UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 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
(Exact name of Registrant as specified in its charter)
Delaware 11-3216809
(State of Incorporation) (I.R.S. Employer Identification No.)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 758-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01
Per Share (the "Common Stock")
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of the registrant's common stock as of June 30, 2004,
the last business day of the registrant's most recently completed second fiscal
quarter (based upon the closing sale price of Marisa Christina's common stock as
reported by NASDAQ National Market on that date), excluding outstanding shares
beneficially owned by executive officers and directors of Marisa Christina, was
approximately $5.2 million.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Form 10-K. Yes [ ] No [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 17, 2005
----- -----------------------------
Common stock, par value $0.01 per share 7,295,065 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Marisa Christina, Incorporated (the "Company" or "Marisa") designs,
manufactures, sources and markets a broad line of high quality clothing for
women primarily under the Marisa Christina (TM) label. The Company operates in
one business segment.
Founded in 1971, the Company had several ownership changes prior to its public
offering in 1994. The Company acquired Flapdoodles, Inc. in 1993 and Adrienne
Vittadini Enterprises, Inc. in 1996. In September 1999 and December 2000, the
Company disposed of substantially all the assets, property and rights of
Adrienne Vittadini Enterprises, Inc. and Flapdoodles, Inc., respectively.
The Company's business strategy is to: (i) offer distinctive products that
reflect consumer preferences, (ii) introduce new products, (iii) expand
distribution through new and existing channels, (iv) minimize inventory risk and
(v) emphasize customer service.
Principal Product Lines
The Company is best known for its high quality sweaters characterized by modern
styling, unique details, exciting yarns and textures, and special occasion
designs. Marisa Christina's product line has evolved into a true sportswear
offering that also includes a selection of other styles encompassing knitted and
casual garments and complementary pieces such as skirts, slacks and jackets,
which are also produced in petite and large sizes. Suggested retail prices for
Marisa Christina products generally range from $80.00 to $140.00 for a sweater,
$40.00 to $60.00 for a specialty T-shirt and $50.00 to $100.00 for a woven skirt
or pants.
Marisa offers four "lines" per year. These are marketed under two primary
labels: Marisa Christina and Christina Rotelli. Each of the four offerings cover
various seasons, i.e., fall, holiday, resort and spring. Fabrications vary from
cotton and linen blends to synthetic and wool blends depending upon the season.
Each season consists of approximately 140 styles organized into approximately
eight to twelve groupings. In addition, the Company offers private label and
exclusive merchandise under various labels. Exclusive and private label
merchandise is an important factor in Marisa Christina's overall offerings.
In each selling season, the Company also offers a selection of complementary
blouses, skirts, pants, and jackets, which, when combined with sweaters, create
complete outfits. The Company estimates that approximately 90% of Marisa
Christina customers order complementary pieces, and it is Marisa Christina's
policy to sell these orders as a group so that it can create a single, unified
display of merchandise. In addition, certain designs and colors are designated
as exclusive merchandise for customers seeking to differentiate themselves from
other retailers by creating brand identity and signature looks.
Design, Production, and Raw Materials
The Company has a staff of 6 designers and merchandisers located in New York
City and 5 merchandisers located in Hong Kong. The staff is divided into
independent teams, each of which is responsible for certain labels and for
creating several groupings each season, which include knitwear and complementary
pieces. As the Company expands its product line to incorporate new design and
merchandising concepts, it hires designers and freelancers with expertise in the
new product area. Designers are selected based upon their experience, their
ability to create interesting and original designs, and their expertise in
knitting techniques and technology. The Company believes that its ability to
create fresh and original designs while maintaining the "look" of each of its
labels is critical for success.
1
The design staff constantly monitors emerging trends in fashions and popular
culture and may travel during the year in order to stay abreast of new designs
and trends. The Company also subscribes to design services that summarize
fashion trends worldwide. The design process generally requires ten to twelve
weeks from the initial concept stage to completion of sample garments for a
seasonal offering. The process begins with concept boards, developed by the
Company's design staff, showing style and color ideas. After review by senior
executives and sales staff, certain concept boards are selected for further
development. From these selections, new boards are created showing detailed
designs for garments and, after further review, drawings are selected to be
produced as prototype samples. The Company's merchandisers in Hong Kong, as well
as agents throughout Europe and Asia, work with manufacturers in executing and
correcting all prototype samples. Prototype samples are reviewed by the design
staff, as well as senior executives and sales staff, before final showroom
samples are created, which generally requires six to eight weeks.
To minimize inventory risk, the Company normally places orders for the
production of the large majority of its merchandise only upon receipt of
customer orders.
The Company negotiates with suppliers for the purchase of all raw materials
required for use by its United States contractors, in accordance with its
specifications and based on orders taken for the upcoming season. Raw materials
required for use by the Company's foreign-based contractors are procured by the
contractors in accordance with the Company's specifications. Approximately sixty
percent of the garments in the Marisa Christina product line consist of sweaters
that have been knit or cut and sewn in The People's Republic of China and Hong
Kong. Turkey, Greece and Korea are also significant sources of supply to the
Company.
