UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended July 5, 2003
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[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From _____ to ____
Commission file number 0-13365
Oshkosh B'Gosh, Inc.
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Delaware |
39-0519915 |
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112 Otter Avenue Oshkosh, Wisconsin 54901 |
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(920) 231-8800
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
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 .
Indicate by check mark whether the Company is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No
As of July 15, 2003, there were outstanding 9,680,794 shares of Class A Common Stock and 2,192,611 shares of Class B Common Stock.
FORM 10-Q
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
INDEX
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Page |
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PART I |
FINANCIAL INFORMATION |
3 |
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Item 1. |
Financial Statements |
3 |
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Condensed Consolidated Balance Sheets - July 5, 2003 and December 28, 2002 |
3 |
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Unaudited Condensed Consolidated Statements of Income - Three- Month and Six-Month periods Ended July 5, 2003 and June 29, 2002 |
4 |
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Unaudited Condensed Consolidated Statements of Cash Flows - Six-Month periods Ended July 5, 2003 and June 29, 2002 |
5 |
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Notes to Condensed Consolidated Financial Statements |
6 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
9 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
23 |
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Item 4. |
Controls and Procedures |
24 |
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PART II |
OTHER INFORMATION |
25 |
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Item 5. |
Submission of Matters to a Vote of Security Holders |
25 |
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Item 6. |
Exhibits and Reports on Form 8-K |
26 |
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Signatures |
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Certifications |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
|
|
July 5, 2003 |
December 28, 2002* |
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(unaudited) |
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|
||||||||||
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ASSETS |
|
|
|||||||||||
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Current assets |
|
|
|||||||||||
|
|
Cash and cash equivalents |
|
$ |
11,864 |
|
$ |
36,198 |
|
|||||
|
|
Accounts receivable |
|
|
19,675 |
|
|
16,729 |
|
|||||
|
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Inventories |
|
|
72,488 |
|
|
57,114 |
|
|||||
|
|
Prepaid expenses and other current assets |
|
|
4,169 |
|
|
1,685 |
|
|||||
|
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Deferred income taxes |
|
|
7,750 |
|
|
9,600 |
|
|||||
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Total current assets |
|
|
115,946 |
|
|
121,326 |
|
||||||
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Property, plant and equipment |
|
|
70,581 |
|
|
71,198 |
|
||||||
|
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Less accumulated depreciation and amortization |
|
|
44,677 |
|
|
43,421 |
|
|||||
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Net property, plant and equipment |
|
|
25,904 |
|
|
27,777 |
|
||||||
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Non-current deferred income taxes |
|
|
900 |
|
|
2,300 |
|
||||||
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Other assets |
|
|
4,446 |
|
|
4,351 |
|
||||||
|
|
|
||||||||||||
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Total assets |
|
$ |
147,196 |
|
$ |
155,754 |
|
||||||
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|
|||||||||||||
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LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
||||||||
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Current liabilities |
|
|
|
|
|
||||||||
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Short-term borrowings |
$ |
3,900 |
$ |
-- |
|||||||||
|
|
Accounts payable |
|
|
11,683 |
11,907 |
||||||||
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Accrued liabilities |
|
|
30,404 |
38,396 |
||||||||
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Total current liabilities |
|
|
45,987 |
50,303 |
|||||||||
|
Employee benefit plan liabilities |
|
|
13,101 |
13,062 |
|||||||||
|
Shareholders' equity |
|
|
|||||||||||
|
|
Preferred stock |
|
|
-- |
-- |
||||||||
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Common stock: |
|
|
||||||||||
|
|
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Class A |
|
|
97 |
97 |
|||||||
|
|
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Class B |
|
|
22 |
22 |
|||||||
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Retained earnings |
|
|
88,151 |
92,290 |
||||||||
|
|
Unearned compensation under restricted stock plan |
|
|
(162 |
) |
(20 |
) |
||||||
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Total shareholders' equity |
|
|
88,108 |
92,389 |
|||||||||
|
|
|
||||||||||||
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Total liabilities and shareholders' equity |
|
$ |
147,196 |
|
$ |
|
155,754 |
|
|||||
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|
|
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*Condensed from audited financial statements. |
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OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
|
|
Three-Month Period Ended |
Six-Month Period Ended |
|||||||||||||||||||
|
|
July 5, 2003 |
June 29, 2002 |
July 5, 2003 |
June 29, 2002 |
|||||||||||||||||
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Net Sales |
|
$ |
84,546 |
$ |
84,124 |
$ |
183,833 |
$ |
184,905 |
||||||||||||
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|
|
|
|||||||||||||||||||
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Cost of products sold |
|
53,846 |
48,096 |
112,429 |
104,618 |
||||||||||||||||
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|
|
|
|||||||||||||||||||
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Gross profit |
|
30,700 |
36,028 |
71,404 |
80,287 |
||||||||||||||||
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|
|
|
|||||||||||||||||||
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Selling, general and administrative expenses |
|
35,527 |
35,963 |
76,345 |
73,356 |
||||||||||||||||
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Royalty income, net |
|
(1,953 |
) |
(2,267 |
) |
(4,166 |
) |
(4,883 |
) |
||||||||||||
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|
|
|
|||||||||||||||||||
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Operating income (loss) |
|
(2,874 |
) |
2,332 |
(775 |
) |
11,814 |
||||||||||||||
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|
|
|
|
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Other income (expense): |
|
||||||||||||||||||||
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Interest expense |
|
(183 |
) |
(391 |
) |
(257 |
) |
(820 |
) |
|||||||||||
|
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Interest income |
|
|
54 |
|
183 |
96 |
309 |
|||||||||||||
|
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Miscellaneous |
|
