10-Q 1 e10-q.txt MIKASA, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ Commission File Number 1-13066 MIKASA, INC. (Exact name of Registrant as specified in its charter) Delaware 33-0099676 ------------------------------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Mikasa Drive, Secaucus, New Jersey 07096 ------------------------------------------ --------- (Address of principal executive offices) (Zip Code) (201) 867-9210 -------------- Registrant's telephone number, including area code Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X_ No _ _ As of June 30, 2000, a total of 16,985,445 shares of the Registrant's Common Stock, $0.01 par value, were outstanding. 2 MIKASA, INC. TABLE OF CONTENTS

2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MIKASA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements. 3 4 MIKASA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements. 4 5 MIKASA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

The accompanying notes are an integral part of these consolidated financial statements. 5 6 MIKASA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share data) 1. INTERIM FINANCIAL STATEMENTS: The accompanying consolidated financial statements of Mikasa, Inc. (the "Company") include its wholly-owned and majority-owned subsidiaries. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 2. INCOME TAXES: For the six months ended June 30, 2000, income taxes were provided at an estimated annual rate of 38.5% of income before income taxes. For the six months ended June 30, 1999, income tax benefit was estimated using an annual rate of 39.1% of loss before income taxes. 3. TRADE ACCOUNTS RECEIVABLE: Trade accounts receivable are net of allowances for uncollectible accounts of $1,012 at June 30, 2000 and $774 at December 31, 1999. 4. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and are net of accumulated depreciation of $58,219 at June 30, 2000 and $51,824 at December 31, 1999. 5. INTANGIBLE ASSETS: Intangible assets are net of accumulated amortization of $3,168 at June 30, 2000 and $2,984 at December 31, 1999. 6. DECLARATION OF DIVIDEND: On June 27, 2000, the Company declared a quarterly dividend of $0.05 per share or $849 on its common stock to stockholders of record on July 7, 2000, payable on July 18, 2000. 6 7 MIKASA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share data) 7. SEGMENT INFORMATION: The Company's reportable segments are based on channels of distribution and geographic operations. Certain of the information reported herein is reported on the basis of the Company's internal management reporting systems rather than under generally accepted accounting principles. Specifically, if the Company were to adjust its accounting to generally accepted accounting principles, the result would be to increase cost of sales for its Retail Accounts Group and decrease cost of sales by the identical amount for its Direct to Consumers Group to adjust for inter-company profits (i.e., for internal reporting and management purposes, amounts related to all inter-company inventory profit eliminations result in a higher cost of sales to the Direct to Consumers Group). Furthermore, since part of the mission of the Company's Direct to Consumers Group is to liquidate slow moving or out of season products within the Company's inventories, the allocation of related mark downs for this activity is inherently subjective and virtually impossible to account for on the basis of generally accepted accounting principles within segments. The Company evaluates the performance of its operating segments based on direct operating income or losses. Each segment records direct expenses related and allocable to its employees and its operations. Summarized financial information concerning the Company's reportable segments as of June 30 are shown in the following table:

7 8 MIKASA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands, except per share data) 8. COMPREHENSIVE INCOME (LOSS): Total comprehensive income (loss) for the three and six months ended June 30, 2000 and 1999 is as follows:

8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth certain financial and operations data for the periods indicated:

