<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended June 30, 2000
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-24176
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Marisa Christina, Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-3216809
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
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(Address of principal executive offices) (Zip Code)
(201)-758-9800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Company's Common Stock on August
11, 2000 were 7,765,769.
<PAGE> 2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 1999
and June 30, 2000 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Loss -- Three and Six Months Ended June 30, 1999
and 2000 (Unaudited) 3
Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1999 and 2000 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 6: Exhibits and Reports on Form 8-K 13
SIGNATURE 14
<PAGE> 3
PART I:FINANCIAL INFORMATION
ITEM I:CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1999 (1) 2000
------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 346,006 $ 566,056
Accounts receivable, less allowance for doubtful
accounts of $253,264 in 1999 and $242,646 in 2000 8,624,566 6,664,117
Inventories 10,522,363 8,654,459
Income taxes recoverable 11,853 330,062
Prepaid expenses and other current assets 2,377,735 1,108,954
------------- ---------------
Total current assets 21,882,523 17,323,648
Property and equipment, net 2,018,232 1,219,987
Goodwill, less accumulated amortization of $2,938,740 in 1999
and $3,224,363 in 2000 6,275,331 6,364,426
Other assets 355,614 243,212
------------- ---------------
Total assets $ 30,531,700 $ 25,151,273
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loan payable $ 4,500,000 $ 4,350,000
Accounts payable 3,075,394 1,894,913
Accrued expenses and other current liabilities 1,072,339 891,947
------------- ---------------
Total current liabilities 8,647,733 7,136,860
------------- ---------------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued - -
Common stock, $.01 par value; 15,000,000 shares
authorized, 8,586,769 shares issued in 1999 and 2000 85,868 85,868
Additional paid-in capital 31,653,186 31,664,680
Accumulated other comprehensive loss (56,600) (56,600)
Accumulated deficit (6,166,052) (10,047,100)
Treasury stock, 821,000 common shares in 1999
and 2000 at cost (3,632,435) (3,632,435)
------------- ---------------
Total stockholders' equity 21,883,967 18,014,413
------------- ---------------
Total liabilities and stockholders' equity $ 30,531,700 $ 25,151,273
============= ===============
</TABLE>
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1999.
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------ ----------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 10,726,118 $ 9,222,879 $ 24,990,359 $ 26,779,954
Cost of goods sold 8,849,971 7,949,326 20,274,167 21,265,990
-------------- -------------- -------------- ---------------
Gross profit 1,876,147 1,273,553 4,716,192 5,513,964
Selling, general and administrative
expenses 4,753,243 3,651,500 9,998,068 8,501,188
Outlet store closing costs - 1,005,417 - 1,005,417
-------------- -------------- -------------- ---------------
Operating loss (2,877,096) (3,383,364) (5,281,876) (3,992,641)
Other income, net 428,294 62,872 850,972 83,444
Interest expense, net (232,932) (144,520) (430,820) (271,851)
-------------- -------------- -------------- ---------------
Loss before income tax
benefit (2,681,734) (3,465,012) (4,861,724) (4,181,048)
Income tax benefit (898,000) (60,000) (1,628,000) (300,000)
-------------- -------------- -------------- ---------------
Net loss (1,783,734) (3,405,012) (3,233,724) (3,881,048)
Other comprehensive income (loss),
net of tax - foreign currency
translation adjustment (3,461) - 5,300 -
-------------- -------------- -------------- ---------------
Comprehensive loss $ (1,787,195) $ (3,405,012) $ (3,228,424) $ (3,881,048)
============== ============== ============== ===============
Net loss per share:
Basic $ (0.23) $ (0.44) $ (0.42) $ (0.50)
Diluted $ (0.23) $ (0.44) $ (0.42) $ (0.50)
============== ============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,233,724) $ (3,881,048)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 744,999 475,876
Write-off of outlet store property and equipment - 654,005
Changes in operating assets and liabilities:
Accounts receivable 3,123,308 1,960,449
Inventories 904,037 1,867,904
Prepaid expenses and other current assets 196,849 617,212
Other assets (20,477) 112,402
Income taxes recoverable 1,089,038 (318,209)
Accounts payable (411,335) (1,180,481)
Accrued expenses and other current liabilities (503,757) (180,392)
------------- ------------
Net cash provided by operating activities 1,888,938 127,718
------------- ------------
Cash flows from investing activities:
Property and equipment additions (174,996) (46,013)
Receipt of amount due from the sale of the
Adrienne Vittadini Division - 651,569
Additions to goodwill related to product line acquisition - (374,718)
------------- ------------
Net cash provided by (used in) investing activities (174,996) 230,838
------------- ------------
Cash flows from financing activities:
Repayments of loan payable to bank, net (2,200,000) (4,500,000)
Borrowings from finance company, net - 4,350,000
Other - 11,494
------------- ------------
Net cash provided by (used in) financing activities (2,200,000) (138,506)
------------- ------------
Net increase (decrease) in cash and cash equivalents (486,058) 220,050
Cash and cash equivalents at beginning of period 981,329 346,006
------------- ------------
Cash and cash equivalents at end of period $ 495,271 $ 566,056
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its wholly owned
subsidiaries (the "Company"). Significant intercompany accounts and
transactions are eliminated in consolidation.