|
28 |
|
24 |
(5 |
) |
(15 |
) |
|||||||||||
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|
|
|
|
||||||||||||||||||
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Other income (expense) -- net |
|
(101 |
) |
(184 |
) |
(166 |
) |
(526 |
) |
||||||||||||
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|
|
|
|||||||||||||||||||
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Income (loss) before income taxes |
|
(2,975 |
) |
2,148 |
(941 |
) |
11,288 |
||||||||||||||
|
|
|
|
|||||||||||||||||||
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Income taxes (benefit) |
|
(1,101 |
) |
816 |
(348 |
) |
4,289 |
||||||||||||||
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|
|
|
|||||||||||||||||||
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Net income (loss) |
|
$ |
(1,874 |
) |
$ |
1,332 |
$ |
(593 |
) |
$ |
6,999 |
||||||||||
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|
|
|
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Net income (loss) per common share |
|
||||||||||||||||||||
|
|
Basic |
|
$ |
(0.16 |
) |
$ |
0.11 |
$ |
(0.05 |
) |
$ |
0.56 |
|||||||||
|
|
Diluted |
|
$ |
(0.16 |
) |
$ |
0.10 |
$ |
(0.05 |
) |
$ |
0.55 |
|||||||||
|
|
|
|
|
||||||||||||||||||
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Weighted average common shares outstanding |
|
||||||||||||||||||||
|
|
Basic |
|
|
11,869 |
|
12,633 |
11,893 |
12,485 |
|||||||||||||
|
|
Diluted |
|
|
12,010 |
|
12,894 |
12,020 |
12,804 |
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|
|
|
|
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Cash dividends per common share |
|
||||||||||||||||||||
|
|
Class A |
|
$ |
0.0700 |
$ |
0.0600 |
$ |
0.1400 |
$ |
0.1200 |
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Class B |
|
$ |
0.0600 |
$ |
0.0525 |
$ |
0.1200 |
$ |
0.1050 |
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|
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See notes to condensed consolidated financial statements. |
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OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
Six-Month Period Ended |
|||||||||||
|
|
July 5, 2003 |
June 29, 2002 |
||||||||||
|
Cash flows from operating activities |
|
|
||||||||||
|
|
Net income (loss) |
|
$ |
(593 |
) |
$ |
6,999 |
|||||
|
|
Depreciation and amortization |
|
|
3,431 |
|
4,199 |
||||||
|
|
Deferred income taxes |
|
|
3,250 |
|
2,500 |
||||||
|
|
Income tax benefit from stock options exercised |
|
|
254 |
|
4,144 |
||||||
|
|
Items in net income (loss) not affecting cash and cash equivalents |
|
|
149 |
|
(295 |
) |
|||||
|
|
Changes in current assets |
|
|
(20,804 |
) |
|
1,007 |
|||||
|
|
Changes in current liabilities |
|
|
(8,216 |
) |
|
(7,776 |
) |
||||
|
Net cash provided by (used in) operating activities |
|
|
(22,529 |
) |
|
10,778 |
||||||
|
Cash flows from investing activities |
|
|
|
|||||||||
|
|
Additions to property, plant and equipment |
|
|
(1,391 |
) |
|
(2,898 |
) |
||||
|
|
Proceeds from disposal of assets |
|
|
126 |
|
387 |
||||||
|
|
Changes in other assets |
|
|
(375 |
) |
|
(270 |
) |
||||
|
|
|
|
|
|||||||||
|
Net cash used in investing activities |
|
|
(1,640 |
) |
|
(2,781 |
) |
|||||
|
Cash flows from financing activities |
|
|
|
|||||||||
|
Short-term borrowings |
3,900 |
-- |
||||||||||
|
|
Payment on long-term debt |
|
|
-- |
|
(16,000 |
) |
|||||
|
|
Dividends paid |
|
|
(1,622 |
) |
|
(1,464 |
) |
||||
|
|
Net proceeds from issuance of common shares |
|
|
358 |
|
6,560 |
||||||
|
|
Repurchase of common shares |
|
|
(2,801 |
) |
|
-- |
|||||
|
|
||||||||||||
|
Net cash used in financing activities |
|
|
(165 |
) |
|
(10,904 |
) |
|||||
|
Net decrease in cash and cash equivalents |
|
|
(24,334 |
) |
|
(2,907 |
) |
|||||
|
Cash and cash equivalents at beginning of period |
|
|
36,198 |
|
29,322 |
|||||||
|
Cash and cash equivalents at end of period |
|
$ |
11,864 |
$ |
26,415 |
|||||||
|
See notes to condensed consolidated financial statements. |
||||||||||||
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands)
(Unaudited)
NOTE 1. BASIS OF PREPARATION
The condensed consolidated financial statements included herein have been prepared by the Company without audit. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the financial position as of July 5, 2003, the results of operations for the three-month and six-month periods ended July 5, 2003 and June 29, 2002, and cash flows for the six-month periods ended July 5, 2003 and June 29, 2002.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report.
NOTE 2. INVENTORIES
A summary of inventories follows:
|
|
July 5, 2003 |
December 28, 2002 |
||||||||
|
Finished goods |
|
$ |
63,439 |
|
$ |
48,103 |
||||
|
Work in process |
|
|
5,826 |
|
7,490 |
|
||||
|
Raw materials |
|
3,223 |
|
1,521 |
|
|||||
|
Total |
|
$ |
72,488 |
|
$ |
57,114 |
|
|||
The replacement cost of inventory exceeds the above LIFO costs by $10,600 at July 5, 2003 and December 28, 2002.
NOTE 3. COMMON STOCK
The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant and the number of shares granted is fixed, no compensation expense is recognized.
The Company's Incentive Stock Option Plans have authorized the grant of options to management personnel and directors for up to 3,125,000 of the Company's Class A common stock. As of July 5, 2003, 493,550 shares are available for grant. Options granted generally have ten-year terms and vest ratably over a four-year period following date of grant.
The following pro forma information regarding net income and net income per share required by SFAS No. 123, "Accounting for Stock Based Compensation," has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003 and 2002, respectively: risk-free interest rates of 3.90% and 4.91%; annual dividends of $.28; volatility factors of the expected market price of the Company's common stock of .364 and .514; and a weighted-average expected life of the option of approximately 8 years. Changes in these subjective assumptions can significantly affect the fair value calculations.
The estimated fair values of the options are amortized to expense over the options' vesting periods:
|
Three-Months Ended |
Six-Months Ended |
||||||||||||||||||||
|
July 5, 2003 |
June 29, 2002 |
July 5, 2003 |
June 29, 2002 |
||||||||||||||||||
|
Net income (loss) as reported |
$ |
(1,874 |
) |
$ |
1,332 |
$ |
(593 |
) |
$ |
6,999 |
|||||||||||
|
Add: Stock based compensation included |
|||||||||||||||||||||
|
|
in net income as reported, net of related tax effects |
46 |
56 |
77 |
118 |
||||||||||||||||
|
Deduct: Stock based compensation |
|||||||||||||||||||||
|
|
determined under fair value based methods for all awards, net of related tax effects |
(479 |
) |
(633 |
) |
(939 |
) |
(1,134 |
) |
||||||||||||
|
Pro forma net income (loss) |
(2,307 |
) |
755 |
(1,455 |
) |
5,983 |
|||||||||||||||
|
Net income (loss) per common share as |
|||||||||||||||||||||
|
Basic |
(0.16 |
) |
0.11 |
(0.05 |
) |
0.56 |
|||||||||||||||
|
Diluted |
|
(0.16 |
) |
0.10 |
(0.05 |
) |
0.55 |
||||||||||||||
|
Pro forma net income (loss) per common |
|||||||||||||||||||||
|
Basic |
(0.19 |
) |
0.06 |
(0.12 |
) |
0.48 |
|||||||||||||||
|
Diluted |
(0.19 |
) |
0.06 |
(0.12 |
) |
0.47 |
|||||||||||||||
Restricted Stock
On February 15, 2000, the Company issued 55,000 shares of restricted stock to certain key employees. The restrictions lapse over four years based on attainment of certain financial performance targets and continued employment. Under APB No. 25, compensation expense is reflected over the period in which services are performed and when the financial performance targets have been met.
