SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO
_________
Commission File Number 1-13066
MIKASA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0099676
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20633 South Fordyce Ave., Long Beach, California 90810
------------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
(310) 886-3700
--------------------------
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 .....
As of March 31, 1998, a total of 18,361,195 shares of the
Registrant's Common Stock, $0.01 par value, was outstanding.
Exhibit Index on page 15
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MIKASA, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of 3
March 31, 1998 and December 31, 1997
Consolidated Statements of Income 4
for the three months ended March 31,
1998 and 1997
Consolidated Statements of Cash Flows 5
for the three months ended March 31,
1998 and 1997
Notes to Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis 7
of Financial Condition and Results of
Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIKASA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
Cash and cash equivalents $ 28,574 $ 61,218
Accounts receivable trade, net 27,167 25,594
Inventories 159,913 150,417
Prepaid expenses and other current assets 8,536 7,559
--------- ---------
Total current assets 224,190 244,788
Property and equipment, net 124,271 119,723
Notes receivable and other assets 880 886
Intangible assets, net 4,964 5,036
--------- ---------
Total assets $ 354,305 $ 370,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 11,312 $ 11,632
Accounts payable 15,383 22,084
Other current liabilities 21,939 27,642
--------- ---------
Total current liabilities 48,634 61,358
Deferred income taxes 2,983 2,983
Notes payable 110,000 110,000
--------- ---------
Total liabilities 161,617 174,341
--------- ---------
Preferred stock, undesignated, $0.01 par value;
authorized 20,000 shares; none issued and
outstanding -- --
Common stock, $0.01 par value; authorized 80,000
shares; issued and outstanding 18,361 and 18,359
shares at March 1998 and December 1997,
respectively 49,641 49,532
Cumulative translation adjustment (1,141) (1,205)
Retained earnings 184,009 187,470
--------- ---------
232,509 235,797
Less treasury stock, 3,930 and 3,921 shares at
March 1998 and December 1997, respectively,
at cost 39,821 39,705
--------- ---------
Total stockholders' equity 192,688 196,092
--------- ---------
Total liabilities and stockholders' equity $ 354,305 $ 370,433
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
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MIKASA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
For The Three Months Ended
March 31,
--------------------------
1998 1997
---------- ----------
Net sales $ 76,210 $ 73,108
Cost of sales 41,878 40,336
-------- --------
Gross profit 34,332 32,772
Selling, general and
administrative expenses 37,870 32,061
-------- --------
Income (loss) from operations (3,538) 711
Interest expense, net 649 216
-------- --------
Income (loss) before income taxes (4,187) 495
Income tax provision (benefit) (1,644) 191
-------- --------
Net income (loss) $ (2,543) $ 304
======== ========
Basic and diluted net income (loss) per
share of common stock $ (0.14) $ 0.02
======== ========
Weighted average number of shares
of common stock outstanding
and diluted shares of common stock 18,513 18,370
======== ========
Cash dividends per share of
common stock $ 0.05 $ 0.05
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
4
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MIKASA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
For The Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (2,543) $ 304
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 2,104 1,397
Changes in operating assets and liabilities (24,671) (14,639)
-------- --------
Net cash used in operating activities (25,110) (12,938)
-------- --------
Cash flows from investing activities:
Capital expenditures (6,343) (14,477)
Decrease in notes receivable 23 92
-------- --------
Net cash used in investing activities (6,320) (14,385)
-------- --------
Cash flows from financing activities:
Net decreases in short term borrowings (320) (452)
Purchase of treasury stock (115) --
Sale of common stock from exercise of
stock options 109 --
Dividends paid (918) --
-------- --------
Net cash used in financing activities (1,244) (452)
-------- --------
Effect of exchange rate changes on cash
and cash equivalents 30 (115)
-------- --------
Net decrease in cash and cash equivalents (32,644) (27,890)
Cash and cash equivalents, beginning of period 61,218 42,287
-------- --------
Cash and cash equivalents, end of period $ 28,574 $ 14,397
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
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MIKASA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share data)
1. Interim Financial Statements:
The accompanying consolidated financial statements of Mikasa, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company") have not been
audited by independent accountants, except for the balance sheet as of December
31, 1997. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
2. Income Taxes:
For the three months ended March 31, 1998, the income tax benefit has been
provided at an estimated annual rate of 39.3% of loss before taxes. For the
three months ended March 31, 1997, income taxes have been provided at an
estimated annual rate of 38.6% of income before taxes.
3. Accounts Receivable, Trade:
Receivables are net of allowances for uncollectible accounts of $724 at
March 31, 1998 and $740 at December 31, 1997.
