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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 0-24176
Marisa Christina, Incorporated
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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. incorporation or organization)
Employer Identification No.)
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__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes__ No [X]
The number of shares outstanding of the Company's Common Stock on November
11, 2004 were 7,295,065.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -- September 30, 2004 (Unaudited)
and December 31, 2003 2
Consolidated Statements of Operations -- Three and Nine Months Ended
September 30, 2004 and 2003 (Unaudited) 3
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 2004 and 2003 (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
Item 4. Internal Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 6: Exhibits 13
SIGNATURE 14
SECTION 302 CERTIFICATIONS 15
SECTION 906 CERTIFICATIONS 17
PART I FINANCIAL INFORMATION
ITEM I CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003 (1)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 484,763 4,845,410
Trade accounts receivable, less allowance for doubtful
accounts of $196,677 in 2004 and $296,043 in 2003 6,107,318 1,678,686
Inventories 2,251,100 2,600,595
Deferred taxes -- 800,000
Prepaid expenses and other current assets 284,537 508,537
------------- ------------
Total current assets 9,127,718 10,433,228
Property and equipment, net 267,877 235,547
Noncurrent deferred taxes -- 5,752,240
Other assets 92,516 55,133
------------- ------------
Total assets $ 9,488,111 16,476,148
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,264,656 1,503,118
Accrued expenses and other current liabilities 245,785 205,307
------------- ------------
Total current liabilities 1,510,441 1,708,425
------------- ------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000 shares;
none issued -- --
Common stock, $.01 par value. Authorized 15,000,000 shares;
8,586,769 shares issued 85,868 85,868
Additional paid-in capital 31,664,680 31,664,680
Accumulated other comprehensive loss (57,004) (59,721)
Accumulated deficit (19,611,598) (12,818,828)
Treasury stock, 1,291,704 common shares (4,104,276) (4,104,276)
------------- ------------
Total stockholders' equity 7,977,670 14,767,723
Commitments and contingencies
------------- ------------
Total liabilities and stockholders' equity $ 9,488,111 $ 16,476,148
============= ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 2003.
See accompanying notes to consolidated financial statements.
2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
----------- ---------- ---------- ----------
Net sales $ 8,365,991 10,347,061 16,485,140 18,406,437
Cost of goods sold 5,055,570 6,422,548 11,514,008 12,299,991
----------- ---------- ---------- ----------
Gross profit 3,310,421 3,924,513 4,971,132 6,106,446
Selling, general and administrative
expenses 2,011,881 2,285,869 5,332,286 6,061,009
----------- ---------- ---------- ----------
Operating earnings
(loss) 1,298,540 1,638,644 (361,154) 45,437
Other income, net 8,205 14,779 101,802 90,543
Interest income, net 5,650 1,333 22,446 23,478
----------- ---------- ---------- ----------
Earnings (loss) before
income tax expense 1,312,395 1,654,756 (236,906) 159,458
Income tax expense 7,080,589 569,745 6,555,864 67,827
----------- ---------- ---------- ----------
Net earnings (loss) $(5,768,194) 1,085,011 (6,792,770) 91,631
=========== ========== ========== ==========
Net earnings (loss) per common share:
Basic $ (0.79) 0.15 (0.93) 0.01
Diluted $ (0.79) 0.15 (0.93) 0.01
=========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- ----------
Cash flows from operating activities:
Net earnings (loss) $(6,792,770) 91,631
Adjustments to reconcile net earnings (loss) to net cash used in
operating activities:
Depreciation and amortization 112,041 105,576
Bad debt expense 108,000 190,000
Deferred income tax expense, including change in
deferred tax valuation allowance 6,552,240 36,000
Changes in operating assets and liabilities:
Trade accounts receivable (4,536,632) (4,322,109)
Inventories 349,495 (757,930)
Prepaid expenses and other assets 186,617 (47,999)
Trade accounts payable (238,462) 60,861
Accrued expenses and other current liabilities 43,259 (186,179)
----------- ----------
Net cash used in operating activities (4,216,212) (4,830,149)
Cash flows used in investing activities for property and
equipment additions (144,435) (32,420)
Cash flows provided by financing activities for borrowings
under credit facility, net -- 572,245
----------- ----------
Net decrease in cash and cash equivalents (4,360,647) (4,290,324)
Cash and cash equivalents at beginning of period 4,845,410 4,721,614
----------- ----------
Cash and cash equivalents at end of period $ 484,763 431,290
=========== ==========
Supplemental information:
Cash paid during the period for:
Income taxes $ 24,814 73,283
=========== ==========
See accompanying notes to consolidated financial statements.