NOTE 4. SEGMENT REPORTING
The Company designs, sources, and markets apparel products using primarily the OshKosh B'Gosh brand. The apparel products are primarily marketed in two distinct distribution channels: domestic wholesale and through Company-owned retail stores. The Company designs and sources product to meet the needs of these distribution channels through a single procurement business unit.
Certain operations have been segregated into segments as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company manages its business operations by periodic analysis of business unit operating results. For this purpose, domestic wholesale, retail, and procurement are separately identified for management reporting and are considered segments as defined by SFAS No. 131.
Management evaluates the operating performance of each of its business units based on income from operations as well as return on net assets. For this purpose, product is transferred from procurement to the domestic wholesale and retail business units at cost. However, procurement receives a markup on product sold by the Company's wholesale and retail business units. Accounting policies used for segment reporting are consistent with the Company's overall accounting policies, except that inventories are valued on a FIFO basis. In addition, interest income, interest expense, certain corporate expenses, and the effects of the LIFO inventory valuation method are not allocated to individual business units, and are included in the All Other/Corporate column below.
Segment assets include all assets used in the operation of each business unit, including accounts receivable, inventories, and property, plant and equipment. Certain other corporate assets that cannot be specifically identified with the operation of a business unit are not allocated. Financial information for the Company's reportable segments follows:
|
|
Domestic |
|
|
All Other/ |
|
||||||||||||||||
|
For the three months |
|
|
|
|
|
||||||||||||||||
|
Net sales |
$ |
32,703 |
51,223 |
45 |
575 |
84,546 |
|||||||||||||||
|
Income (loss) before |
|
(843 |
) |
(439 |
) |
(918 |
) |
(775 |
) |
(2,975 |
) |
||||||||||
|
Assets |
48,805 |
69,061 |
15,578 |
13,752 |
147,196 |
||||||||||||||||
|
Depreciation expense |
|
339 |
965 |
135 |
171 |
1,610 |
|||||||||||||||
|
Property, plant and equipment |
|||||||||||||||||||||
|
additions |
248 |
590 |
68 |
38 |
944 |
||||||||||||||||
|
For the three months |
|
|
|
|
|
||||||||||||||||
|
Net sales |
$ |
30,328 |
$ |
53,103 |
$ |
61 |
$ |
632 |
$ |
84,124 |
|||||||||||
|
Income (loss) before |
|
(1,232 |
) |
1,110 |
|
1,821 |
449 |
2,148 |
|||||||||||||
|
Assets |
44,685 |
60,133 |
13,261 |
35,381 |
153,460 |
||||||||||||||||
|
Depreciation expense |
|
361 |
|
1,017 |
|
139 |
179 |
1,696 |
|||||||||||||
|
Property, plant and equipment |
|||||||||||||||||||||
|
additions |
6 |
1,290 |
50 |
2 |
1,348 |
||||||||||||||||
|
For the six months |
|
|
|
|
|
||||||||||||||||
|
Net sales |
$ |
83,170 |
99,138 |
63 |
1,462 |
183,833 |
|||||||||||||||
|
Income (loss) before income |
|
3,597 |
(1,884 |
) |
392 |
(3,046 |
) |
(941 |
) |
||||||||||||
|
Assets |
48,805 |
69,061 |
15,578 |
13,752 |
147,196 |
||||||||||||||||
|
Depreciation expense |
|
676 |
1,915 |
224 |
336 |
3,151 |
|||||||||||||||
|
Property, plant and equipment |
|||||||||||||||||||||
|
additions |
303 |
895 |
133 |
60 |
1,391 |
||||||||||||||||
|
For the six months |
|
|
|
|
|
||||||||||||||||
|
Net sales |
$ |
82,233 |
$ |
100,456 |
$ |
75 |
$ |
2,141 |
$ |
184,905 |
|||||||||||
|
Income before income taxes |
|
4,934 |
|
2,041 |
|
3,676 |
637 |
11,288 |
|||||||||||||
|
Assets |
44,685 |
60,133 |
13,261 |
35,381 |
153,460 |
||||||||||||||||
|
Depreciation expense |
|
929 |
|
1,981 |
|
352 |
368 |
3,630 |
|||||||||||||
|
Property, plant and equipment |
|||||||||||||||||||||
|
additions |
26 |
2,779 |
87 |
6 |
2,898 |
||||||||||||||||
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected Company income statement data expressed as a percentage of net sales.
|
As a Percentage of Net Sales for the |
|||||||||||||||||||
|
|
Three-Month Period Ended |
Six-Month Period Ended |
|||||||||||||||||
|
|
July 5, |
June 29, |
July 5, |
June 29, |
|||||||||||||||
|
Net Sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||||||||
|
Cost of products sold |
|
63.7 |
% |
57.2 |
% |
61.2 |
% |
56.6 |
% |
||||||||||
|
Gross profit |
|
36.3 |
% |
42.8 |
% |
38.8 |
% |
43.4 |
% |
||||||||||
|
Selling, general and administrative expenses |
|
42.0 |
% |
42.7 |
% |
41.5 |
% |
39.7 |
% |
||||||||||
|
Royalty income, net |
|
(2.3 |
%) |
(2.7 |
%) |
(2.3 |
%) |
(2.7 |
%) |
||||||||||
|
Operating income (loss) |
|
(3.4 |
%) |
2.8 |
% |
(0.4 |
%) |
6.4 |
% |
||||||||||
|
Other income (expense) -- net |
|
(0.1 |
%) |
(0.2 |
%) |
(0.1 |
%) |
(0.3 |
%) |
||||||||||
|
Income (loss) before income taxes |
|
(3.5 |
%) |
2.6 |
% |
(0.5 |
%) |
6.1 |
% |
||||||||||
|
Income taxes (benefit) |
|
(1.3 |
%) |
1.0 |
% |
(0.2 |
%) |
2.3 |
% |
||||||||||
|
Net income (loss) |
|
(2.2 |
%) |
1.6 |
% |
(0.3 |
%) |
3.8 |
% |
||||||||||
The Company's net sales for the three-month and six-month periods ended July 5, 2003 and June 29, 2002 are summarized as follows:
|
Net Sales |
||||||||||||||||||||||
|
Domestic |
||||||||||||||||||||||
|
|
Wholesale |
Retail |
Other |
Total |
||||||||||||||||||
|
Three months ended: |
|
|
|
|
|
|||||||||||||||||
|
July 5, 2003 |
$ |
32.7 |
$ |
51.2 |
$ |
0.6 |
$ |
84.5 |
||||||||||||||
|
June 29, 2002 |
30.3 |
53.1 |
0.7 |
84.1 |
||||||||||||||||||
|
Increase (decrease) |
$ |
2.4 |
$ |
(1.9 |
) |
$ |
(0.1 |
) |
$ |
0.4 |
||||||||||||
|
Percent increase (decrease) |
7.9 |
% |
(3.6 |
%) |
(14.3 |
%) |
0.5 |
% |
||||||||||||||
|
Six months ended: |
|
|
|
|
|
|||||||||||||||||
|
July 5, 2003 |
$ |
83.2 |
$ |
99.1 |
$ |
1.5 |
$ |
183.8 |
||||||||||||||
|
June 29, 2002 |
82.2 |
100.5 |
2.2 |
184.9 |
||||||||||||||||||
|
Increase (decrease) |
$ |
1.0 |
$ |
(1.4 |
) |
$ |
(0.7 |
) |
$ |
(1.1 |
) |
|||||||||||
|
Percent increase (decrease) |
1.2 |
% |
(1.4 |
%) |
(31.8 |
%) |
(0.6 |
%) |
||||||||||||||
SECOND QUARTER RESULTS
Net Sales
Consolidated net sales for the three-month period ended July 5, 2003 were $84.5 million, a $.4 million increase (.5%) compared to 2002 second quarter net sales of $84.1 million.