The Company's products may be significantly affected by economic, political,
governmental and labor conditions in The People's Republic of China until
alternate sources of production can be found.
Management of the Company believes raw materials to be readily available and can
be provided from a number of alternative suppliers.
Sales and Marketing
Marisa Christina has a direct sales force of 6 full-time salespersons located in
its New York showroom who are compensated on a salaried basis. The direct sales
force is responsible for Marisa Christina's large department store and specialty
store chain accounts. Marisa Christina also utilizes independent sales
representatives who market Marisa Christina products to independent specialty
stores and boutiques and are compensated on a commission basis. In many cases,
these representatives also market products of other non-competing apparel
companies that have been approved by the Company. In addition, Marisa Christina
has a licensing arrangement in Japan.
Distribution
The Company uses a centralized distribution system, under which all merchandise
is received, processed and distributed through the Company's distribution
facility located in North Bergen, New Jersey. Merchandise received at the
distribution center is promptly inspected to insure expected quality in
workmanship and conformity to Company sizing specifications. The merchandise is
then packed for delivery and shipped to its customers, principally by common
carrier.
Trademarks
The Company owns all rights, title and interest in Marisa Christina and its
other trademarks. Marisa Christina's trademarks are registered in the U.S.
Patent and Trademark Office and also in many foreign countries.
The Company diligently and vigorously protects its original designs against
infringement.
2
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 seasons. 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 selling seasons, are
shipped primarily in the first two quarters. In addition, prices of products in
the Resort, Spring/Summer and Early Fall collections average 5% to 10% lower
than in the other selling seasons. In 2004, net sales of the Company's products
were $5.6 million in the first quarter, $2.5 million in the second quarter, $8.4
million in the third quarter and $5.5 million in the fourth quarter.
Customers
The Company's products are currently sold in approximately 2,800 individual
stores by over 1,390 retailers. Approximately 51% of the Company's 2004 net
sales consisted of sales to specialty stores and specialty store chains,
including Talbots and Coldwater Creek, and 29% consisted of sales to department
stores, including Saks Incorporated, Dillards and Lord & Taylor. The balance was
sold to catalog merchandisers, off-price retailers and others. In 2004, Saks
Incorporated, Dillards and QVC accounted for approximately 10%, 8% and 7%,
respectively, of the Company's net sales and were the only customers that
individually accounted for more than 5% of the Company's net sales.
Backlog Orders
At January 31, 2005, the Company had unfilled customer orders of approximately
$7.8 million compared with $10.2 million at January 31, 2004. Because the amount
of backlog at a particular time is a function of a number of factors, including
scheduling of independent contractors and the shipping of orders to the
Company's customers, a comparison of backlog from period to period is not
necessarily meaningful or indicative of actual sales. In addition, actual sales
resulting from backlog may be reduced by trade discounts and allowances. The
Company's experience has been that cancellations, rejections and returns of
orders do not materially reduce the amount of sales realized from its backlog.
Competition
The sectors of the apparel industry in which the Company competes are intensely
competitive. The Company competes with numerous manufacturers, some of which are
larger, more diversified and have greater financial and marketing resources than
the Company. The Company competes on the basis of quality, design, price and
customer service. Management believes that the Company's competitive advantages
are its well-established brand names, reputation for customer service and
ability to provide consumers with fresh and original designs.
Government Regulation
The Company does not expect existing Federal, state and local regulations
relating to the workplace and the discharge of materials into the environment to
have a material effect on the Company's financial or operating results, and
cannot predict the impact of any future changes in such regulations.
Employees
As of December 31, 2004, the Company employed approximately 60 people, including
3 executives, 8 persons in sales, retail, marketing and advertising, 11 persons
in design and merchandising, 20 persons in administration, 10 persons in quality
control and finishing and 8 persons in production. All employees are nonunion
and management believes its relations with all employees are good.
3
AVAILABLE INFORMATION
Interested persons may obtain copies of filings the Company has made with the
Securities and Exchange Commission (SEC) through the Company's website
www.marisachristina.com or the SEC website www.sec.gov. Investors and other
parties with questions, including requests for the Company's filings with the
SEC (available without charge) should direct requests in writing to S.E. Melvin
Hecht, Chief Financial Officer, Marisa Christina, Inc., 8101 Tonnelle Avenue,
North Bergen, New Jersey 07047-4601 or mhecht@marisachristina.com.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 8101 Tonnelle Avenue,
North Bergen, New Jersey 07047-4601. As of December 31, 2004, the general
location, use and approximate size of the Company's principal properties, all of
which are leased, are set forth below:
APPROXIMATE
LOCATION FUNCTION SQUARE FOOTAGE
-------- -------- --------------
North Bergen, New Jersey Executive offices 8,000
New York, New York Showroom and design offices 13,600
Hong Kong Production and quality control offices 2,300
Marisa Christina has outsourced its receiving, warehousing and shipping
functions to a third party adjacent to its North Bergen facility. Under the
outsourcing agreement, the Company pays a fixed handling charge per unit with no
minimum.
The Company believes that its existing facilities are well maintained, in good
operating condition and that its existing facilities will be adequate for the
foreseeable future.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2004.