---------------- Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Net Sales. Net sales for the three months ended June 30, 2000 (the "current period") were $83.9 million, a decrease of $2.9 million or 3.3% lower than net sales of $86.8 million for the three months ended June 30, 1999 (the "prior period"). This decrease in net sales in the current period was attributable to a combination of factors. First, the Company's retail accounts channel of distribution provided a decrease of $1.9 million from the prior period. Second, the Company's direct to consumers channel of distribution, where sales are generally consummated at higher price levels than in the retail accounts channel, provided a decrease of $2.0 million of sales from the prior period. This decrease is primarily attributable to sales foregone in the current period of $1.5 million from stores closed, while the decline in comparable store sales was offset by new store sales. The decrease in domestic sales was partially offset by an increase in sales through the international channel of distribution of $1.0 million. Gross Profit. Gross profit for the current period was $41.7 million, an increase of $1.2 million or 3.0% over the prior period's gross profit of $40.5 million. Gross profit as a percentage of net sales increased to 49.7% in the current period from 46.7% in the prior period. The gross profit increase as a percentage of net sales was primarily due to improved margins from the direct to consumers channel of distribution. 9 10 Selling, General and Administrative Expenses. Selling, general and administrative expenses in the current period were $38.7 million, an increase of $0.1 million or 0.3% compared to $38.6 million in the prior period. As a percentage of net sales, such expenses increased to 46.2% in the current period from 44.5% in the prior period. During the current period, $1.8 million in expenses were added for ongoing operating expenses of the new stores opened in the United States during the last twelve months and certain pre-opening expenses for these stores and other stores expected to open in 2000. It is the Company's practice to expense all costs associated with new store openings as incurred. During the current period, savings of $1.0 million in expenses were recognized from the stores closed in the last twelve months. Income from Operations. Income from operations in the current period was $2.9 million, an increase of $1.0 million or 52.6% from the prior period's $1.9 million. As a percentage of net sales, this represented an increase to 3.5% in the current period from 2.2% in the prior period. Interest Expense, Net. Net interest expense was $1.4 million in the current period, a decrease of $0.2 million from the prior period of $1.6 million. The decrease resulted from the loan repayments of the Company's long-term debt. Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Net Sales. Net sales for the six months ended June 30, 2000 (the "current period") were $164.2 million, a decrease of $3.0 million or 1.8% from net sales of $167.2 million for the six months ended June 30, 1999 (the "prior period"). This decrease in net sales in the current period was attributable to a combination of factors. First, the Company's retail accounts channel of distribution provided a decrease of $3.0 million from the prior period. Second, the Company's direct to consumers channel of distribution, where sales are generally consummated at higher price levels than in the retail accounts channel, provided a decrease of $3.0 million of sales from the prior period. This decrease is primarily attributable to sales foregone in the current period of $1.9 million from stores closed, while the decline in comparable store sales was offset by new store sales. The increase in sales through the international channel of distribution was $3.1 million. Gross Profit. Gross profit for the current period was $79.6 million, an increase of $2.1 million or 2.7% over the prior period's gross profit of $77.5 million. Gross profit as a percentage of net sales increased to 48.5% in the current period from 46.3% in the prior period. The gross profit increase as a percentage of net sales was primarily due to improved margins from the direct to consumers channel of distribution. Selling, General and Administrative Expenses. Selling, general and administrative expenses in the current period were $75.3 million, a decrease of $0.6 million or 0.8% compared to the prior period of $75.9 million. As a percentage of net sales, such expenses increased to 45.8% in the current period from 45.4% in the prior period. During the current period, $3.3 million in expenses were added for ongoing operating expenses of the new stores opened in the United States during the last twelve months and certain pre-opening expenses for these stores and other stores expected to open in 2000. It is the Company's practice to expense all costs associated with new store openings as incurred. During the current period, savings of $1.9 million in expenses were recognized from the stores closed in the last twelve months. Operating expenses also reflect decreased expenses from the Company's Secaucus, New Jersey warehouse as it completed its distribution function transfer to the Charleston, South Carolina facility in March 1999. Income from Operations. Income from operations in the current period was $4.3 million, an increase of $2.8 million or 186.7% from the prior period's $1.5 million. As a percentage of net sales, this represented an increase to 2.6% in the current period from 0.9% in the prior period. Interest Expense, Net. Net interest expense was $2.8 million in the current period, a decrease of $0.3 million from the prior period net interest expense of $3.1 million. The decrease resulted from loan repayments of the Company's long-term