The Company's domestic wholesale business unit shipments for the three-month period ended July 5, 2003 increased approximately 17% as compared to the corresponding three-month period of 2002. The increase in unit shipments resulted from a combination of higher booked orders for the Summer 2003 season and an increase in the number of "close-out" units sold. Despite the increased unit volume, net domestic wholesale sales dollars for the quarter were impacted by a 9.5% decrease in average unit selling price (resulting from the Company's strategic decision to reduce average unit selling prices in the 10% range which commenced in July 2002), higher margin support allowances to our wholesale customers to assist in more effective flow of Company products through the retail channels and an increased amount of "close-out" sales at discounted prices.
The Company's second quarter 2003 retail sales decrease of $1.9 million (3.6%) resulted from a comparable store sales decrease of 8.2% offset in part by sales from stores opened subsequent to March 30, 2002. The comparable store sales decrease is primarily attributable to the overall average decrease in selling prices and lower store traffic, combined with a retail environment that continues to be highly promotional.
At July 5, 2003, the Company operated 158 domestic OshKosh retail stores, including 151 factory outlet stores, two showcase stores, and five strip mall stores. During the second quarter of 2003, the Company opened two factory outlet stores. At June 29, 2002 the Company operated a total of 151 domestic OshKosh retail stores.
Gross Profit
The Company's gross profit margin as a percent of net sales was 36.3% in the second quarter of 2003, compared to 42.8% in the second quarter of 2002. The Company's gross profit margin percentage decreased from second quarter 2002 levels due to the impact of selling price reductions that could not be fully offset by product cost reductions, an increase in "close-out" sales and higher margin support for our wholesale customers.
Selling, General and Administrative Expenses (SG&A)
SG&A expenses for the three-month period ended July 5, 2003 decreased $.4 million compared to 2002. As a percentage of net sales, SG&A expenses were 42.0% for the three-month period ended July 5, 2003, as compared to 42.7% in the comparable period of 2002. Second Quarter 2003 SG&A expenses included approximately $1.1 million of costs incurred to develop our Family Lifestyle Store concept and design product for the Target Stores licensing arrangement. These costs were more than offset by reduced advertising expenses, along with the effects of cost cutting measures taken to better align our corporate support functions with current business activities.
Royalty Income
The Company licenses the use of its trade name to selected licensees in the U.S. and in foreign countries. Royalty income for the three-month period ended July 5, 2003 was $2.0 million compared to $2.3 million in the second quarter of 2002.
Royalty income from domestic licensees was approximately $.6 million in the three-month period ending July 5, 2003, as compared with $.8 million for the same period in 2002. The decrease in domestic royalties reflects reduced sales by our juvenile products and footwear licensees. Royalty income from international licensees was approximately $1.4 million for the three-month period ended July 5, 2003 as compared with $1.5 million for the same period in 2002.
Operating Income (Loss)
As a result of the factors described above, the Company experienced an operating loss for the three-month period ended July 5, 2003 of $2.9 million, as compared to operating income of $2.3 million for the comparable period in 2002.
Other Income (Expense) -- Net
The Company's second quarter 2003 net other income (expense) was a $.1 million expense compared to $.2 million expense in 2002. Interest expense was lower for the second quarter ended July 5, 2003 compared to 2002 due primarily to prepayments of the Company's long-term debt during 2002.
Income Taxes
The Company's effective tax rate for the three-month period ended July 5, 2003 was approximately 37.0% compared to 38.0% in 2002.
Net Income (Loss)
The Company experienced a net loss for the three months ended July 5, 2003 of $1.9 million compared to net income for the three months ended June 29, 2002 of $1.3 million. Diluted loss per share for the quarter ended July 5, 2003 was $(.16), compared to diluted earnings per share of $.10 in 2002. Stock repurchases in 2002 and 2003 reduced the diluted shares outstanding by approximately 884,000 shares (approximately 6.9%).
YEAR-TO-DATE RESULTS
Net Sales
Consolidated net sales for the six-month period ended July 5, 2003 were $183.8 million, a $1.1 million decrease (.6%) from net sales of $184.9 million for the first six months of 2002.
The Company's domestic wholesale unit shipments for the six-month period ending July 5, 2003 increased approximately 14.5% as compared to 2002. The increase in unit shipments resulted from a combination of slightly higher booked orders, the timing of shipment of Spring 2003 season merchandise (higher level shipped in January 2003 versus December 2002) and an increase in the number of "close-out" units sold. While unit shipments increased, net year-to-date domestic wholesale sales dollars were affected by lower average unit selling prices and higher margin support to our wholesale customers to assist in more effective flow of Company products through the retail channels, and a substantial increase in the amount of "close-outs" sold at reduced selling prices.
The Company's decrease in retail sales for the first six months of 2003 resulted from a comparable store sales decline of 10.7%, offset in part by sales volume from newly opened stores and inclusion of an additional week of sales in 2003 due to the Company's 52/53 week fiscal year. The comparable store sales decline is attributable to price reductions in our product line, lower store traffic and a highly promotional retail environment.
