised approximately $3.2 million by issuing Series F Preferred
Stock and common stock purchase warrants. Approximately $2.7 million of the
preferred stock has been exchanged for 5,488,000 shares of common stock and the
remaining $500,000 is intended to be redeemed.
In June 1999, we received a cash investment of $1,050,000 by issuing
our Series G Preferred Stock. The Series G Preferred Stock is convertible into
common stock based on the average of the closing bid prices for the lowest five
of the twenty trading days immediately preceding the date of conversion. For
example, assuming a conversion price of $0.75, the Series G Preferred Stock
holders would receive on conversion an aggregate of 1,400,000 shares of common
stock. The Series G Preferred Stock is redeemable at our option, but must be
redeemed out of the proceeds of any public offering in excess of $9 million.
In September 1999, we raised $1.1 million by issuing common stock and
an additional $400,000 from a short term subordinated loan.
We recently settled a lawsuit brought by Paul Russo. Mr. Russo alleged
that he is entitled to the Unit Purchase Option granted to the underwriter in
connection with our initial public offering in November 1993. As part of the
settlement, Mr. Russo gave up any claim had under the Unit Purchase Option. We
agreed to pay Mr. Russo $600,000, payable in monthly installments of $25,000,
with 8% interest, commencing September 1, 1999. We also agreed to prepay
$300,000 of the $600,000 out of the proceeds of a public offering.
We, however, continue to experience working capital shortages and
require additional capital resources to fund our existing operations. As of
September 27, 1999, we have borrowed the maximum amounts available under the
First Source loan facility and there is no unused loan availability. We are
pursuing a number of financing alternatives, although there can be no assurance
that such efforts will result in necessary financing or that the terms of such
financing will be on terms favorable to us or our stockholders. The failure to
secure additional working capital could materially adversely affect our business
and financial condition. Insufficient working capital may require us to alter
operations significantly.
We can not guaranty that we will be able to operate profitably in the
future or that cash from operations will become the principal source of funds
for operations.
Liquidity Considerations and Management's Planned Actions
We have formulated certain planned actions and taken various steps toward
mitigating the effect of the consolidated working capital and stockholder's
deficit at June 30, 1999 as well as attaining profitable operations and
improving our cash flows. The plans and steps taken include, among other things,
the following:
o We anticipate improving, with the proceeds of the proposed public
offering described above, credit availability from our vendors,
thereby timely delivering merchandise and reducing order
cancellations.
o We implemented a cost containment program in 1998. We anticipate $2.65
million in annual savings by reducing selling, general and
administrative expenses.
o In September 1999, Robert Rubin and the Trust transferred to First
Source certain pledged assets to pay down approximately $5 million of
the loan facility. In addition, Mr. Rubin purchased 6 million shares
of our common stock for $1 million.
o We are in the process of building and testing branded e-commerce sites
for each of Lew Magram and Brownstone Studio with our strategic
partner, Tadeo Holdings, Inc. We believe that Internet commerce will
ultimately allow us to significantly reduce our largest
non-merchandise expenses such as catalog printing costs, postage and
customer communications.
In addition, if the proposed public offering discussed above is not
completed, Robert Rubin, our chairman of the board, intends to provide us
limited financial support for a period of one year to the extent cash generated
internally and cash available under the First Source loan facility are not
sufficient to provide the capital required for such purposes and to fund future
operations.
Seasonality
Our business does not follow the seasonal pattern typical of the retail
apparel industry, but is, instead, more closely related to the timing and
distribution of catalog mailings. Through 1997 there were significant variations
in our seasonal sales volume with the largest volume
19
<PAGE>
period being first quarter, ending December 31. In 1998, the Lew Magram and
Brownstone acquisitions helped to spread out the volume evenly throughout the
year since mail order volume varies only in proportion to the orders generated
and merchandise shipped. Accordingly, we are now less susceptible to seasonable
variations. The combined net sales of Lew Magram, Brownstone and Ecology Kids
for each quarter of the fiscal years ended September 30, 1996, September 30,
1997, and September 30, 1998, presented as a percentage of net sales for each
such year, were as follows:
Percentage of Annual Sales
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal Year Quarter Quarter Quarter Quarter
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
September 30, 1996.......................................................... 27% 24% 30% 19%
September 30, 1997.......................................................... 33% 25% 24% 18%
September 30, 1998.......................................................... 24% 23% 28% 25%
</TABLE>
Inflation
There was no significant impact on our operations as a result of
inflation during fiscal year 1996, fiscal year 1997 or fiscal year 1998.
Year 2000
Year 2000 Compliance
Beginning in the Year 2000, the data fields coded in some software
products and computer systems will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such Year 2000 requirements. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance issues.
State of Readiness
We have developed a remediation plan for the Year 2000 issue that
involves identification, assessment and testing of the equipment and systems
affected:
o an assessment of information technology (IT) equipment and systems
has been done;
o an assessment of non-information technology (non-IT) embedded
systems such as telephones, voice mail and building security systems has been
completed; and
o the readiness of significant third party vendors and suppliers of
services is being
20
<PAGE>
analyzed.