debt. 10 11 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has used cash from operations, an equity offering and debt financing to fund working capital requirements and capital expenditures. In June 1997, the Company placed $60.0 million in unsecured, senior notes with a group of insurance companies at an interest rate of 7.38% per annum, payable semi-annually, which mature on June 4, 2007. Principal payments of $15.0 million per year will be due annually commencing in June 2004. The Company also has outstanding $30.0 million in unsecured senior notes with a group of insurance companies which bear interest at the rate of 6.66% per annum, payable semi-annually, which mature in May 2003. Principal payments on these notes of $10.0 million per year are due annually in May each year until May 2003. The Company also has a $50.0 million unsecured revolving credit facility provided by two banks. The maturity date of the revolving credit facility is May 19, 2001. As of June 30, 2000, $4.7 million had been used for letters of credit under the revolving credit facility. The balance of $45.3 million was unused and available at June 30, 2000. The Company's senior notes and revolving credit agreements contain certain financial covenants, including restrictions on cash distributions to stockholders, which could limit the Company's future ability to pay cash dividends. The Company had working capital of $165.3 million at June 30, 2000 and working capital of $175.1 million at December 31, 1999. Net cash (used in) provided by operating activities were $(17.9) million and $2.7 million for the six months ended June 30, 2000 and 1999, respectively. The increase in net cash used in operating activities was primarily attributable to an increase in inventory and a decrease in accounts payable and other current liabilities. Net cash used in investing activities for capital expenditures were $3.2 million and $4.1 million in the six months ended June 30, 2000 and 1999, respectively. These capital expenditures consisted primarily of expenditures for fixtures and leasehold improvements for new stores, improvements to distribution facilities and renovation of existing retail stores. Pursuant to the Company's previously announced common stock repurchase program of up to $20 million of its common stock, the Company has purchased 1,412,800 shares in the period from January 1, 1998 through June 30, 2000 at a total cost of $15.7 million. This is in addition to 3,921,300 shares previously acquired at a cost of $39.7 million. Certain monetary assets and liabilities of the Company are in foreign currencies and may be subject to foreign exchange risk. Foreign currency exchange losses have not in the past had a material effect on the Company's financial condition since these assets and liabilities are not material to its consolidated monetary assets and liabilities. As such, these items are not hedged by the Company. The Company's inventory purchases in 1999 were approximately 20% from Japanese factories and approximately 31% from German and Austrian factories combined. The significant portion of inventory purchases in foreign currencies exposes the Company to foreign currency fluctuations which can affect the Company's gross profit margin. To hedge against potential foreign currency swings, the Company has strategies in place which are intended to minimize the adverse impact of foreign currency fluctuations on its business. These strategies are: (i) Currency risk sharing arrangements with the Company's Japanese suppliers; (ii) Forward exchange contract coverage on part of its German mark related purchases; (iii) Sourcing of products from countries other than Japan and Germany where feasible; and (iv) Converting certain purchases from foreign currency to U.S. dollar denominations. The currency risk sharing arrangements minimize the impact of currency swings by the equal sharing of currency exposures against inventory purchases denominated in Japanese yen between the suppliers and the Company. Future fluctuations of the U.S. dollar in relation to foreign currencies can impact earnings in future periods. 11 12 The Company has two primary distribution centers in the United States, located in Charleston, South Carolina and Long Beach, California. The Charleston facility is owned and the Long Beach facility is leased. The Company also leases additional off-site warehouse space in separate buildings to augment the Long Beach facility. The Company has its corporate office facility in Secaucus, New Jersey, which is Company owned. After transfer of the Secaucus facility's warehouse function to the Company's Charleston distribution facility, the warehouse portion of the facility was leased to an unrelated third party in April 1999. The lease term is for 9 years and will provide annually in excess of $2 million in pre-tax income. The Company's 580,000 square foot distribution facility in Charleston, South Carolina became fully operational during the latter part of 1998. During the second quarter of 2000, the Company opened three new retail stores in the United States to end the quarter with 167 stores, including six Canadian stores. The Company operates retail stores in 41 U.S. States and in three Canadian provinces. The Company plans to continue expansion of its retail store network in the United States and Canada. Present plans include opening up to four new retail stores in the balance of 2000 and up to ten new retail stores in 2001. The Company currently estimates that its aggregate capital expenditures in 2000 and 2001 will approximate up to $20 million. This includes the expansion and support of the Company's retail store network and expansion of its international operations and capital expenditures for the Company's distribution and office facilities, including system and