Gross Profit
The Company's year-to-date gross profit margin as a percent of net sales was 38.8% compared to 43.4% for the first six months of 2002. The Company's gross profit margin decrease from 2002 levels is due to a combination of the impact of selling price decreases that could not be fully offset by product cost reductions, an increase in "close-out" sales and sharply higher margin support for our wholesale customers.
Selling, General and Administrative Expenses (SG&A)
Year-to-date SG&A expenses increased $3.0 million over the six-month period ended June 29, 2002. As a percentage of net sales, SG&A expenses were 41.5% as compared to 39.7% in the comparable period of 2002. The increase in expense relate primarily to approximately $4.3 million of costs incurred to develop our Family Lifestyle Store concept and design costs for the Target Stores licensing arrangement, along with growth in the Company's retail operation compared to 2002. These cost increases were partially offset by reduced advertising expenses, reductions in retail operating costs and the effects of cost cutting measures taken to align our corporate support functions with current business activities.
Royalty Income
Royalty income for the six-month period ended July 5, 2003 was $4.2 million compared with $4.9 million in the second quarter of 2002.
Royalty income from domestic licensees was approximately $1.3 million in the six- month period ending July 5, 2003, as compared with $1.8 million for the same period in 2002. The decrease is primarily attributable to reduced sales by our juvenile products and accessories licensees. Royalty income from international licensees was approximately $2.9 million for the six-month period ending July 5, 2003 as compared with $3.1 million for the same period in 2002. The decrease is primarily attributable to a strategic change in the Company's Japanese menswear licensee to better align the licensee with the Company's long-term growth objectives.
Operating Income (Loss)
The Company experienced an operating loss of $.8 million for the six-month period ended July 5, 2003 as compared to $11.8 million operating income for the comparable period in 2002. The primary reasons for this decrease are reduced gross margin as previously discussed, substantial investment in the Family Lifestyle Store concept and Target Stores licensee design costs.
Other Income (Expense) -- Net
The Company's net other income (expense) for the six-month period ended July 5, 2003 was a $.2 million expense compared to $.5 million for 2002. Interest expense decreased in 2003 due to prepayments of the Company's long-term debt in 2002.
Income Taxes
The Company's effective tax rate for the six-month period ended July 5, 2003, was approximately 37.0% compared to 38.0% in 2002. The Company expects to fully utilize the tax benefit relating to an operating loss for the period ending July 5, 2003.
Net Income (Loss)
The Company experienced a net loss for the six-months ended July 5, 2003 of $.6 compared to net income for the six-months ended June 29, 2002 of $7.0 million.
SEASONALITY OF BUSINESS
The Company's business is increasingly seasonal, with highest sales and income in the third quarter, which is the Company's peak wholesale shipping period and a major retail selling season at its retail stores. The Company's second quarter sales and income are the lowest of the year because of relatively low domestic wholesale unit shipments and relatively modest retail store sales during this period. The Company anticipates this seasonality trend to continue to impact 2003 quarterly sales and income.
Financial Position, Capital Resources and Liquidity
At July 5, 2003, the Company's cash and cash equivalents were $11.9 million, compared to $36.2 million at the end of 2002 and $26.4 million at June 29, 2002. The decrease in cash and cash equivalents at July 5, 2003 compared with December 28, 2002 relates to increases in inventories and accounts receivable, a reduction in accrued liabilities and share repurchases. The decrease in cash and cash equivalents at July 5, 2003 compared with June 29, 2002 is primarily attributable to the prepayment of long-term debt in July 2002, stock repurchases in the second half of 2002 and higher inventory levels. Net working capital at July 5, 2003 was $70.0 million compared to $71.0 million at December 28, 2002, and $77.3 million at June 29, 2002. The decrease in working capital compared to June 29, 2002 is primarily attributable to decreases in cash and cash equivalents. Accounts receivable at July 5, 2003, were $19.7 million compared to $16.7 million at December 28, 2002, and $18.3 million at June 29, 2002. Inv entories at July 5, 2003 were $72.5 million, compared to $57.1 million at December 28, 2002, and $62.0 million at June 29, 2002. The inventory increase over June 2002 levels reflects a buildup in classic replenishment product and to a lesser degree remaining prior-season product. The Company has modified its production schedule to gradually reduce the inventory levels of replenishment product over the balance of 2003 and is exploring marketing alternatives to reduce prior-season inventory levels.
Cash used in operations amounted to approximately $22.5 million in the first six months of 2003, compared to cash provided of $10.8 million in the first half of 2002. The change in cash from operating activities in the first quarter of 2003 compared to 2002 is primarily attributable to reduced net income, increased inventory levels and minimal stock option exercises during the first half of 2003. During 2002, the income tax benefit of stock option exercises provided operating cash flow.
Cash used in investing activities totaled $1.6 million in the first half of 2003 compared to $2.8 million in 2002. Capital expenditures were $1.4 million in 2003 and $2.9 million in the first quarter of 2002. These capital expenditures relate primarily to additional retail stores and remodeling existing retail stores.
Cash used in financing activities totaled $.2 million in the second quarter of 2003, compared to $10.9 million in the comparable period of 2002. The Company's primary financing activities in 2003 consisted of cash dividends and stock repurchases. In 2002, primary financing activities consisted of dividends and common stock issuance in connection with the exercise of stock options and a prepayment of long-term debt. At July 5, 2003, the Company had $3.9 million in borrowings outstanding under its credit agreement for the acquisition of inventory and other short-term working capital needs.
On December 6, 1999, the Company's Board of Directors authorized a repurchase program for up to 1.5 million shares of its Class A common stock. On December 11, 2000, the Company's Board of Directors authorized an addition of 1.0 million shares to this repurchase program. During 2003, the Company repurchased 118,900 shares of its Class A common stock under these programs for approximately $2.8 million (an average of $23.55 per share). The Company has 432,700 shares of its Class A common stock available to be repurchased under its current repurchase program.
The Company has an unsecured credit agreement with a number of banks that provides a $75 million credit facility available for general corporate purposes, including cash borrowings and issuances of letters of credit. The credit facility expires October 30, 2003. The Company intends to renew this credit agreement before its expiration.
At July 5, 2003, the Company had outstanding obligations under existing credit facilities of $3.9 million. There were no outstanding borrowings on existing credit facilities at December 28, 2002 or June 29, 2002. The Company continues to rely on this credit facility to support its acquisition of inventory under letters of credit.
The Company believes that this credit facility, along with cash generated from operations for the second half of the year, will be sufficient to finance the Company's seasonal working capital needs as well as its capital expenditures and business development needs.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company's contractual obligations disclosure in its Annual Report on Form 10-K for the year ended December 28, 2002 has not materially changed since that report was filed. The addition of three-year computer leases and additions and renewals of Retail store leases, generally over five-year terms, were offset by payments made on existing operating leases during the first half of 2003.