4. Property and Equipment:
Property and equipment, at cost, are net of accumulated depreciation and
amortization of $31,808 at March 31, 1998 and $29,775 at December 31, 1997.
5. Intangible Assets:
Intangible assets are net of accumulated amortization of $2,473 at March
31, 1998 and $2,401 at December 31, 1997.
6. Declaration of Dividend:
On March 23, 1998, the Company declared a quarterly dividend of $0.05 per
share or $918 on its common stock to stockholders of record on April 3,1998,
payable on April 13, 1998.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table sets forth certain financial and operations data for
the periods indicated:
(Dollar amounts in thousands)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- -----------
Net Sales by Channel of Distribution:
Direct to consumers $ 44,162 $ 39,062
Retail accounts 25,718 28,981
International 6,330 5,065
----------- -----------
Total $ 76,210 $ 73,108
=========== ===========
U.S. Operations Data:
Stores open at beginning of period 149 133
Stores opened during period 0 5
Stores closed during period 2 2
----------- -----------
Stores open at end of period (1) 147 136
=========== ===========
(1) Stores in Canada open at end of
period were 4 in 1998 and 1 in 1997
Percentage increase in comparable
store net sales 0.9% 2.9%
As Of March 31,
-------------------------
1998 1997
---------- ----------
Total store gross square footage 1,483,200 1,291,400
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales for the three months ended March 31, 1998 (the
"current period") were $76.2 million, an increase of $3.1 million or 4.2% from
net sales of $73.1 million for the three months ended March 31, 1997 (the "prior
period"). This increase is primarily attributable to an increase in sales of
$5.1 million through the direct to consumers channel of distribution, resulting
from the growth in the retail store network. Sales from relocated and new retail
stores open less than twelve months accounted for $5.0 million of the increase.
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Increase in sales through the international channel of distribution was $1.3
million, while the retail accounts channel of distribution decreased in sales by
$3.3 million. During the quarter, the Company began to divert large shipments
from overseas suppliers to its new distribution facility in Charleston, South
Carolina. As a result, the order volume at this facility substantially
increased. This combination of inbound shipments and customer orders pushed the
Charleston facility beyond its capacity at that time. In certain instances, the
Company was unable to fill orders from some retail accounts customers and some
of its retail stores in full and on time. These servicing problems negatively
impacted sales for the retail accounts and direct to consumers channels of
distribution.
GROSS PROFIT. Gross profit for the current period was $34.3 million, an
increase of $1.6 million or 4.8% over the prior period's gross profit of $32.8
million. Gross profit as a percentage of net sales increased to 45.1% in the
current period from 44.8% in the prior period. The gross profit increase as a
percentage of net sales was primarily due to improved margins from the direct to
consumers and international channels of distribution.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the current period were $37.9 million, an increase of
$5.8 million or 18.1% over the prior period of $32.1 million. As a percentage of
net sales, such expenses increased to 49.7% in the current period from 43.9% in
the prior period. During the current period, expenses associated with relocated
and new stores open less than twelve months accounted for $2.5 million of the
increase. Operating expenses were impacted by the inbound shipments and customer
order difficulties encountered by the new Charleston, South Carolina
distribution facility as discussed in Net Sales above. Startup costs of $1.7
million associated with this facility as well as the inability of the Company to
shed certain expenses as rapidly as projected because of the new facility's
problems noted above also impacted operating expenses.
INCOME (LOSS) FROM OPERATIONS. Loss from operations in the current period
was ($3.5) million, a decrease of $4.2 million from the prior period's income
from operations of $0.7 million. This represented a decrease as a percentage of
net sales to (4.6%) in the current period from 1.0% in the prior period.
INTEREST EXPENSE, NET. Net interest expense was $0.6 million in the
current period, an increase of $0.4 million from the prior period of $0.2
million. This reflects the increased interest expense from the new $60 million
private placement of debt partially offset by increased interest income from
higher cash available.
Liquidity and Capital Resources
- -------------------------------
Historically, the Company has used cash from operations, an equity
offering and debt financing to fund working capital requirements and capital
expenditures. In June 1997, the Company placed $60.0 million in unsecured senior
notes with a group of insurance companies at an interest rate of 7.38% per annum
payable semi-annually that mature on June 4, 2007. Principal payments of $15.0
million per year will be due annually commencing in June 2004. The Company also
8
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has outstanding $60.0 million in unsecured senior notes placed with a group of
insurance companies which bear interest at the rate of 6.66% per annum payable
semi-annually and mature in May 2003. Principal payments on these notes of $10.0
million per year will be due annually commencing in May 1998. The Company also
has a $50.0 million unsecured revolving credit facility provided by two banks.