The evaluation, which is expected to be completed by December 1999,
covers the following phases:
o development of an inventory of all IT equipment and systems and
non-IT systems that are potentially affected (100% complete);
o determination of those systems that require repair or replacement
(70% complete);
o repair or replacement of those systems (25% complete); and
o creation of contingency plans in the event of Year 2000 failures
(25% complete).
To date, less than 10% of assessed systems have required repair or
replacement. Non-IT systems and internally developed programs have been
reviewed, and are not considered to be date sensitive to the Year 2000. Based on
this evaluation, we do not believe that our systems and programs present Year
2000 issues, and generally believe that we will be Year 2000 compliant.
Although we believe that we will be Year 2000 compliant, third party
equipment and software is used that may not be Year 2000 compliant. An
evaluation of the Year 2000 compliance of the third party products used in our
internal systems and major vendors have begun, but we are unable to predict the
extent to which:
o the Year 2000 issue will affect suppliers; or
o we would be vulnerable to the suppliers' failure to remediate any
Year 2000 issues on a timely basis.
All our vendors and suppliers have been placed in a priority category
according to their importance to our business. Letters will be sent to all
vendors and suppliers with an operating impact seeking details of the status of
their Year 2000 program. Vendor and supplier readiness is being assessed and
tracked. Vendors have generally indicated that they are making best efforts
toward Year 2000 compliance. We expect to have certification that all vendors
and suppliers with an operating impact are Year 2000 compliant by December 1999.
Plans are being developed to ensure continued availability of service through
alternate channels in the event that satisfactory commitments are not received
from vendors and suppliers with an operating impact. For the highest priority
vendors and suppliers, where business risk warrants it, we are planning to
conduct, in the fourth quarter, an integration test of Y2K compliance where
specific dates are simulated. These vendors and suppliers include merchandise
suppliers such as Call Center Services, Convergys Group, CommercialWare, Inc.
and Clairicom and package delivery services such as United Parcel Service and
the United States Postal Service. The failure of one of these highest priority
vendors or suppliers to convert its systems on a timely basis or in a manner
compatible with our systems could cause us to incur unanticipated expenses to
remedy any problems and could adversely affect its business. In addition, the
software and hardware products used by affiliate Web sites, advertisers,
customers, governmental agencies, public utilities, telecommunication companies
and others, may not be Year 2000 compliant. If these products are
21
<PAGE>
not Year 2000 compliant, customers' ability to use our Web site may be
disrupted.
Costs to Address Year 2000 Compliance
To date, we have incurred approximately $100,000 in connection with
identifying or evaluating Year 2000 compliance issues. Most of these expenses
have related to the opportunity cost of time evaluating software, the current
versions of our products and Year 2000 compliance matters generally. We expect
that our future Year 2000 costs will be approximately $250,000 and will be
funded out of cash on hand. However, the full impact of the Year 2000 issues
cannot be determined at this time. The failure by certain third parties to
address their Year 2000 issues on a timely basis could adversely affect our
business.
Contingency Plan
We have not yet completed our Year 2000 contingency plans. Such plans
include, but are not limited to, using alternative suppliers and establishing
contingent supply arrangements. We expect to have such plans in place by the end
of December 1999. The worst case scenario related to Year 2000 issues would
involve a major shutdown of the telecommunication companies, which would result
in the loss of our principal revenue source until the shutdown was resolved.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, we issued to one investor 100,000 shares of our common
stock and an option to purchase up to 100,000 shares of our common stock at an
exercise price of $1.00 per share for a cash investment of $100,000. The
proceeds were used for working capital purposes.
In May 1999, we granted to two consulting firms common stock purchase
warrants to purchase up to an aggregate of 125,000 shares of common stock at
$1.15625 per share for consulting services.
In June 1999, we issued to Finova Mezzanine Capital a common stock
purchase warrant to purchase 200,000 shares of common stock at $2.00 per share
as required by the Debenture Purchase Agreement dated June 29, 1998.
In June 1999, we entered into agreements with two investors to issue an
aggregate of 500 shares of Series G Preferred Stock and common stock purchase
warrants to purchase up to 120,000 shares of common stock at $1.00 per share for
an aggregate cash investment of $50,000. The transaction closed in July 1999.
The proceeds were used for working capital purposes.
In June 1999, we entered into an agreement with Tadeo E-Commerce, Inc.
to issue to it 10,000 shares of Series G Preferred Stock for a cash investment
of $1,000,000. In addition, we issued 1,066,098 shares of our common stock for
285,715 shares of Tadeo Holdings, Inc. common stock, the parent of Tadeo
E-Commerce, Inc. The transaction closed in July 1999. The proceeds were used for
working capital purposes.
In July 1999, we granted to a director an option to purchase 50,000
shares of common stock at $1.00 per share for his continuing to serve as a
director.
Each of the above issuances of securities was exempt from registration
under the 1933 Act by virtue of the exemption under Section 4(2).