The unaudited consolidated financial statements do not include all
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles. For further information, such as the significant accounting
policies followed by the Company, refer to the notes to the Company's
audited consolidated financial statements, included in its annual report
on Form 10-K for the year ended December 31, 1999.
In the opinion of management, the unaudited consolidated financial
statements include all necessary adjustments (consisting of normal,
recurring accruals), for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented.
The results of operations for the three months and six months ended June
30, 1999 and 2000 are not necessarily indicative of the operating
results to be expected for a full year.
(2) OUTLET STORE CLOSING
During the second quarter of 2000, the Company closed twelve of its
thirteen Flapdoodles outlet stores and recognized a nonrecurring
operating charge of approximately $1.0 million. The nonrecurring charge
consisted of $650.0 thousand for the write-off of store property and
equipment, $300.0 thousand for lease termination fees and other facility
closure costs and $50.0 thousand for severance and employee benefits
costs. As of June 30, 2000, $18,500 was included in accrued expenses and
other current liabilities and will be paid by year end. In addition, in
connection with the store closures the Company recognized inventory
write-offs of approximately $150,000, which are included in cost of goods
sold.
(3) DISPOSITION OF THE ADRIENNE VITTADINI DIVISION
On September 2, 1999, the Company completed the sale of substantially
all the assets, properties and rights of its Adrienne Vittadini Division
("AVE") to de V & P, Inc. for $9.77 million in cash and the assumption
of certain liabilities of AVE. Cash proceeds received at closing of $8.1
million, net of transaction and related costs, were used by the Company
to pay down borrowings under its bank credit facility. A post-closing
adjustment of approximately $920.0 thousand was also included in the
sale price, for which approximately $650.0 thousand was reflected in
prepaids and other current assets at December 31, 1999 and subsequently
collected in 2000. The Company recognized a pre-tax gain of
approximately $646.0 thousand on the sale.
5
(Continued)
<PAGE> 7
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
Pro forma consolidated net sales, net loss and diluted loss per common
share for the three and six months ended June 30, 1999, assuming the
disposition had occurred on January 1, 1999, are as follows (in
thousands, except for per common share amount):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
------------ ----------
<S> <C> <C>
Net sales $ 8,398 $ 20,029
Net loss (1,440) (2,059)
Diluted loss per common share (0.19) (0.27)
============ ==========
</TABLE>
(4) INVENTORIES
Inventories at December 31, 1999 and June 30, 2000 consist of the
following:
<TABLE>
<CAPTION>
1999 2000
------------ ------------
<S> <C> <C>
Piece goods $ 2,268,287 $ 1,287,977
Work in process 1,353,743 1,408,753
Finished goods 6,900,333 5,957,729
============ ============
$ 10,522,363 $ 8,654,459
============ ============
</TABLE>
(5) LOAN PAYABLE
Effective June 14, 2000, the Company has a $17.5 million line of credit
facility with a finance company, which may be utilized for commercial
letters of credit, banker's acceptances, commercial loans and letters of
indemnity. Borrowings under the facility are secured by certain of the
Company's assets, primarily inventory and accounts receivable, and bear
interest at the prime rate plus .75%. In addition, the credit agreement
requires the Company to maintain certain levels of working capital and
tangible net worth. The arrangement expires on June 14, 2002.