The maturity date of the revolving credit facility is May 19, 2000, subject to
automatic extensions in one year increments at the end of each commitment year,
unless either bank delivers a notice of intention not to extend the maturity
date. As of March 31, 1998, $11.6 million had been used for letters of credit
under the revolving credit facility. The balance of $38.4 million was unused and
available. The Company's senior notes and revolving credit agreements contain
certain financial covenants including restrictions on cash distributions to
stockholders which could limit the Company's future ability to pay cash
dividends.
The Company had working capital of $175.6 million at March 31, 1998 and
working capital of $183.4 million at December 31, 1997. Net cash used in
operating activities was $25.1 million and $12.9 million for the three months
ended March 31, 1998 and 1997, respectively. The increase in net cash used in
operating activities is primarily attributable to increases in accounts
receivable and inventory.
Net cash used in investing activities was $6.3 million and $14.4 million
in the three months ended March 31, 1998 and 1997, respectively. The Company
made capital expenditures of $6.3 million and $14.5 million in the three months
ended March 31, 1998 and 1997, respectively (consisting primarily of the
expenditures for construction of the new distribution center in South Carolina,
fixtures and leasehold improvements for new stores, improvements to distribution
facilities and renovation of existing retail stores).
Pursuant to the Company's previously announced common stock repurchase
program of up to $10 million of common stock, the Company has purchased 8,500
shares in the first quarter of 1998 at a total cost of $115,000.
Certain monetary assets and liabilities of the Company are in foreign
currencies and may be subject to foreign exchange risk. Foreign currency
exchange losses have not in the past had a material effect on the Company's
financial condition since these assets and liabilities are not material to its
consolidated monetary assets and liabilities. As such, these items have not been
hedged by the Company.
The Company's inventory purchases in 1997 were approximately 23% from
Japanese factories and approximately 30% from German and Austrian factories
combined. The significant portion of inventory purchases in foreign currencies
exposes the Company to foreign currency fluctuations which can affect the
Company's gross profit margin. To hedge against potential foreign currency
swings, the Company has strategies in place which are intended to minimize the
adverse impact of foreign currency fluctuations on its business. These
strategies include: (i) Currency risk sharing arrangements with the Company's
Japanese suppliers; (ii) Forward exchange contract coverage on part of its
German mark related purchases; (iii) Sourcing of products from countries other
than Japan and Germany where feasible; and (iv) Converting certain purchases
from foreign currency to U.S. dollar denominations. The currency risk sharing
arrangements minimize the impact of currency swings by the equal sharing of
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currency exposures against inventory purchases denominated in Japanese yen
between the suppliers and the Company. Future fluctuations of the U.S. dollar in
relation to foreign currencies can impact earnings in future periods.
The Company has two primary distribution centers in the United States,
located in Secaucus, New Jersey and Long Beach, California. While the Secaucus
facility is owned, the Long Beach facility is leased pursuant to a lease
expiring in January 2000. The Company also leases additional off-site warehouse
space on a short-term and mid-term basis in separate buildings to augment each
of these primary facilities. Construction of the Company's 580,000 square foot
distribution facility in Charleston, South Carolina commenced in the second
quarter of 1996 and was completed in the latter part of 1997. Test shipments
from this facility commenced late in the third quarter of 1997. The facility is
undergoing extensive testing as well as staff hiring and training with the
expectation to be fully operational during the latter part of 1998. Part of the
proceeds from the $60 million unsecured senior notes issued in June 1997 were
used to finance the balance of this capital commitment. The new facility should
over time enable the Company to eliminate the need for offsite facilities in
Long Beach and Secaucus and accommodate substantially increased volume. The
Company believes that the use of state of the art distribution technology in the
new facility and relief from inefficiencies resulting from overcrowding of
existing facilities should provide long-term benefits. However, transition costs
are currently negatively impacting operating results and are expected to
continue to impact operating results in the mid-term. The Company also expects
to begin depreciation of this new facility in the second quarter of 1998 which
will impact earnings.
During the first quarter of 1998, the Company opened one new retail store
in Canada and closed two in the United States to end the quarter with 151
stores. The number of states in which the Company operates retail stores is 42
and the number of Canadian provinces is 3. The Company plans to pursue continued
expansion of its store network in the United States and Canada. Present plans
include opening between 10 and 15 new retail stores in each of 1998 and 1999.
Each store requires a commitment of inventory, fixtures, equipment and
pre-opening store expenses.
The Company currently estimates that its aggregate capital expenditures
and initial investments (including inventory) for stores in 1998 and 1999 will
approximate up to $40 million. This includes the expansion of the retail store
network, expansion of its international operations and the completion of the new
distribution facility in Charleston, South Carolina. In each of these cases,
there can be no assurance that the Company's capital expenditures will not
exceed this estimated amount.