4
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded over-the-counter under the symbol MRSA.
Prior to December 27, 2004, the Company's Common Stock was traded on the NASDAQ
National Market. The table below presents the high and low bid prices for the
Common Stock for each quarter during the two years ended December 31, 2004. The
quotations in the table represent inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
2004
-------------------------
QUARTER HIGH LOW
- ------- ----------- ----------
First $ 2.00 1.46
Second 1.67 1.09
Third 1.45 1.09
Fourth 1.75 0.86
2003
-------------------------
QUARTER HIGH LOW
- ------- ----------- ----------
First $ 1.71 1.00
Second 1.78 1.17
Third 1.76 1.26
Fourth 2.49 1.00
While the Company has delisted from NASDAQ, it has not deregistered from
reporting with the Securities and Exchange Commission (SEC) at this time. The
Company is still in the process of evaluating opportunities and alternatives for
the benefit of the Company and its stockholders. These could include sales,
mergers, acquisitions, divestitures, recapitalizations, share repurchases or
similar transactions; there can be no assurances the Company will be successful,
and there can be no assurance that the Company will decide to proceed with any
such transaction. Also, there can be no assurance that the Company will not
deregister from the SEC in the future.
HOLDERS OF COMMON STOCK
The number of shareholders of record of the Company's Common Stock as of March
9, 2005, was 47. The Company believes there are approximately 530 beneficial
holders of the Company's Common Stock.
On December 14, 1994, the Company announced an open market purchase program for
its Common Stock. The Company has purchased 835,000 shares of Common Stock
pursuant to this program.
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends on
the Common Stock for the foreseeable future. From time to time, the board of
directors intends to review the Company's dividend policy. Any payment of
dividends will be at the direction of the Board of Directors and will be
dependent on the earnings and financial requirements of the Company and other
factors, including the restrictions imposed by the General Corporation Law of
the State of Delaware and such other factors as the Board of Directors deems
relevant.
5
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
The information that follows should be read in conjunction with the consolidated
financial statements and notes thereto that appear elsewhere in this Form 10-K
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
YEARS ENDED DECEMBER 31
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- -------- -------- -------- --------
Net sales (1) $ 22,032 23,393 26,975 34,126 57,985
Gross profit 6,623 7,125 9,243 10,817 12,194
Selling, general, and administrative
expenses 7,201 7,952 8,451 10,422 16,703
Outlet store closing costs -- -- -- -- 1,005
Operating income (loss) (579) (826) 792 395 (5,515)
Income (loss) before income taxes (376) (641) 1,045 629 (13,725)
Income tax expense (benefit) 6,578 (210) (6,249) (17) 437
Net income (loss) (6,955) (431) 7,294 646 (14,162)
Basic and diluted net income (loss) per
common share (0.95) (0.06) 1.00 0.09 (1.82)
Basic and diluted weighted average
common shares outstanding 7,295 7,295 7,295 7,298 7,761
DECEMBER 31
------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- -------- -------- -------- --------
Working capital $ 7,498 8,725 9,224 7,373 6,556
Total assets 9,116 16,476 17,167 9,199 10,355
Stockholders' equity 7,815 14,768 15,201 7,907 7,268
(1) Net sales for the year ended December 31, 2000 include net sales of $18.7
million from the Company's Flapdoodles division, which the Company sold in
December 2000.
6
ITEM 7. 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 and the notes thereto that follow in this Form
10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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.
OVERVIEW
Over the past four years, the Company has undertaken a number of initiatives to
focus resources, improve profitability and return the Company to its core
business and history of success. These initiatives had returned the Company to
profitable operations in 2001 and 2002, but softer demand for the Company's
product in 2003 and 2004 led to operating losses. The softer retail economy has
hurt margins during this period as customers required greater discounts and
markdowns to move the product at the retail level. The Company has reduced
selling, general and administrative expenses by $3.2 million over the last four
years, primarily related to the closing of two unprofitable divisions, but also
related to reducing operating costs commensurate with the size of the business.
Over most of the past four years, the Company's focus has been to eliminate
unprofitable lines and reduce operating costs. During 2003, the senior
management sharpened its focus on rebuilding the volume of the core business. In
this regard, the sales function was restructured by hiring a new group of highly
experienced people and realigning the sales function by dividing it into the
Company's three main distribution channels (i.e., department stores, specialty
stores and private label customers). The Company's new sales leadership is
establishing tools to analyze profitability by customer for each of its selling
locations in order to provide merchandise mixes for each retail location based
on their consumer profile. Management believes that these initiatives together
with a stronger retail economy will enable the Company to return to profitable
operations in 2005.
While the Company's plans for the future are not dependent on one single
strategy, the possible failure of a large number of new initiatives could have
an adverse impact on profitability. In addition, the Company's results are
heavily dependent upon demand for its Fall and Holiday product lines. In 2004,
sales of Fall and Holiday product represented 57% of the Company's net sales.
Should the Company's customers not react positively to styles offered by the
Company for the 2005 Fall and Holiday seasons or should the retail economy not
improve, the Company may not be able to return to profitable operations in 2005.