As of June 30, 2000, $4.35 million of borrowings, bearing interest at
10.25% and $2.7 million of commercial letters of credit were outstanding
under the credit facility. Available borrowings at June 30, 2000 were
$4.13 million. The Company expects to have sufficient financing to meet
its working capital needs through the expiration of the arrangement.
Prior to June 14, 2000, the Company had a $10.0 million line of credit
facility with a bank.
6
(Continued)
<PAGE> 8
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLTDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
(6) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is based on the weighted
average number of common shares outstanding, which was 7,765,769 for the
three and six months ended June 30, 1999 and 2000. The effect of stock
options outstanding during the three and six months ended June 30, 1999
and 2000 was not included in the computation of diluted loss per common
share because the effect would have been antidilutive.
(7) SEGMENT REPORTING
The divisions of the Company include: Marisa Christina (MC), Flapdoodles
and Adrienne Vittadini (AVE), prior to its disposition in September
1999, for which a summary of each follows:
- MC designs, manufactures and distributes "better" women's
knitwear.
- Flapdoodles designs, manufactures and distributes children's
clothing. Flapdoodles also maintains licensees for footwear and
sleepwear.
- AVE designed and distributed sportswear for women and maintained
licensees for scarves, swimwear, eyewear, shoes, cosmetics,
travel bags and luggage.
The Company evaluates performance based on stand-alone division earnings
(loss) before income taxes. The following information is provided in
thousands:
<TABLE>
<CAPTION>
MC FLAPDOODLES AVE ELIMINATION CONSOLIDATION
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
JUNE 30, 1999
Net sales $ 4,560 3,838 2,328 -- 10,726
Operating loss (1,164) (1,012) (701) -- (2,877)
Earnings (loss) before taxes (879) (1,291) (1,368) 856 (2,682)
THREE MONTHS ENDED
JUNE 30, 2000
Net sales $ 5,850 3,373 -- -- 9,223
Operating loss (1,491) (1,892) -- -- (3,383)
Earnings (loss) before taxes (1,573) (2,273) -- 381 (3,465)
SIX MONTHS ENDED
JUNE 30, 1999
Net sales $ 11,128 8,901 4,961 -- 24,990
Operating loss (1,717) (1,412) (2,153) -- (5,282)
Earnings (loss) before taxes (1,154) (1,986) (3,420) 2,088 (4,862)
Total assets 15,313 16,158 8,137 (1,528) 38,080
SIX MONTHS ENDED
JUNE 30, 2000
Net sales $ 16,354 10,426 -- -- 26,780
Operating loss (1,683) (2,310) -- -- (3,993)
Earnings (loss) before taxes (1,872) (3,072) -- 763 (4,181)
Total assets 14,913 15,231 -- (4,993) 25,151
</TABLE>
(8) LEGAL PROCEEDINGS
The Company is involved, from time to time, in litigation and
proceedings arising out of the ordinary course of business. There are no
pending material legal proceedings or environmental investigations to
which the Company is a party or to which the property of the Company is
subject.
7
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
In order to reverse the trend of declining sales and profits the Company
undertook a number of initiatives over the past three years to reduce
overhead, replace certain sales and marketing personnel and exit
unprofitable product lines.
During the second quarter of 2000, the Company closed twelve of its
thirteen Flapdoodles outlet stores and recognized a nonrecurring
operating charge of approximately $1.0 million. The nonrecurring charge
consisted of $650.0 thousand for the write-off of store property and
equipment, $300.0 thousand for lease termination fees and other facility
closure costs and $50.0 thousand for severance and employee benefits
costs. As of June 30, 2000, $18,500 was accrued in accrued expenses and
other current liabilities and will be paid by year end. In addition, in
connection with the store closures the Company recognized inventory
write-offs of approximately $150,000 which are included in cost of goods
sold.
On September 2, 1999, the Company completed the sale of substantially
all of the assets, properties and rights of AVE to de V & P, Inc. for
$9.77 million in cash and the assumption of certain liabilities of AVE.