4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2004 and 2003
(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 accounting principles generally
accepted in the United States of America. 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, 2003.
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 and nine month periods ended
September 30, 2004 and 2003 are not necessarily indicative of the
operating results to be expected for a full year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) REVENUE AND RECEIVABLES
Revenue is recognized when title and risk of ownership transfers to
the customer, which is when the product is shipped to the customer.
Allowances are provided for estimated uncollectible receivables
based on review of specific accounts and historical experience.
Allowances and credits, which are given to customers in connection
with sales incentives and promotional activities, are recognized as
reductions of sales when the related sales revenue is earned and
recognized. As of September 30, 2004 and December 31, 2003, the
Company's reserves for sales allowances were $866,500 and
$1,328,000, respectively. Such amounts are recorded as reductions to
trade accounts receivable.
(b) STOCK OPTION PLAN
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation
of APB Opinion No. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123,
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed
by SFAS No. 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS No. 123.
(Continued)
5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
The following table illustrates the effect on net earnings (loss) if
the fair-value-based method had been applied to all outstanding and
unvested awards for the three and nine months ended September 30,
2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ------------------------------
2004 2003 2004 2003
------------- ----------- ------------- -------------
Net earnings (loss), as reported $ (5,768,194) 1,085,011 (6,792,770) 91,631
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (36,000) (36,000) (108,000) (94,000)
-------------- ----------- ------------- -------------
Pro forma net earnings
(loss) $ (5,804,194) 1,049,011 (6,900,770) (2,369)
============== =========== ============ =============
Diluted net earnings (loss) per
weighted average common share:
As reported $ (0.79) 0.15 (0.93) 0.01
Pro forma $ (0.80) 0.14 (0.95) --
============= =========== ============= =============
(c) COMPREHENSIVE INCOME (LOSS)
Comprehensive loss was ($5,768,566) and ($6,790,053) for the three
and nine months ended September 30, 2004, respectively.
Comprehensive income was $1,085,011 and $91,631 for the three and
nine months ended September 30, 2003, respectively. Comprehensive
income (loss) includes the Company's net earnings (loss) and the
change in the foreign currency translation adjustment.
(3) INVENTORIES
Inventories at September 30, 2004 and December 31, 2003 consist of the
following:
2004 2003
----------- ---------
Piece goods $ 33,800 86,495
Finished goods 2,217,300 2,514,100
----------- ---------
$ 2,251,100 2,600,595
=========== =========
(4) BORROWINGS UNDER CREDIT FACILITY
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 trade accounts receivable, and bear interest at the prime
rate plus 0.75%. The Company is required to pay an annual commitment fee
of approximately $50,000. The credit facility contains various covenants
that require minimum levels of working capital and net tangible worth.
(Continued)
6
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Nine Months Ended September 30, 2004 and 2003
(Unaudited)
As of September 30, 2004, there were no borrowings outstanding and
approximately $79,200 of commercial letters of credit outstanding under
the credit facility. Available borrowings at September 30, 2004 were $7.3
million. The arrangement expires on June 14, 2006 and is cancelable by
either party with 90 days' written notice. The Company expects to have
sufficient financing to meet its working capital needs throughout the next
twelve months. As of December 31, 2003, there were no borrowings
outstanding and approximately $79,200 of commercial letters of credit
outstanding under the credit facility.