7
Management believes the Company's balance sheet is strong. Cash at December 31,
2004 was over $5.4 million and total liabilities were $1.3 million. At December
31, 2004, the Company had no outstanding long-term debt and available borrowings
of $3.2 million under a line of credit arrangement. During 2004, the Company had
no borrowings outstanding under the line of credit. In addition, the Company has
a Federal tax loss carryforward of approximately $30 million, which can be
utilized in various amounts through 2024. This should meaningfully limit the
amount of cash taxes the Company will owe on its taxable earnings, which may
enhance future cash flows.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both important to the
presentation of the Company's 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 allowances for 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 December 31, 2004, the Company had allowances for bad debts
of approximately $192 thousand and allowances for sales incentives, promotional
activities and trade discounts of approximately $1.0 million.
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.
Valuation 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.
8
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 ended December 31, 2004 would
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 $6.4 million to $11.3 million during the quarter ended
September 30, 2004. The Company, as of December 31, 2004, had 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.
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results for the years
ended December 31, 2004, 2003, and 2002.
PERCENTAGE PERCENTAGE PERCENTAGE
OF NET OF NET OF NET
2004 SALES 2003 SALES 2002 SALES
------------- ---------- ------------- ---------- ------------- ----------
Net sales $ 22,032,019 100.0% $ 23,393,152 100.0% $ 26,975,402 100.0%
------------- ---------- ------------- ---------- ------------- ----------
Gross profit 6,622,687 30.1 7,125,323 30.5 9,242,637 34.3
Selling, general, and
administrative expenses 7,201,490 32.7 7,951,734 34.0 8,450,776 31.3
------------- ---------- ------------- ---------- ------------- ----------
Operating income (loss) (578,803) (2.6) (826,411) (3.5) 791,861 2.9
Interest income, net 31,417 0.1 21,490 0.1 63,570 0.2
Other income, net 171,005 0.8 163,850 0.7 189,953 0.7
Income tax expense (benefit) 6,578,464 29.9 (209,703) (0.9) (6,248,900) (23.2)
------------- ---------- ------------- ---------- ------------- ----------
Net income (loss) $ (6,954,845) (31.6)% $ (431,368) (1.8)% $ 7,294,284 27.0%
============= ========== ============= ========== ============= ==========
YEAR ENDED DECEMBER 31, 2004 (2004) COMPARED WITH YEAR ENDED DECEMBER 31, 2003
(2003)
Net sales. Net sales decreased 5.8%, from $23.4 million in 2003 to $22.0 million
in 2004, primarily as a result of lower sales to a large private label account.
Three customers accounted for 25% of the Company's net sales in 2004 and three
customers accounted for 34% of the Company's net sales in 2003
Gross profit. Gross profit decreased 7.1%, from $7.1 million in 2003 to $6.6
million in 2004. As a percentage of net sales, gross profit decreased from 30.5%
in 2003 to 30.1% in 2004, due to a slight change in product mix.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 9.4%, from $8.0 million in 2003 to $7.2
million in 2004, primarily as a result of reduced salaries and cost reduction
initiatives. As a percentage of net sales, SG&A decreased from 34.0% in 2003 to
32.7% in 2004.
Interest income, net. Interest income, net increased from $21.5 thousand in 2003
to $31.4 thousand in 2004, primarily as the result of higher average invested
cash balances and higher interest rates.
Other income, net. Other income, net, which consists primarily of royalty and
licensing income, increased 4.4% from $163.9 thousand in 2003 to $171.0 thousand
in 2004 due to higher licensee sales.
9
Income tax expense. Income tax expense changed from a benefit of $209.7 thousand
in 2003 to an expense of $6.6 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 ended December 31, 2004 would 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 $6.4 million to $11.3 million during the quarter ended September
30, 2004. The Company, as of December 31, 2004, had a full valuation allowance
for its deferred tax assets.
Net income (loss). Net loss was $431.4 thousand in 2003 compared to net loss of
$7.0 million in 2004 due to factors discussed above.
YEAR ENDED DECEMBER 31, 2003 (2003) COMPARED WITH YEAR ENDED DECEMBER 31, 2002
(2002)
Net sales. Net sales decreased 13.3%, from $27.0 million in 2002 to $23.4
million in 2003, primarily as a result of flat or slightly lower sales to
existing customers and due to the closing of a division. Three customers
accounted for 34% of the Company's net sales in 2003 and two customers accounted
for 29% of the Company's net sales in 2002.
Gross profit. Gross profit decreased 22.8%, from $9.2 million in 2002 to $7.1
million in 2003. As a percentage of net sales, gross profit decreased from 34.3%
in 2002 to 30.5% in 2003, primarily as a result of higher markdowns and
discounts.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 5.9%, from $8.5 million in 2002 to $8.0
million in 2003, primarily as a result of cost reduction initiatives and closing
of a division. As a percentage of net sales, SG&A increased from 31.3% in 2002
to 34.0% in 2003.
Interest income, net. Interest income, net decreased from $63.6 thousand in 2002
to $21.5 thousand in 2003, primarily as the result of lower average invested
cash balances and lower interest rates.