Cash proceeds received at closing of $8.1 million, net of transaction
and related costs, were used by the Company to pay down borrowings under
its bank credit facility. A post-closing adjustment of approximately
$920.0 thousand was also in the sale price, for which approximately
$650.0 thousand was reflected in prepaids and other current assets at
December 31, 1999 and subsequently collected in 2000. The Company
recognized a pre-tax gain of approximately $646.0 thousand on the sale.
Management believes that the Company's prospects for profitability for
the remainder of 2000 are better due to the improving outlook of MC and
the closing of Flapdoodles' outlet stores. Sales and operating costs at
Flapdoodles' closed stores for the six months ended June 30, 2000 were
approximately $1.3 million and $700 thousand, respectively. Failure to
achieve profitability could negatively impact the recoverability of the
carrying value of assets, including goodwill.
The following table sets forth information with respect to the
percentage relationship to net sales of certain items of the
consolidated statements of operations of the Company for the three and
six months ended June 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 2000 1999 2000
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
------------ ---------- ------------ ----------
Gross profit 17.5 13.8 18.9 20.6
Selling, general and administrative expenses 44.3 39.6 40.0 31.7
Outlet store closing costs -- 10.9 -- 3.8
------------ ---------- ------------ ----------
Operating loss (26.8) (36.7) (21.1) (14.9)
Other income, net 4.0 0.7 3.4 0.3
Interest expense, net (2.2) (1.6) (1.7) (1.0)
lncome tax benefit (8.4) (0.7) (6.5) (1.1)
------------ ---------- ----------- ----------
Net loss (16.6)% (36.9)% (12.9) (14.5)%
============ ========== ============ ==========
</TABLE>
8
<PAGE> 10
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2000
Net sales. Net sales decreased 14.0% from $10.7 million in 1999 to $9.2
million in 2000. Higher sales were achieved at MC. Net sales of MC
increased 28.3% from $4.6 million in 1999 to $5.9 million in 2000. MC
introduced a new line this year that contributed about 69% of the MC
sales increase in this quarter. Net sales of Flapdoodles decreased 12.1%
from $3.8 million in 1999 to $3.4 million in 2000. Net sales of AVE were
$2.3 million in 1999. Excluding net sales of AVE, net sales increased
9.8% from 1999 to 2000.
MC's sales improved due to a new line, new customers and increased
distribution. Flapdoodles' sales declined due to the closing of its
outlet stores in April 2000.
Gross profit. Gross profit decreased 32.1% from $1.9 million in 1999 to
$1.3 million in 2000, primarily as a result of higher production costs
and losses incurred on disposal of inventory at the closed Flapdoodles'
outlet stores. As a percentage of net sales, gross profit decreased from
17.5% in 1999 to 13.8% in 2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 23.2% from $4.8 million in 1999
to $3.7 million in 2000. As a percentage of net sales of the Company,
SG&A expenses decreased from 44.3% in 1999 to 39.6% in 2000. The
decrease in dollar amount is attributable to the disposition of AVE and
the closing of Flapdoodles' outlet stores offset by higher variable
expense at MC related to the higher sales volume. SG&A of MC was $1.7
million in 1999 and $2.3 million in 2000. SG&A of Flapdoodles was $2.0
million in 1999 and $1.4 million in 2000.
Outlet store closing costs. Outlet store closing costs relate to the
closing of twelve of Flapdoodles' thirteen retail outlets, as described
above.
Other income, net. Other income, net which consists of royalty and
licensing income, decreased 85.3% from $428.3 thousand in 1999 to $62.9
thousand in 2000. The decrease is attributed to the decline in licensing
income as a result of the sale of AVE, which contributed $368.0 thousand
of licensing income in 1999.
Interest expense, net. Interest expense, net decreased from $232.9
thousand in 1999 to $144.5 thousand in 2000, principally as the result
of lower average outstanding borrowings offset by higher interest rates.
Income tax benefit. Income tax benefit decreased from $898.0 thousand in
1999 to $60.0 thousand in 2000. The Company's effective income tax rate
was 33.5% for 1999 and 1.7% for 2000 because of an increase in valuation
allowance.