Future Developments
- -------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that a public enterprise reports
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, and requires restatement of
earlier periods presented. Management is currently evaluating the requirements
of SFAS 131.
10
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Year 2000 Compliance
- --------------------
Many installed computer systems are coded to accept only two digit entries
in the date code field. As the year 2000 approaches, these code fields will need
to accept four digit entries to distinguish years beginning with "19" from those
beginning with "20." As a result, in less than two years, computer systems used
by many companies may need to be upgraded to comply with such year 2000
requirements. The Company is assessing its internal management information
systems in order to identify and modify those systems that are not year 2000
compliant. The Company expects such modifications will be made on a timely basis
and does not believe that the cost of such modifications will have a material
effect on the Company's operating results or financial condition. There can be
no assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of such changes, and the Company's inability
to implement such changes could have an adverse effect on future results of
operations.
Seasonality and Quarterly Fluctuations
- --------------------------------------
Historically, the Company's operations have been seasonal, with higher
sales and net income occurring in the third and fourth quarters, reflecting
increased demand during the year-end holiday selling season. Since the biggest
retail selling season is the year-end holiday season, and as more of the
Company's principal department store customers adopt electronic data interchange
which allows them to defer shipments until later in the selling season, future
sales are expected to be more heavily weighted toward the third and fourth
quarters. In addition, the Company's retail stores experience a similar seasonal
selling pattern, however, sales are more heavily weighted toward the fourth
quarter. As a result, as the Company increases the number of stores, the shift
of sales volume toward the latter part of the year is expected to continue.
The Company's results of operations may also fluctuate from quarter to
quarter in the future as a result of the amount and timing of sales contributed
by, and expenses related to the opening of, new retail stores and the
integration of such stores into the operations of the Company, as well as other
factors. The addition of a significant number of retail stores, as is
anticipated with the Company's store expansion program, can therefore
significantly affect results of operations on a quarter-to-quarter basis. As the
addition of new stores continues, operating income for the first and second
quarters will be more impacted by the combination of seasonally lower sales
volumes during this period and increased operating expenses. The increase in
operating expenses is expected to be principally due to an increased percentage
of fixed expenses that relate to retail stores and the additional incremental
expense from new developing stores.
Forward-Looking Information
- ---------------------------
Certain statements or assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involves risks and uncertainties
inherent in the Company's business. Those statements include statements related
to the impact on future sales and profitability of the effort to bring the
Company's new distribution facility on line, foreign exchange and foreign
11
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purchasing risks, planned expansion of the Company's retail store network,
capital expenditure levels associated with planned projects, year 2000
compliance issues and future trends relating to seasonality. Actual results,
performance levels or achievements may be materially different from any future
results, performance levels or achievements expressed or implied by such
forward-looking information. Actual results, performance levels and achievements
will be dependent upon: the Company's successful performance of internal plans;
its ability to control inventory levels; customer changes in short range and
long range plans; domestic and international competition in the Company's
product areas; whether the Company will be able to accomplish store closures
within the current time table for closure and within the parameters of the loss
provision (which are based on current estimates of closure costs); future
performance of the Company's new distribution facility and successful completion
of programs to improve efficiency of the new facility; continued acceptance of
existing products and the development and acceptance of new products;
performance issues with key suppliers; changes in government import and export
policies; risks related to international transactions and hedging strategies;
and general economic risks and uncertainties.
12
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
13
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SIGNATURES
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.
MIKASA, INC.
(Registrant)
Date: May 15, 1998 /s/ Raymond B. Dingman
---------------------------------
Raymond B. Dingman
President and Chief Executive Officer
/s/ Brenda W. Flores
---------------------------------
Brenda W. Flores
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
14
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EXHIBIT INDEX
Exhibit No. Description Page
- --------------------------------------------------------------------------------
27 Financial Data Schedule 16
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 28,574
<SECURITIES> 0
<RECEIVABLES> 27,891
<ALLOWANCES> 724
<INVENTORY> 159,913
<CURRENT-ASSETS> 224,190
<PP&E> 156,079
<DEPRECIATION> 31,808
<TOTAL-ASSETS> 354,305
<CURRENT-LIABILITIES> 48,634
<BONDS> 110,000
0
0
<COMMON> 18,359
<OTHER-SE> 182,868
<TOTAL-LIABILITY-AND-EQUITY> 354,305
<SALES> 79,210
<TOTAL-REVENUES> 79,210
<CGS> 44,878
<TOTAL-COSTS> 82,748
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 649
<INCOME-PRETAX> (4,187)
<INCOME-TAX> (1,644)
<INCOME-CONTINUING> (2,543)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,543)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