Other income, net. Other income, net, which consists primarily of royalty and
licensing income, decreased 13.7% from $190.0 thousand in 2002 to $163.9
thousand in 2003 due to lower licensee sales.
Income tax benefit. Income tax benefit was $209.7 thousand in 2003 primarily as
a result of the Company's 2003 net operating loss, partially offset by current
state income taxes. Income tax benefit was $6.2 million in 2002 primarily as a
result of the Company decreasing the valuation allowance related to its deferred
tax assets.
Net income (loss). Net income was $7.3 million in 2002 compared to net loss of
$431.4 thousand in 2003 due to factors discussed above.
10
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 seasons. 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 trade accounts receivable
and inventories, and bear interest at the prime rate plus 0.75%. The arrangement
expires on June 14, 2006. There were no borrowings outstanding and approximately
$79,200 of commercial letters of credit outstanding under the credit facility at
December 31, 2004. Available borrowings at December 31, 2004 were $3.2 million.
The Company expects to have sufficient financing and funds generated by
operations to meet its working capital needs throughout 2005.
During 2004, the Company had capital expenditures of approximately $150
thousand, primarily to upgrading computer systems. Capital expenditures for 2005
are expected to be $100 thousand. These capital expenditures will be funded by
internally generated funds and, if necessary, borrowings under the Company's
line of credit facility.
The following table summarizes the Company's contractual cash obligations as of
December 31, 2004:
CONTRACTUAL OBLIGATIONS
------------------------------------------------------
LESS THAN 1 - 3 3 - 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
--------------- --------- --------- --------- ---------
Long-term debt $ -- -- -- -- --
Operating leases (A) 530,000 1,094,000 1,067,000 2,197,000 4,888,000
Purchase obligations for
inventory (B) 3,000,000 -- -- -- 3,000,000
--------------- --------- --------- --------- ---------
$ 3,530,000 1,094,000 1,067,000 2,197,000 7,888,000
=============== ========= ========= ========= =========
(A) See note 8 to the consolidated financial statements.
(B) The Company generally does not make unconditional, noncancelable purchase
commitments for goods and services other than inventory. The Company
enters into other purchase orders in the normal course of business, but
they do not exceed one-year terms. Other purchase commitments are not
significant.
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not enter into any off-balance sheet arrangements during 2004 or
2003, nor did the Company have any off-balance sheet arrangements at December
31, 2004.
11
EXCHANGE RATES
Although it is the Company's 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However,
interest expense was not and is not expected to be a material expense of the
Company. The Company has implemented management monitoring processes designed to
minimize the impact of sudden and sustained changes in interest rates. As of
December 31, 2004, there were no borrowings under its credit facility and there
was no interest expense in 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 December 31,
2004.
12
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm 14
Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 2004 and 2003 15
Consolidated Statements of Operations and Comprehensive Income (Loss) --
Years ended December 31, 2004, 2003, and 2002 16
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 2004, 2003, and 2002 17
Consolidated Statements of Cash Flows --
Years ended December 31, 2004, 2003, and 2002 18
Notes to Consolidated Financial Statements 19
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Marisa Christina, Incorporated:
We have audited the accompanying consolidated balance sheets of Marisa
Christina, Incorporated and subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of operations and comprehensive income
(loss), stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2004. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule listed under item 15(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marisa Christina,
Incorporated and subsidiaries as of December 31, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Baltimore, Maryland
March 17, 2005
14
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
2004 2003
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,438,218 4,845,410
Trade accounts receivable, less allowance for doubtful accounts
of $192,381 in 2004 and $296,043 in 2003 1,994,327 1,678,686
Inventories 1,199,675 2,600,595
Deferred taxes - 800,000
Prepaid expenses and other current assets 166,885 508,537
------------ ----------
Total current assets 8,799,105 10,433,228
Property and equipment, net 236,651 235,547
Noncurrent deferred taxes - 5,752,240
Other assets 80,094 55,133
------------ ----------
Total assets $ 9,115,850 16,476,148
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 892,792 1,503,118
Income taxes payable 22,600 -
Accrued expenses and other current liabilities 385,861 205,307
------------ ----------
Total current liabilities 1,301,253 1,708,425
------------ ----------
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized 15,000,000 shares;
issued 8,586,769 shares in 2004 and 2003 85,868 85,868
Additional paid-in capital 31,664,680 31,664,680
Accumulated other comprehensive loss (58,002) (59,721)
Accumulated deficit (19,773,673) (12,818,828)
Treasury stock, 1,291,704 common shares, at cost (4,104,276) (4,104,276)
------------ ----------
Total stockholders' equity 7,814,597 14,767,723
Commitments and contingencies (notes 5, 8, and 13)
------------ ----------
Total liabilities and stockholders' equity $ 9,115,850 16,476,148
============ ==========
See accompanying notes to consolidated financial statements.