technology enhancements. In each of these cases, there can be no assurance that the Company's capital expenditures will not exceed this estimated amount. FUTURE DEVELOPMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, which was amended in June 2000 by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. These Statements establish accounting and reporting standards for derivatives and hedging activities. In accordance with these Statements, all derivatives must be recognized as assets or liabilities and measured at fair value. These Statements will be effective for the Company beginning in the first quarter of 2001. The Company is currently evaluating the requirements of SFAS No. 133 and SFAS No. 138. SEASONALITY AND QUARTERLY FLUCTUATIONS Historically, the Company's operations have been seasonal, with higher sales and net income occurring in the third and fourth quarters, reflecting increased demand during the year-end holiday selling season. Since the biggest retail selling season is the year-end holiday season, and as more of the Company's principal department store customers adopt electronic data interchange which allows them to defer shipments until later in the selling season, future sales are expected to be more heavily weighted toward the third and fourth quarters. In addition, the Company's retail stores experience a similar seasonal selling pattern, however, sales are more heavily weighted toward the fourth quarter. As a result, as the Company increases the number of stores, the shift of sales volume toward the latter part of the year is expected to continue. The Company's results of operations may also fluctuate from quarter to quarter in the future as a result of the amount and timing of sales contributed by, and expenses related to, the opening of new retail stores and the integration of such stores into the operations of the Company, as well as other factors. The addition of a significant number of retail stores, as is anticipated with the Company's store expansion program, can therefore significantly affect results of operations on a quarter-to-quarter basis. As the addition of new stores continues, operating income for the first and second quarters will be more impacted by the combination of seasonally lower sales volumes during this period and increased operating expenses. The increase in operating expenses is principally due to an increased percentage of fixed expenses that relate to retail stores and the additional incremental expense from new developing stores. 12 13 FORWARD-LOOKING INFORMATION We believe that certain statements or assumptions contained in Management's Discussion and Analysis constitute "forward-looking" information (as defined in the Private Securities Litigation and Reform Act of 1995). These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to vary materially from our predicted results, performance or achievements. Our factors include, among others, the impact on future sales and profitability by the Company's distribution facilities, foreign exchange and foreign purchasing risks, planned expansion of the Company's retail store network, capital expenditure levels associated with planned projects, future trends relating to seasonality, competition from the expansion of retail store networks by our competitors, increased governmental quotas, tariffs or other restrictions on products the Company imports, and various other factors referenced in this Quarterly Report on Form 10-Q. We will not update the forward-looking information to reflect actual results or changes in factors affecting the forward-looking information. The forward-looking information referred to above includes, but is not limited to: (a) expectations regarding the Company's financial condition and liquidity, as well as future cash flows; (b) expectations regarding capital expenditures; and (c) expectations regarding sales growth, gross margins, and selling, general and administrative expenses. In addition to the risks, uncertainties and other factors referred to above which may cause the actual results, performance or achievements to vary from predicted results, these estimated amounts are based on various factors and were derived using numerous important assumptions, including: the Company's successful performance of internal plans; its ability to control inventory levels; customer changes in short range and long range plans; domestic and international competition in the Company's product areas; successful completion of programs to improve efficiency of the Company's distribution facilities; continued acceptance of existing products and the development and acceptance of new products; performance issues with key suppliers; changes in government import and export policies; risks related to international transactions and hedging strategies; the ability to establish a successful e-commerce function; and general economic risks and uncertainties. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS None 13 14 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on May 24, 2000, the following members were re-elected to the Board of Directors: Alfred J. Blake Robert H. Hotz Joseph S. Muto The following proposal was approved at the Company's Annual Meeting:

There were no broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (27) Financial Data Schedule (b) Reports on Form 8-K None 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MIKASA, INC. (Registrant) Date: August 14, 2000 /s/ Raymond B. Dingman -------------------------------------------- Raymond B. Dingman President and Chief Executive Officer /s/ Brenda W. Flores -------------------------------------------- Brenda W. Flores Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 15 16 EXHIBIT INDEX Exhibit No. Description Page 27 Financial Data Schedule 17 16

MIKASA INC 10-Q