(5) NET EARNINGS (LOSS) PER COMMON SHARE
Basic and diluted net earnings (loss) per common share are based on the
weighted average number of common shares outstanding, which was 7,295,065
for the three and nine months ended September 30, 2004 and 2003. The
effect of stock options outstanding during the three and nine months ended
September 30, 2004 and 2003 was not included in the computation of diluted
loss per common share because the effect would have been antidilutive.
(6) DEFERRED TAX ASSETS
The Company deferred tax assets relate principally to net operating loss
carry forwards of approximately $30 million that expire in various amounts
through 2023. During the quarter ended September 30, 2004, the Company
reassessed the recovery of its deferred tax assets in accordance with the
provisions of SFAS No. 109, Accounting for Income Taxes. In making its'
assessment, management determined that expected operating results for the
three-year period ending December 31, 2004 will not be sufficient to
support a conclusion that recovery of the deferred tax assets is more
likely than not. While management believes the Company will achieve
profitable operations in future years that will enable the Company to
recover a substantial portion of its deferred tax assets, the Company
presently does not have sufficient objective evidence to support
management's belief. Accordingly, the Company increased its valuation
allowance for deferred tax assets by approximately $6.6 million to $11.5
million at September 30, 2004. The Company, as of September 30, 2004,
has a full valuation allowance for its deferred tax assets.
(7) 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
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Marisa Christina's
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. The statements
regarding Marisa Christina in this document that are not historical in nature,
particularly those that utilize terminology such as "may," "will," "should,"
"likely," "expects," "anticipates," "estimates," "believes" or "plans," or
comparable terminology are forward-looking statements based on current
expectations about future events, which Marisa Christina has derived from
information currently available. These forward-looking statements involve known
and unknown risks and uncertainties that may cause our results to be materially
different from results implied in such forward-looking statements. Those risks
include, among others, risks associated with the apparel industry, the
dependence on senior management maintaining sufficient working capital
financing, 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. The Company's most
critical accounting policies relate to estimates related to allowances for
uncollectible receivables, customer sales allowances, valuation of inventories
and valuation of deferred tax assets.
Receivables
Allowances are provided for estimated uncollectible receivables based on review
of specific accounts and historical experience. Allowances and credits, which
are given to customers in connection with sales incentives and promotional
activities, are recognized as reductions of sales when the related sales revenue
is earned and recognized. Events or changes in market conditions that adversely
impact our customers or the Company's ability to generate sales, could impact
management's estimates of uncollectible receivables or require the Company to
offer greater sales incentives, which could negatively impact sales or profits
in the future. As of September 30, 2004, the Company has allowances for bad
debts of approximately $197,000 and reserves for sales allowances of
approximately $866,500.
Inventories
Inventories are stated at the lower of cost, by the first-in, first-out method
or market. In assessing the market value of its inventories, particularly those
with slower turnover, the Company considers the estimated sales value less costs
to dispose and a reasonable profit margin and assesses the likelihood of
realizing the recorded amounts of inventory. Changes in market conditions could
impact the Company's ability to achieve sales at the estimated selling prices
and could negatively impact the carrying value of the Company's inventory.
8
Valuations of Deferred Tax Assets
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Management makes an assessment of the realizability of the Company's deferred
tax assets. In making this assessment, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities and projected future taxable income of the Company in
making this assessment. A valuation allowance is recorded to reduce the total
deferred income tax assets to its net realizable value. The Company's deferred
tax assets related primarily to a U.S. net operating loss carryforward of
approximately $30 million which can be utilized over the next twenty years.
During the quarter ended September 30, 2004, the Company reassessed the recovery
of its deferred tax assets in accordance with the provisions of SFAS No. 109,
Accounting for Income Taxes. In making its' assessment, management determined
that operating results for the three-year period ending December 31, 2004 will
not be sufficient to support a conclusion that recovery of the deferred tax
assets is more likely than not. While management believes the Company will
achieve profitable operations in future years that will enable the Company to
recover a substantial portion of its deferred tax assets, the Company presently
does not have sufficient objective evidence to support management's belief.