15
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003, and 2002
2004 2003 2002
------------ ---------- ----------
Net sales $ 22,032,019 23,393,152 26,975,402
Cost of goods sold 15,409,332 16,267,829 17,732,765
------------ ---------- ----------
Gross profit 6,622,687 7,125,323 9,242,637
Selling, general, and administrative expenses 7,201,490 7,951,734 8,450,776
------------ ---------- ----------
Operating income (loss) (578,803) (826,411) 791,861
Interest income, net 31,417 21,490 63,570
Other income, net 171,005 163,850 189,953
------------ ---------- ----------
Income (loss) before income taxes (376,381) (641,071) 1,045,384
Income tax expense (benefit) 6,578,464 (209,703) (6,248,900)
------------ ---------- ----------
Net income (loss) (6,954,845) (431,368) 7,294,284
Other comprehensive income (loss), net of tax -
foreign currency translation adjustment 1,719 (1,539) (258)
------------ ---------- ----------
Comprehensive income (loss) $ (6,953,126) (432,907) 7,294,026
============ ========== ==========
Basic and diluted net income (loss) per
weighted average common share $ (0.95) (0.06) 1.00
============ ========== ==========
See accompanying notes to consolidated financial statements.
16
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2004, 2003, and 2002
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
----------------------- PAID-IN COMPREHENSIVE ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL LOSS DEFICIT STOCK TOTAL
--------- ----------- ---------- ------------- ----------- ----------- ----------
Balance at December 31, 2001 8,586,769 $ 85,868 31,664,680 (57,924) (19,681,744) (4,104,276) 7,906,604
Net income - - - - 7,294,284 - 7,294,284
Other comprehensive loss - - - (258) - - (258)
--------- ----------- ---------- ------ ---------- --------- ----------
Balance at December 31, 2002 8,586,769 85,868 31,664,680 (58,182) (12,387,460) (4,104,276) 15,200,630
Net loss - - - - (431,368) - (431,368)
Other comprehensive loss - - - (1,539) - - (1,539)
--------- ----------- ---------- ------ ---------- --------- ----------
Balance at December 31, 2003 8,586,769 85,868 31,664,680 (59,721) (12,818,828) (4,104,276) 14,767,723
Net loss - - - - (6,954,845) - (6,954,845)
Other comprehensive income - - - 1,719 - - 1,719
--------- ----------- ---------- ------ ---------- --------- ----------
Balance at December 31, 2004 8,586,769 $ 85,868 31,664,680 (58,002) (19,773,673) (4,104,276) 7,814,597
========= =========== ========== ====== ========== ========= ==========
See accompanying notes to consolidated financial statements.
17
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
2004 2003 2002
----------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(6,954,845) (431,368) 7,294,284
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 148,830 141,028 149,213
Deferred income tax expense (benefit) 6,552,240 (262,240) (6,290,000)
Bad debt expense 119,000 280,000 159,321
Changes in assets and liabilities:
Trade accounts receivable (434,641) 1,604,241 (561,975)
Inventories 1,400,920 (757,405) (100,355)
Prepaid expenses and other assets 316,691 (134,754) 131,437
Trade accounts payable (610,326) (3,461) 673,142
Accrued expenses and other
current liabilities 204,873 (255,810) 945
----------- --------- ----------
Net cash provided by operating
activities 742,742 180,231 1,456,012
Cash used in investing activities - purchases
of property and equipment (149,934) (56,435) (65,000)
----------- --------- ----------
Net increase in cash and cash
equivalents 592,808 123,796 1,391,012
Cash and cash equivalents at beginning of year 4,845,410 4,721,614 3,330,602
----------- --------- ----------
Cash and cash equivalents at end of year $ 5,438,218 4,845,410 4,721,614
=========== ========= ==========
Cash paid during the year for:
Income taxes $ 26,814 45,400 41,100
=========== ========= ==========
Interest $ - 4,600 -
=========== ========= ==========
See accompanying notes to consolidated financial statements.
18
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Marisa Christina, Incorporated and subsidiaries (the Company)
designs, manufactures, sources and markets a broad line of high
quality "better" clothing for women primarily under the Marisa
Christina(TM) label and other labels.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its subsidiaries,
each of which is wholly owned. Significant intercompany accounts and
transactions are eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. As of
December 31, 2004 and 2003, approximately $5.3 million and $4.6
million, respectively, were on deposit with a finance company, which
earns interest at a rate of 3% below prime rate. Such amounts are
not insured by the FDIC.
(d) 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 December 31, 2004 and 2003, the Company's
allowances for sales incentives, promotional activities and trade
discounts were approximately $1,031,000 and $1,328,000,
respectively. Such amounts are recorded as reductions to accounts
receivable.
(e) INVENTORIES
Inventories are stated at the lower of cost, by the first-in,
first-out method, or market.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization is calculated on the straight-line method over the
estimated useful lives of the respective assets (which range from
five years to seven years) or, where applicable, the term of the
lease, if shorter. Additions to property and equipment, as well as
major renewals and betterments, are capitalized. The costs of
maintenance and repairs are charged to operations as incurred.
Depreciation and amortization expense for the years ended December
31, 2004, 2003, and 2002 was approximately $143,000, $141,000 and
$149,000, respectively, which was recorded in selling, general and
administrative expense each year.