Net loss. Net loss increased from $1.8 million in 1999 to $3.4 million
in 2000, as a result of the aforementioned items.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2000
Net sales. Net sales increased 7.2% from $25.0 million in 1999, to $26.8
million in 2000. Higher sales were achieved at MC and Flapdoodles. Net
sales of MC increased 47.0% from $11.1 million in 1999 to $16.4 million
in 2000. During the first quarter of 2000, MC introduced a new line,
which contributed about one-half of the MC sales increase. Net sales of
Flapdoodles increased 17.1% from $8.9 million in 1999 to $10.4 million
in 2000. Net sales of AVE were $5.0 million in 1999. Excluding net sales
of AVE, net sales increased 33.7% from 1999 to 2000.
MC's and Flapdoodles' sales improved due to a new line, new customers
and increased distribution.
Gross profit. Gross profit increased 16.9% from $4.7 million in 1999, to
$5.5 million in 2000, primarily as a result of higher sales. As a
percentage of net sales, gross profit increased from 18.9% in 1999 to
20.6% in 2000. Gross profit was positively impacted by the elimination
of AVE.
9
<PAGE> 11
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 15.0% from $10.0 million in
1999 to $8.5 million in 2000. As a percentage of net sales of the
Company, SG&A expenses decreased from 40.0% in 1999 to 31.7% in 2000.
The decrease in dollar amount is attributable to the disposition of AVE
offset by higher variable expense at MC related to the higher sales
volume. SG&A of MC was $3.7 million in 1999 and $5.1 million in 2000.
SG&A of Flapdoodles was $3.9 million in 1999 and $3.4 million in 2000.
Outlet store closing costs. Outlet store closing costs relate to the
closing of twelve of Flapdoodles' thirteen retail outlets, as described
above.
Other income, net. Other income, net, which consists of royalty and
licensing income, decreased 90.2% from $851.0 thousand in 1999 to $83.4
thousand in 2000. The decrease is attributed to the decline in licensing
income as a result of the sale of AVE, which contributed $751.0 thousand
of licensing income in 1999.
Interest expense, net. Interest expense, net decreased from $430.8
thousand in 1999 to $271.9 thousand in 2000, principally as the result
of lower average outstanding borrowings but higher interest rates.
Income tax benefit. Income tax benefit decreased from $1.6 million in
1999 to $300.0 thousand in 2000. The Company's effective income tax rate
was 33.5% for 1999 and 7.2% for 2000 because of an increase in valuation
allowance.
Net loss. Net loss increased from $3.2 million in 1999 to $3.9 million
in 2000, as a result of the aforementioned items.
SEASONALITY
The Company's business is seasonal, with a substantial portion of its
revenues and earnings occurring during the second half of the year as a
result of the Back-to-School, Fall and Holiday selling seasons. This is
due to both a larger volume of unit sales in these seasons and
traditionally higher prices for Fall and Holiday season garments, which
generally require more costly materials than the Spring/Summer and
Resort seasons. Merchandise from the Back-to-School and Fall
collections, the Company's largest selling seasons, and Holiday, the
Company's next largest season, are shipped in the last two fiscal
quarters. Merchandise for Resort, Spring/Summer and Early Fall, the
Company's lower volume seasons, is shipped primarily in the first two
quarters. In addition, prices of products in Resort, Spring/Summer and
Early Fall collections average 5% to 50% lower than in other selling
seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17.5 million line of credit facility with a finance
company, which may be utilized for commercial letters of credit,
banker's acceptances, commercial loans and letters of indemnity.
Borrowings under the facility are secured by certain of the Company's
assets, primarily inventory and accounts receivable, and bear interest
at the prime rate plus .75%. The arrangement expires on June 14, 2002.
As of June 30, 2000, $4.35 million of borrowings, bearing interest at
10.25% and $2.7 million of commercial letters of credit were outstanding
under the credit facility. Available borrowings at June 30, 2000 were
$4.13 million. The Company expects to have sufficient financing to meet
its working capital needs through the expiration of the arrangement.
During 2000, the Company had capital expenditures of approximately $46.0
thousand, primarily to upgrade computer systems. Capital expenditures
for the remainder of 2000 are expected to be $304.0 thousand. These
capital expenditures will be funded by internally generated funds and,
if necessary, borrowings under the Company's line of credit facility.