As of July 5, 2003, the Company remains obligated under commercial commitments for merchandise letters of credit of $43.9 million and standby letters of credit of $.7 million. All of these commitments expire within one year.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which is effective for fiscal years ending after December 15, 2002. This statement provides alternative methods for a transition to the fair value method of accounting for stock-based compensation. The statement also amends the disclosure provision of Statement 123, "Accounting for Stock-Based Compensation" by requiring disclosure in the summary of significant accounting policies of the entity's accounting policy, and additional disclosure of the impact on net income of the Company's existing method and fair value method of accounting for stock-based compensation. While the Company has not elected to adopt fair value accounting for its stock-based compensation, it has complied with the new disclosure requirements under Statement 148. As adopted, this statement does not have any impact on the Company's results of operations or financial position.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, and revenues and expenses during the period. Significant accounting policies employed by the Company, including the use of estimates, are presented in the Notes to Consolidated Financial Statements of the Company's Annual Report.
Critical accounting policies are those that are most important to the presentation of the Company's financial condition and the results of operations, require management's most difficult, subjective and complex judgments, and involve uncertainties. The Company's most critical accounting policies, discussed below, pertain to revenue recognition, accounts receivable, net, inventories and accrued expenses. Management must use informed judgments and best estimates to properly apply these critical accounting policies. Because of the uncertainty in these estimates, actual results could differ from estimates used in applying the critical accounting policies. The Company is not aware of any reasonably likely events or circumstances which would result in different amounts being reported that would materially affect its financial condition or results of operations.
Revenue Recognition
Retail store revenue is recognized at the time of sale and is net of returns.
Revenue within the Company's wholesale business is recognized at the time merchandise is shipped from the Company's distribution centers, as this is when title and risk of loss passes to the customer. Revenue is reduced by provision for returns when the return is authorized by the Company. A provision for promotional support, allowances and co-op advertising claims recorded as a reduction of revenue is recognized when revenue from the related shipment of product is recognized.
Wholesale revenue is recorded net of returns, promotional support, allowances and the portion of co-op advertising program support that is not correlated with a specific acquisition of advertising material as described below.
|
Returns The Company determines the amount of potential returns of unsaleable products, and reduces sales for the full amount of the credit that is anticipated will be issued or has been issued to its wholesale customers. |
|
Promotional Support In accordance with long-standing programs with many of the Company's wholesale customers, the Company provides allowances to effectively flow products through the retail channels. The Company periodically performs a review of its outstanding customer support obligations for all product shipped through the date of the financial statements. These amounts are evaluated on a customer by customer basis based on an evaluation of product sell-through results, retailer performance, current market conditions and consider any unauthorized deductions taken by the customer. Settlements of promotional support arrangements are periodically compared to the Company's original estimates to enhance the Company's ability to predict support levels in subsequent seasons. Promotional support arrangements are recorded as a reduction of sales. |
|
Co-op Advertising In accordance with the Financial Accounting Standard Board's Emerging Issues Task Force issue number 01-09 (EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer"), the Company carefully evaluates the substance of any co-op advertising support. To the extent that the co-op advertising support relates to the acquisition of advertising material which the Company could obtain independently, these costs are considered advertising expense. To the extent that they relate to promotional support for the Company's customers' advertising activities, they are considered reductions of revenue, in accordance with the EITF 01-09. The Company evaluates co-op advertising commitments on a customer by customer basis considering actions taken throughout the course of the year, and the Company's prior history in dealing with customer co-op advertising issues. |
Accounts receivable, net
In the normal course of business, the Company extends credit to customers. Accounts receivable, as shown on the Consolidated Balance Sheets, is net of allowances for doubtful accounts and other allowances.
An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on historic trends and an evaluation of the impact of economic conditions.
The Company regularly receives unauthorized charge backs from its customers for a variety of operational reasons. The Company periodically evaluates the adequacy of its reserve for such amounts by reviewing the historical collection of operational charge backs. The Company also considers likely charge backs that are anticipated to be taken in the foreseeable future based on historical charge back rates to properly match subsequent charge back activity with the revenue reflected in the Company's financial statements.
Allowances for returns of unsaleable products and promotional support which reduce net sales are also reflected as a reduction to accounts receivable as they are generally settled upon payment of customer invoices.
Inventories
Inventories are stated at lower of cost (using the last-in, first-out method) or market. The Company continually evaluates the composition of its inventories assessing slow-turning, ongoing product as well as prior season fashion product. Market value of aged inventory is determined based on historical sales trends for this category of inventory, the impact of market trends and economic conditions and current sales negotiations for this type of inventory.
Accrued Expenses
Accrued expenses for employee health insurance, workers' compensation, profit sharing, contracted advertising, professional fees and other outstanding Company obligations are assessed based on statistical trends and estimates based on projections and current expectations, and are updated periodically as additional information becomes available.
FORWARD OUTLOOK
The retail climate, particularly in many of the channels in which the Company's products are sold, remains challenging. The Company's booked orders in dollars for the 2003 Fall and Holiday seasons were below orders booked in dollars for the comparable 2002 seasons. The Company believes that this reduction is due primarily to the significant economic slowdown experienced in the U.S. We anticipate that our wholesale customers will experience sluggish consumer spending on apparel, and will take a cautious approach to inventory management. We also believe the promotional environment that exists in our wholesale business is likely to continue throughout 2003.
We are currently planning comparable store sales decreases in our retail business unit in the low single digit range for the remainder of 2003, primarily as a result of lower retail selling prices to our consumers, lower store traffic and a continuing promotional environment. However, the overall price reductions taken by the Company in the Fall/Back-to-School season in 2002 will begin to affect the year-to-year same store sales comparison. We are also planning for three additional new retail stores by year end 2003.
The Company expects contraction of its gross margin percentage of 260 to 320 basis points for the entire year over prior year amounts, due to anticipated margin support to our wholesale customers and the existing promotional environment at all retail channels.
The Company continues to make financial investments in the Family Lifestyle retail store concept and Target licensing arrangement. These initiatives are expected to add $.9-$1.5 million to the SG&A costs for the remainder of the year. However, the Company has taken several steps to control other SG&A expenses for the remainder of the year.
We anticipate that our royalty income for the year will be approximately $1.7-$2.2 million higher than the 2002 amounts primarily due to the Target license in the second half of the year. The Genuine Kids from OshKosh product debuted in Target Stores in early July, 2003 and will begin generating royalty income in the Third Quarter.
For the entire year 2003, we are currently estimating net sales of $425-$438 million:
|
Wholesale |
$172-180 million |
|
Retail |
$248-255 million |
We are currently projecting diluted earnings per share to be in the range of $1.60 to $1.75 for 2003.
For the entire year 2003, we are planning capital expenditures of $5.0-$6.0 million. We are currently budgeting depreciation and amortization for 2003 of $7.0 million.