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
23
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 10, 1999, we held our 1999 Annual Meeting of Stockholders. At
the meeting, our stockholders elected six directors and voted on six proposals
presented at the meeting upon the recommendation of our Board.
The following persons were elected to the Board for the next year and
the number of voting shares voted for each nominee:
Robert M. Rubin 10,383,996 For 91,651 Abstain
Warren H. Golden 10,385,496 For 90,151 Abstain
Stuart Leiderman 10,388,422 For 87,225 Abstain
Julia Aryeh 10,385,246 For 90,401 Abstain
Howard B. Katz 10,388,922 For 86,725 Abstain
David Abel 10,388,922 For 86,725 Abstain
The following proposals were presented to the stockholders at the
Annual Meeting and how the voting shares were voted on each proposal:
Proposal Number 1 - the stockholders approved an amendment to our
Certificate of Incorporation to effect a 1-for-6 reverse split of our common
stock -- 10,198,556 For; 0 Against; 0 Abstain. The Board originally proposed a
1-for-5 reverse split of our common stock. At the Annual Meeting, the proposal
was amended to provide for a 1-for-6 reverse split. The proposal was approved by
stockholders attending the meeting in person holding a majority of the
outstanding voting shares.
Proposal Number 2 - the stockholders approved an amendment to our
Certificate of Incorporation to change our name to StyleSite Marketing, Inc. --
10,467,872 For; 5,500 Against; 2,275 Abstain.
Proposal Number 3 - the stockholders approved an amendment to our
Certificate of Incorporation to increase the maximum size of our Board of
Directors from seven members to nine -- 10,360,746 For; 102,251 Against; 12,650
Abstain.
Proposal Number 4 - the stockholders approved an increase in the number
of shares reserved for future issuance under our November 1996 Stock Option Plan
from 1,500,000 to 2,500,000 -- 10,343,826 For; 124,696 Against; 7,125 Abstain.
Proposal Number 5 - the stockholders ratified BDO Seidman, LLP as our
independent certified public auditors for the next fiscal year -- 10,459,696
For; 6,526 Against; 9,425 Abstain.
Proposal Number 6 - the stockholders approved the conversion and
exchange offer to our preferred stockholders -- 10,367,146 For; 93,826 Against;
14,675 Abstain.
24
<PAGE>
ITEM 5. OTHER INFORMATION
On July 26, 1999, we amended the Secured Credit Agreement dated May 12,
1999 with First Source Financial LLP, our secured asset-based lender, to allow
for an additional $1.1 million in additional funds available under the loan
facility. This additional availability was secured by a pledge by the Rubin
Family Irrevocable Stock Trust of 400,000 shares of Tadeo Holdings, Inc. common
stock. We reported this on Form 8-K filed on August 9, 1999.
On August 9, 1999, we again amended the Secured Credit Agreement with
First Source Financial LLP to allow for an additional $900,000 in additional
funds available under the loan facility. This additional availability was
secured by a pledge by the Rubin Family Irrevocable Stock Trust of 500,000
shares of Tadeo Holdings, Inc. common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Exhibits.
3.1 Amended and Restated Certificate of Incorporation*
10.1 Third Amendment to Secured Credit Agreement and Waiver*
27 Financial Data Schedule
* Previously filed with our Form 10-Q for the quarter ended
June 30, 1999
(b) Reports on Form 8-K.
On August 9, 1999, we filed a Current Report on Form 8-K under Item 5
disclosing the strategic alliance with Tadeo Holdings, Inc. and the amendment to
the Secured Credit Agreement with First Source Financial LLP. The date of the
Report was July 27, 1999.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STYLESITE MARKETING, INC.
Dated: October 4, 1999 By: /s/ WARREN H. GOLDEN
---------------------
Warren H. Golden
President and Chief Executive Officer
By: /s/ MARK J. McSWEENEY
----------------------
Mark J. McSweeney
Chief Financial Officer
26
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation*
10.1 Third Amendment to Secured Credit Agreement and Waiver*
27 Financial Data Schedule
* Previously filed with our Form 10-Q for the quarter ended June 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-Q/A-1 FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 815,081
<SECURITIES> 0
<RECEIVABLES> 1,849,649
<ALLOWANCES> (104,094)
<INVENTORY> 11,658,574
<CURRENT-ASSETS> 19,533,039
<PP&E> 8,025,180
<DEPRECIATION> (4,284,675)
<TOTAL-ASSETS> 35,317,634
<CURRENT-LIABILITIES> 26,736,057
<BONDS> 9,127,847
0
3,966
<COMMON> 1,700
<OTHER-SE> (551,936)
<TOTAL-LIABILITY-AND-EQUITY> 35,317,634
<SALES> 56,442,962
<TOTAL-REVENUES> 56,442,962
<CGS> 29,613,001
<TOTAL-COSTS> 35,369,557
<OTHER-EXPENSES> 9,716,343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,701,432
<INCOME-PRETAX> (19,957,371)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,453,757)
<DISCONTINUED> (870,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,323,757)
<EPS-BASIC> (1.76)
<EPS-DILUTED> (1.76)
</TABLE>