Accordingly, the Company increased its valuation allowance for deferred tax
assets by approximately $6.6 million to $11.5 million at September 30, 2004. The
Company, as of September 30, 2004, has a full valuation allowance for its
deferred tax assets. If the Company is able to realize taxable income in the
future, the valuation allowance could be reduced.
OVERVIEW
In order to reverse the trend of continuing losses, the Company undertook a
number of initiatives over the past few years to reduce overhead, replace
certain sales and marketing personnel and exit unprofitable product lines. The
Company returned to profitability in 2001 and 2002 primarily as a result of
these initiatives and focusing on its core business. The Company's operations
are seasonal and year to date seasonal fluctuations are in line with historical
trends. Due to sales volume not meeting expectations, management believes that
the Company will have a loss before income tax expense of less than $500,000 for
2004. There can be no assurance that the loss will not be greater.
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 nine months ended September 30, 2004
and 2003.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------
2004 2003 2004 2003
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Gross profit 39.6 37.9 30.1 33.2
Selling, general and administrative expenses 24.0 22.1 32.3 32.9
------ ------ ------ ------
Operating earnings (loss) 15.6 15.8 (2.2) 0.3
Other income, net -- 0.1 0.6 0.5
Interest income, net -- -- 0.1 0.1
Income tax expense 84.6 5.5 39.8 0.4
------ ------ ------ ------
Net earnings (loss) (69.0)% 10.4% (41.3)% 0.5%
====== ====== ====== ======
9
THREE MONTHS ENDED SEPTEMBER 30, 2004 (2004) COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 2003 (2003)
Net sales. Net sales decreased 19.1% from $10.3 million in 2003 to $8.4 million
in 2004, primarily as a result of lower sales to a large private label account.
Gross profit. Gross profit decreased 15.6% from $3.9 million in 2003 to $3.3
million in 2004 due to lower sales volume. As a percentage of net sales, gross
profit increased from 37.9% in 2003 to 39.6% in 2004, primarily as a result of
lower markdowns and discounts.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 12.0% from $2.3 million in 2003 to $2.0
million in 2004 as a result of continuous cost reduction initiatives including
reduced salaries and a variety of other savings. As a percentage of net sales,
SG&A increased from 22.1% in 2003 to 24.0% in 2004 due to the lower sales
volume.
Other income, net. Other income, net, which consists of royalty and licensing
income, was $14.8 thousand and $8.2 thousand in 2003 and 2004, respectively.
Interest income, net. Interest income, net increased from $1.3 thousand in 2003
to $5.7 thousand in 2004, as a result of higher invested balances.
Income tax expense. Income tax expense changed from $569 thousand in 2003 to
$7.1 million in 2004. During the quarter ended September 30, 2004, the Company
reassessed the recovery of its deferred tax assets in accordance with the
provisions of SFAS No. 109, Accounting for Income Taxes. In making its'
assessment, management determined that operating results for the three-year
period ending December 31, 2004 will not be sufficient to support a conclusion
that recovery of the deferred tax assets is more likely than not. While
management believes the Company will achieve profitable operations in future
years that will enable the Company to recover a substantial portion of its
deferred tax assets, the Company presently does not have sufficient objective
evidence to support management's belief. Accordingly, the Company increased its
valuation allowance for deferred tax assets by approximately $6.6 million to
$11.5 million at September 30, 2004. The Company, as of September 30, 2004, has
a full valuation allowance for its deferred tax assets. Income tax expense for
2004 also includes tax expense of approximately $500 thousand related to the
pre-tax profit for the quarter.
Net income (loss). Net income (loss) changed from $1.1 million earnings in 2003
to $5.8 million loss in 2004 as a result of the matters discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 2004 (2004) COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2003 (2003)
Net sales. Net sales decreased 10.4% from $18.4 million in 2003 to $16.5 million
in 2004, primarily as a result of lower sales to a large private label account.