The Company remains committed to its retail Family Lifestyle Store concept. The Company intends to open 12 to 15 Family Lifestyle Stores in the first quarter of 2004.
The foregoing forward-looking statements are qualified in their entirety by the reference to the risks and uncertainties set forth under the heading "Forward-Looking Statements" below.
Forward-Looking Statements
Statements contained herein and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in Company press releases and in oral statements made by, or with the approval of, authorized personnel that relate to the Company's future performance, including, without limitation, statements with respect to the Company's anticipated financial position, results of operations and level of business for 2003 or any other future period, are forward-looking statements within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such statements, which are generally indicated by words or phrases such as "plan", "estimate", "project", "anticipate", "the Company believes", "management expects", "currently anticipates", "intends" and similar phrases are based on current expectations only and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove inco rrect, actual results may vary materially from those anticipated, projected or estimated.
The following discussion highlights some of the risks that affect the financial success of the Company. Because it is not possible to determine the impact of these factors or changes in these factors, these risks and uncertainties may affect the Company's operating results in future periods.
There are deflationary pressures on the selling price of apparel products in the United States.
The highly competitive nature of the apparel industry has heightened deflationary pressure on selling prices over the past several years. If this trend persists, it will continue to put pressure on the Company's ability to increase its sales and operating margin. Historically, the Company has been able to achieve a relatively stable gross profit margin due to deflationary effects that influenced the manufacturing costs of apparel on a global scale. The maintenance of the Company's gross margin is dependent upon the Company's ability to resist deflationary price pressures and its ability to reduce apparel costs which include raw materials costs, especially cotton, and the cost of manufacturing throughout the world. If raw material costs increased or if the Company was not successful in negotiating low manufacturing costs, the Company would experience a reduction in gross profit margin in the future.
Wholesale customer and consumer tastes and preferences, along with fashion trends, will affect the acceptance of our product in the market place.
The OshKosh B'Gosh brand has represented quality, style and a proper value proposition to its consumers for over a century. We believe that continued success depends on our ability to deliver trend-relevant merchandise that embodies the OshKosh brand essence, and provides a unique and compelling value proposition for our consumers in the Company's distribution channels. There can be no assurance that the demand for OshKosh B'Gosh product will not decline, or that we will be able to successfully evaluate and adapt our product to be aware of fashion trends in addition to wholesale customer and consumer preferences. A decline in the demand for our product would have a material adverse affect on our business, financial position and results of operations.
The children's wear apparel business is highly competitive.
The children's apparel segment of the retail business is highly competitive. There are a number of brands, including Baby Gap, Gap Kids, The Children's Place, Gymboree, Carters, Healthtex, Old Navy, Disney licensed apparel products and a variety of private label brands that compete with our product offering in the higher quality department store market. There are also a number of competitors in the private label and discount channels that indirectly compete with the Company's product. Increased competition may reduce our sales and gross margins, therefore impacting our Company's operating results.
Our business is sensitive to overall levels of consumer spending, particularly in the apparel segment.
The Company believes that spending on children's apparel is somewhat discretionary. While certain apparel purchases are less discretionary due to size changes as children grow, the amount of clothing consumers desire to purchase, specifically name brand apparel products, is impacted by the overall level of consumer spending. Overall economic conditions that affect discretionary consumer spending include employment levels, business conditions, tax rates, interest rates, overall levels of consumer indebtedness and other factors that affect consumer spending. Reduction in the level of discretionary spending or shifts in consumer spending to other products may have a material adverse affect on the Company's sales and results of operations.
The Company's sales are seasonal with the Fall/Back-to-School season as the key selling season.
Historically, a disproportionate amount of our retail sales and shipments to wholesale customers related to the Fall/Back-to-School season for retail sales in the months of July, August and September. Since the Company's product is impacted by the season in which it is offered, changes in consumer spending or buying habits during key marketing periods could have a major impact on the Company's profitability. Consumer spending during any season may be influenced by weather conditions. For example, if the country were to experience unseasonably warm weather during the Fall/Back-to-School season, consumers may reduce their purchases of heavier and long sleeve apparel. If the Company's product offering for a particular season was not well received due to consumer spending factors unforeseen by the Company, the Company would have a substantial increase in obsolete product which would require significant markdowns out of season. If the Company was unable to meet its forecasted sales levels for the Fall/Bac k-to-School season, this would have a material affect on the Company's sales, gross margin and results of operations for the year.
The majority of the Company's products are sourced outside of the United States. This sourcing matrix creates risks associated with international business.
The Company routinely sources its product in Asia, Mexico, Central America, and to a lesser degree, other areas of the world. Due to the inability of the Company to forecast or control these countries' political environments, labor climates or infrastructures, there is inherent risk associated with this product sourcing plan. Our business is subject to risks associated with foreign international business, including foreign governmental regulation and intervention, foreign currency fluctuation, social or political unrest, natural disasters, shipping and customs clearance in foreign countries and in the U.S., local business practices and economic conditions in countries outside of the United States. In addition, the spread of the SARS Virus and extent of local preventative measures taken in countries where the Company sources its product could affect contractor production capabilities. If any of these factors hinder the Company's ability to obtain products on a timely basis, there could be a significant disruption in the Company's operations.
The Company's products are imported into the United States in accordance with international trade and U.S. customs procedures.
The Company is dependent upon a variety of seaports for the importation of the Company's products, and is responsible for compliance with procedures established by U.S. customs for the importing of products. Changes in U.S. customs procedures concerning the importation of apparel products could have a material adverse impact on the Company's ability to utilize its global sourcing matrix. Further, the complications and stringent regulations that may be developed as part of the Homeland Security Program may result in delays or further costs in importing the Company's products. Unforeseen delays in customs clearance of any goods could have material adverse impact on our ability to deliver shipments in accordance with customer shipping specifications, resulting in material adverse affects on the Company's sales and profitability.
The Company is dependent upon a global transportation network to import its products.
Since the majority of the Company's products are imported, the Company is dependent upon a fleet of international ocean carriers to deliver product on a timely basis. If this global transportation matrix were to be disrupted by factors such as a port strike, world trade restrictions or imposition of war, the Company would be unable to timely receive product sourced overseas. This could have a material adverse affect on the Company's sales and results of operations.
The Company's reputation may be severely harmed if contractors used to manufacture its clothing engage in practices that our consumers believe are unethical.
The Company regularly uses contractors located outside the United States. Accordingly, the labor laws and business practices in these countries may vary from those generally accepted in the United States. The Company requires its independent manufacturers to operate their businesses in compliance with local laws and regulations. However, due to their status as independent manufacturers, the Company cannot assure compliance with applicable local laws and cannot be certain that these laws are not different than those generally accepted in the United States. The Company could experience negative publicity as a result of media attention focused on international apparel manufacturing operations. Any negative publicity received by the Company could have a detrimental impact on its net sales and results of operations.