(Continued)
19
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(g) LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of
the asset.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The ultimate realization of
the deferred tax assets is dependent upon the generation of future
taxable income during periods in which temporary differences become
deductible.
(i) ADVERTISING
The Company expenses advertising as incurred. Advertising expense
was $114,000 in 2004, $298,000 in 2003 and $164,000 in 2002.
(j) SHIPPING AND HANDLING EXPENSE
Shipping and handling costs are included as a component of selling,
general and administrative expenses. Shipping and handling costs
were $583,036 in 2004, $683,946 in 2003 and $773,675 in 2002.
(k) NET INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Basic and diluted net income (loss) per weighted average common
share is based on the weighted average number of common shares
outstanding, which were 7,295,065 for 2004, 2003 and 2002. The
effect of stock options outstanding were not included in the
computation of diluted net income (loss) per share because the
effect would have been antidilutive.
(l) FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operation is the
local currency. The translation of the foreign currency into U.S.
dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue
and expense accounts using average rates of exchange prevailing
during the year. Adjustments resulting from such translation are
included as a separate component of accumulated other comprehensive
loss.
(Continued)
20
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(m) 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 exceeds 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. The
following table illustrates the effect on net income (loss) if the
fair-value-based method had been applied to all outstanding and
unvested awards for 2004, 2003 and 2002:
2004 2003 2002
----------- -------- ---------
Net income (loss), as reported $(6,954,845) (431,368) 7,294,284
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax (139,000) (136,000) (130,000)
----------- -------- ---------
Pro forma net income (loss) $(7,093,845) (567,368) 7,164,284
=========== ======== =========
Basic and diluted net income (loss) per
weighted average common share
As reported $ (0.95) (0.06) 1.00
Pro forma $ (0.97) (0.08) 0.98
=========== ======== =========
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments,
consisting of cash and cash equivalents, trade accounts receivable
and trade accounts payable, approximate their carrying values due to
the short-term maturities of such instruments.
(o) USE OF ESTIMATES
The preparation of the consolidated financial statements requires
management of the Company to make a number of estimates and
assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period.
Significant items subject to such estimates and assumptions include
the valuation allowances for receivables, inventories and deferred
income tax assets. Actual results could differ from these and other
estimates.
(Continued)
21
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(p) RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004 the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)), which addresses the
accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be
settled by the issuance of such equity instruments. SFAS No. 123(R)
requires an entity to recognize the grant-date fair-value of stock
options and other equity-based compensation issued to employees in
the income statement. The revised statement requires that an entity
account for those transactions using the fair-value-based method,
and eliminates an entity's ability to account for share-based
compensation transactions using the intrinsic value method of
accounting. The Company is required to adopt SFAS No. 123(R) as of
July 1, 2005. Adoption is not expected to have a material impact on
the Company's results of operations.
(2) INVENTORIES
Inventories at December 31, 2004 and 2003 consist of the following:
2004 2003
---------- ------------
Piece goods $ 31,815 86,495
Finished goods 1,167,860 2,514,100
---------- ----------
$1,199,675 2,600,595
========== ==========
Based on management's assumptions and estimates relating to future
operations, the Company has reduced its inventory value for slow moving
inventory at December 31, 2004 and 2003. Actual results could differ from
those estimates.
(3) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2004 and 2003
consist of the following:
2004 2003
-------- -------
Prepaid expenses $116,664 371,889
Nontrade receivables 50,221 136,648
-------- -------
$166,885 508,537
======== =======
(Continued)
22
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consist of the
following:
2004 2003
-------- -------
Computer equipment and software $406,971 338,862
Furniture and fixtures 145,965 136,382
Leasehold improvements 251,012 251,012
-------- -------
Total 803,948 726,256
Less accumulated depreciation and amortization 567,297 490,709
-------- -------
$236,651 235,547
======== =======
(5) 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
trade accounts receivable and inventories, 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 tangible net worth.
As of December 31, 2004 and 2003, there were no borrowings outstanding and
approximately $79,200 of commercial letters of credit outstanding under
the credit facility. Available borrowings at December 31, 2004 were
approximately $3.2 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 2005.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2004 and
2003 consist of the following:
2004 2003
-------- -------
Accrued compensation $148,303 27,172
Other accrued expenses 237,558 178,135
-------- -------
$385,861 205,307
======== =======
(7) RETIREMENT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of all
eligible employees. Profit sharing expense was $69,031 in 2004, $63,255 in
2003 and $67,599 in 2002.
(Continued)
23
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(8) LEASES
The Company is committed under various noncancelable operating leases for
office, showroom and design space. The leases expire on various dates
through 2013. Future annual minimum lease payments under noncancelable
operating leases as of December 31, 2004 are as follows:
2005 $ 529,061
2006 546,344
2007 547,912
2008 526,491
2009 540,185
Thereafter 2,197,746
------------------
$ 4,887,739
==================
Total rent expense charged to operations was $590,000 in 2004, $703,000 in
2003 and $624,000 in 2002.