Gross profit. Gross profit decreased 18.6% from $6.1 million in 2003 to $5.0
million in 2004 due to lower sales volume. As a percentage of net sales, gross
profit decreased from 33.2% in 2003 to 30.1% in 2004. Gross profit as a
percentage of net sales was adversely impacted by price compression including
deeper discounts to the major department stores without a corresponding decrease
in the cost of goods sold and the sale of a higher percentage of products from
older seasons, which were sold at lower margins in the early part of 2004.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 12.0% from $6.1 million in 2003 to $5.3
million in 2004 as a result of continuous cost reduction initiatives including
reduced salaries and a variety of other savings. As a percentage of net sales,
SG&A decreased from 32.9% in 2003 to 32.3% in 2004.
10
Other income, net. Other income, net, which consists of royalty and licensing
income, was $90.5 thousand in 2003 and $101.8 thousand in 2004.
Interest income, net. Interest income, net decreased from $23.5 thousand in 2003
to $22.4 thousand in 2004, principally as the result of lower invested balances
and lower interest rates.
Income tax expense. Income tax expense changed from $68 thousand in 2003 to $6.6
million in 2004. The change is a result of the increase in the deferred tax
valuation allowance discussed above.
Net income (loss). Net income (loss) changed from $91.6 thousand earnings in
2003 to $6.8 million loss in 2004 due to factors discussed above.
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
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 season. Merchandise from the Fall collection, the
Company's largest selling season, 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 10% 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 trade
accounts receivable, and bear interest at the prime rate plus 0.75%. The
arrangement expires on June 14, 2006. The Company is required to pay an annual
commitment fee of approximately $50,000. The credit facility contains various
covenants that require minimum levels of working capital and net tangible worth.
As of September 30, 2004, there were no borrowings outstanding and approximately
$79,200 of commercial letters of credit outstanding under the credit facility.
Available borrowings at September 30, 2004 were $7.3 million.
During the nine months ended September 30, 2004, the Company had capital
expenditures of approximately $148,000, primarily for upgrading computer
systems. Capital expenditures for the remainder of 2004 are expected to be
approximately $16,000. These capital expenditures will be funded by internally
generated funds and, if necessary, borrowings under the Company's credit
facility. The Company's contractual cash obligations related to operating leases
as of September 30, 2004 include approximately $130,000 for the remainder of
2004; $529,061 in 2005; $546,344 in 2006; $547,912 in 2007, $526,491 in 2008;
and $2,737,930 thereafter.
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 a
significant 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.
11
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 expense of
the Company throughout 2004. The Company has implemented management monitoring
processes designed to minimize the impact of sudden and sustained changes in
interest rates. The Company's floating rate debt is based on the prime rate;
however, there were no borrowings outstanding at September 30, 2004.
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 United States dollars and the
Company's investment in its foreign subsidiary was $140,000 at September 30,
2004.
ITEM 4: CONTROLS AND PROCEDURES
As of September 30, 2004, the Company carried out, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and the Company's Chief Financial Officer, an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934. Based on that evaluation, the Company's Chief Executive Offer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information which
is required to be included in the periodic reports that the Company must file
with the Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
12
PART II. OTHER INFORMATION
ITEM 1: 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 party
or to which the property of the Company is subject.
ITEM 6: EXHIBITS
(a) Exhibits
31.1 Section 302(a) certification of Michael H. Lerner, Chairman of
the Board of Directors, Chief Executive Officer and President
of the Company, dated November 11, 2004.
31.2 Section 302(a) certification of S. E. Melvin Hecht, Vice
Chairman of the Board of Directors, Chief Financial Officer
and Treasurer of the Company, dated November 11, 2004.
32.1 Section 906 certification of Michael H. Lerner, Chairman of
the Board of Directors, Chief Executive Officer and President
of the Company.
32.2 Section 906 certification of S. E. Melvin Hecht, Vice Chairman
of the Board of Directors, Chief Financial Officer and
Treasurer of the Company.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 2004 /s/ S. E. Melvin Hecht
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S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
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