During the first quarter of 2000, the Company also acquired the name of
a small ladies and mens apparel company for approximately $375.0
thousand, including transaction costs.
10
<PAGE> 12
EXCHANGE RATES
Although it is Company policy to contract for the purchase of imported
merchandise in United States dollars, reductions in the value of the
dollar could result in the Company paying higher prices for its
products. During the last three fiscal years, however, currency
fluctuations have not had an impact on the Company's cost of
merchandise. The Company does not engage in hedging activities with
respect to such exchange rate risk.
IMPACT OF INFLATION
The Company has historically been able to adjust prices, and therefore,
inflation has not had, nor is it expected to have, a significant effect
on the operations of the Company.
CHANGES IN ACCOUNTING PRINCIPLES
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activity. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities and requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. The Company expects to adopt SFAS No. 133, in
accordance with the pronouncement as amended, and currently does not
believe the impact, if any, during 2001 will be material on its
consolidated financial statements.
During March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions involving
Stock Compensation. Interpretation No. 44 clarifies certain issues,
related to the application of APB Opinion No. 25, Accounting for Stock
Issued to Employees, including the accounting consequence of various
modifications to the terms of previously fixed stock options. The
Company expects to adopt Interpretation No. 44 during the third quarter
of 2000, in accordance with the interpretation, and is currently
evaluating the impact on its consolidated financial statements.
11
<PAGE> 13
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates.
However, interest expense has not been and is not expected to be a
material operating expense of the Company. The Company has implemented
management monitoring processes designed to minimize the impact of
sudden and sustained changes in interest rates. As of June 30, 2000, the
Company's floating rate debt is based on Prime. The fair market value of
the Company's debt approximates its book value. If the Company's
interest rates increased or decreased by 100 basis points during the six
months ended June 30, 2000, interest expense and cash flows would have
increased or decreased, respectively, by approximately $22.0 thousand.
Currently, the Company does not use foreign currency forward contracts
or commodity contracts and does not have any material foreign currency
exposure. All purchases from foreign contractors are made in U.S.
dollars and the Company's investment in its foreign subsidiary was
$140.0 thousand at June 30, 2000.
FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the statements in
this form are forward-looking statements that are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the Company's actual results in future
periods to differ materially from forecasted results. Those risks
included, among others, risks associated with the success of future
advertising and marketing programs, the receipt and timing of future
customer orders, price pressures and other competitive factors and a
softening of retailer or consumer acceptance of the Company's products
leading to a decrease in anticipated revenues and gross profit margins.
These and other risks are described in the Company's filings with the
Securities and Exchange Commission (SEC), copies of which are available
from the SEC or may be obtained upon request from the Company.
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<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings required to be disclosed in response to
Item 103 of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following are the results of the balloting at the Registrant's
Annual Meeting of Stockholders' held on May 19, 2000:
<TABLE>
<CAPTION>
FOR AGAINST
--------- ---------
<S> <C> <C>
1. Election of Directors
Michael H. Lerner 5,758,028 15,400
Marc Ham 5,758,028 15,400
Michael Dees 5,738,028 35,400
Christine M. Carlucci 5,726,028 47,400
S.E. Melvin Hecht 5,757,028 16,400
Robert Davidoff 5,749,128 24,300
Lawrence D. Glaubinger 5,749,128 24,300
Brett J. Meyer 5,758,028 15,400
Barry S. Rosenstein 5,758,028 15,400
David W. Zalaznick 5,751,628 21,800
</TABLE>
2. Ratification of the appointment of KPMG LLP as the independent public
accountants of the company for the year ending December 31, 2000.
<TABLE>
<CAPTION>
FOR AGAINST
----------- ---------
<S> <C>
5,751,528 20,600
</TABLE>
3. In their discretion, the proxies are authorized to vote such other
matters as may properly come before this annual meeting of shareholders.
<TABLE>
<CAPTION>
FOR AGAINST
----------- ---------
<S> <C>
5,693,994 63,034
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedule
13
<PAGE> 15
Reports on Form 8-K -- no reports on Form 8-K were filed during the
quarter ended June 30, 2000.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2000 /s/ S. E. Melvin Hecht
-------------------------------------
S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
14