The Company's wholesale distribution channel is dependent upon a number of key wholesale accounts.
The Company sells its products to a number of department stores, including Kohl's, Kids R Us, JC Penney, May Co. and Federated Department Stores. The success of the Company's wholesale business is, in part, aligned with the success of these retailers and the levels of customer traffic in these department stores. While the Company believes that its target consumers will stay aligned with target customers of these department stores, further prospects for growth of the Company's wholesale business depend upon the success of these companies. The inability of these distribution channels to grow or achieve sales targets for the Company's products may have a significant material adverse affect on the Company's sales and results of operations.
The Company's retail success and future growth is dependent upon identifying and negotiating appropriate lease terms at factory outlet centers.
Substantially all of the Company's retail stores are located in factory outlet centers across the country. Successful operation of a retail outlet store depends in part on the overall acceptance of the factory outlet center to attract a customer base sufficient to make store sales volume profitable. If the Company is unable to identify new outlet centers with anticipated consumer traffic sufficient to support a profitable sales level, retail growth may consequently be limited. Further, if existing outlet centers do not attract a sufficient customer base to obtain a reasonable sales volume, that could have a material adverse impact on the Company's sales, gross margin and results of operations. Further, the Company invests in an initial build out at these outlet centers. If the Company determined that a certain retail store was not successful, additional impairment of the retail build out and related fixtures may be necessary to reflect the reduced ongoing market value of these improvements. This woul d have an adverse affect on the Company's results of operations and financial position.
The Company's success is dependent upon retaining key individuals within the organization to execute the Company's strategic direction.
The Company's ability to attract and retain qualified design, sourcing and sales personnel, executive management and support function staff is key to the Company's success. If the Company were unable to attract and retain qualified individuals in these areas, an adverse impact on the Company's growth and results of operations may result.
The Company's licensing income, including anticipated licensing income from the Genuine Kids from OshKosh license agreement from Target stores, is greatly impacted by the Company's brand reputation.
The Company's brand image as a consumer product with outstanding quality and name recognition makes it valuable as a license source. The Company is able to license complementary products and obtain license income from use of the OshKosh, OshKosh B'Gosh and related trademarks. The Company is able to obtain substantial amounts of foreign license income as the OshKosh label carries an international reputation for quality and American style. While the Company takes significant steps to ensure the reputation of its brand is maintained through its license agreements, there can be no guarantee the Company's brand image will be enhanced or potentially be deteriorated through its association with products outside of the core OshKosh B'Gosh apparel products.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company has a $75 million credit agreement available for general corporate purposes. Borrowings under this agreement bear interest at a variable rate, based on the London Interbank Offered Rates. Accordingly, the Company could be affected by interest rate changes. Management monitors this risk by carefully analyzing the short-term rates before borrowing on the credit facility.
Foreign Currency Risk
The Company contracts for the manufacture of apparel with contractors in Asia, Central America, and Mexico. While these contracts are stated in terms of U.S. dollars, there can be no assurance that the cost for the production of the Company's products will not be affected by exchange fluctuations between the United States and the local currencies of these contractors. Due to the number of currencies involved, the Company cannot quantify the potential impact of future currency fluctuations on net income in future years. The Company does not hedge its exchange rate risk.
Investment Risk
The Company does not believe it has material exposure to market risk with respect to any of its investments; the Company does not utilize market rate sensitive instruments for trading or other purposes.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), within 90 days prior to the filing date of this quarterly report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company's management, including the certifying officers of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the certifying officers concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
There were not any significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 5. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The registrant's annual meeting of stockholders was held on May 6, 2003 (the "2003 Annual Meeting"). A majority of the shares of each class of the registrant's Common Stock, represented in person or by proxy, was required to constitute a quorum for action to be taken by such class. A total of 9,002,074 shares of Class A Common Stock and 1,894,873 shares of Class B Common Stock were represented, in person or by proxy, at the 2003 Annual Meeting, constituting a quorum of each class.
With respect to the election of Class A Directors, the following votes were cast in favor of and withheld with respect to the following management nominees:
|
Nominee |
Votes in favor |
Votes withheld |
Broker non-votes |
|
Shirley A. Dawe |
8,776,228 |
225,846 |
0 |
|
Robert C. Siegel |
8,776,596 |
225,478 |
0 |
With respect to the election of Class B Directors, the following votes were cast in favor of and withheld with respect to the following management nominees:
|
Nominee |
Votes in favor |
Votes withheld |
Broker non-votes |
|
Douglas W. Hyde |
1,826,317 |
68,556 |
0 |
|
David L. Omachinski |
1,894,873 |
0 |
0 |
|
William F. Wyman |
1,889,373 |
5,500 |
0 |
|
Paul A. Lowry |
1,894,873 |
0 |
0 |
|
Steven R. Duback |
1,889,373 |
5,500 |
0 |
|
Phoebe A. Wood |
1,894,873 |
0 |
0 |
|
Tamara L. Heim |
1,894,873 |
0 |
0 |
Directors are elected by a plurality of the votes of the shares of the class entitled to elect such directors, present in person or represented by proxy at the meeting. "Plurality" means that the individuals who receive the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the meeting. There were no nominees for director other than management's nominees identified above. Accordingly, each such nominee received a plurality of the votes cast by shares of the class indicated and, therefore, was elected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits |
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99.1 |
Certification by the Chief Executive Officer |
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99.2 |
Certification by the Chief Financial Officer |
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(b) Reports on Form 8-K |
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On July 23, 2003, the Registrant filed an 8-K to accompany its press release announcing certain financial results for the second quarter ended July 5, 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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OSHKOSH B'GOSH, INC. |
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Date: July 23, 2003 |
By: |
/S/DOUGLAS W. HYDE |
|
|
Douglas W. Hyde |
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Chairman of the Board, President |
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Chief Executive Officer and Director |
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|
Date: July 23, 2003 |
By: |
/S/DAVID L. OMACHINSKI |
|
|
David L. Omachinski |
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|
Executive Vice President, Chief Operating and |
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|
Financial Officer, Treasurer and Director |
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I, Douglas W. Hyde, certify that:
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: July 23, 2003 |
By: |
/S/DOUGLAS W. HYDE |
|
Douglas W. Hyde |
||
|
Chairman of the Board, President |
||
|
Chief Executive Officer and Director |
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I, David L. Omachinski, certify that:
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: July 23, 2003 |
By: |
/S/DAVID L. OMACHINSKI |
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David L. Omachinski |
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Executive Vice President, Chief Operating and |
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Financial Officer, Treasurer and Director |