(9) STOCK OPTION PLAN
The Company sponsors an incentive stock ownership plan (Plan) that
provides for the grant of up to 900,000 options to purchase shares of the
Company's common stock at fair market value on the dates of grant. Options
generally vest over a five-year period and are exercisable over a ten-year
period from the dates of grant. At December 31, 2004, there were 206,460
additional shares available for grant and 894,910 shares reserved for
issuance under the plan.
A summary of the changes in options outstanding and exercisable under the
Plan, including the weighted average exercise prices per share follows:
WEIGHTED AVERAGE NUMBER OF
PER SHARE PRICE SHARES
---------------- ---------
December 31, 2001 $ 1.88 468,450
Granted 1.43 259,000
Forfeited 1.43 (5,000)
-------
December 31, 2002 1.72 722,450
Granted 1.39 79,000
Forfeited 1.78 (45,000)
-------
December 31, 2003 1.68 756,450
Granted 1.13 19,150
Forfeited 1.83 (87,150)
-------
December 31, 2004 $ 1.65 688,450
=======
Options exercisable:
December 31, 2002 $ 1.88 330,450
December 31, 2003 $ 1.83 420,250
December 31, 2004 $ 1.75 484,850
(Continued)
24
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
Weighted average characteristics of outstanding and exercisable stock
options as of December 31, 2004 were as follows:
AVERAGE
NUMBER REMAINING NUMBER
EXERCISE OF OPTIONS CONTRACTUAL OF OPTIONS
PRICE OUTSTANDING LIFE EXERCISABLE
- ------------ ----------- ----------- -----------
$ 1.88 356,300 3.5 years 356,300
1.43 234,000 7.0 years 93,600
1.39 79,000 8.5 years 15,800
1.13 19,150 9.5 years 19,150
In October 1999, the Company repriced 153,450 options to $1.88 per share.
The per share weighted average fair value of the stock options granted
during 2004, 2003 and 2002, using the Black Scholes option-pricing model
with the following weighted average assumptions, was $0.78, $1.03 and
$1.11 per share, respectively.
2004 2003 2002
------- ------- -------
Risk-free interest rate 1.3% 1.0% 2.0%
Volatility 75% 83% 89%
Expected life 7 years 7 years 7 years
Expected dividend yield 0% 0% 0%
(10) INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 2004, 2003 and 2002 were as follows:
2004 2003 2002
----------- -------- ----------
Current:
Federal $ - - -
State and local 26,224 52,537 41,100
----------- -------- ----------
26,224 52,537 41,100
----------- -------- ----------
Deferred:
Federal 5,897,016 (217,076) (5,786,416)
State and local 655,224 (45,164) (503,584)
----------- -------- ----------
6,552,240 (262,240) (6,290,000)
----------- -------- ----------
$ 6,578,464 (209,703) (6,248,900)
=========== ======== ==========
(Continued)
25
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
The tax effects of temporary differences between the financial reporting and
income tax bases of assets and liabilities that are included in the net deferred
tax assets at December 31, 2004 and 2003 were as follows:
2004 2003
------------- -----------
Deferred tax assets:
Uniform inventory capitalization $ 28,348 44,056
Accrued expenses and other assets and liabilities 435,755 567,586
Federal and state net operating losses 10,811,116 10,795,728
Depreciation on property and equipment 17,806 --
------------- -----------
Total gross deferred tax assets 11,293,025 11,407,370
Valuation allowance (11,293,025) (4,855,130)
------------- -----------
Net deferred tax asset $ -- 6,552,240
============= ===========
At December 31, 2004, the Company had Federal net operating loss carryforwards
of approximately $30 million, which expire in various amounts through 2024.
The Company's deferred tax assets relate principally to net operating losses,
which included losses on the disposal of two divisions in 1999 and 2000. In
assessing the realizability of deferred tax assets, management considered
whether it was more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable income during periods in which
temporary differences become deductible. 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 ended December 31, 2004 would 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 $6.4
million. As of December 31, 2004, the Company had a full valuation allowance for
its deferred tax assets.
A reconciliation of the income tax benefit and the amounts computed by applying
the Federal income tax rate of 34% to income (loss) before income tax benefit is
as follows for the years ended December 31, 2004, 2003 and 2002:
2004 2003 2002
------------ ------------ -----------
Income tax (benefit) on income (loss)
before income tax expense computed
at statutory rate
State and local income tax $ (127,970) (217,964) 355,431
State and local income tax 17,308 4,868 41,100
Change in valuation allowance 6,437,895 -- (6,612,142)
Other 251,231 3,393 (33,289)
------------ ------------ -----------
$ 6,578,464 (209,703) (6,248,900)
============ ============ ===========
26
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(11) BUSINESS RISKS AND CREDIT CONCENTRATIONS
A significant amount of the Company's product lines are produced in The
People's Republic of China. The Company's operations with respect to these
product lines may be significantly affected by economic, political,
governmental and labor conditions in The People's Republic of China until
alternative sources of production can be found.
The Company's products are sold principally in the United States to
apparel retailers operating in the department and specialty store
segments. Three customers accounted for 25% of the Company's net sales in
2004, three customers accounted for 34% of the Company's net sales in 2003
and two customers accounted for 29% of the Company's net sales in 2002.
Receivables from two customers represented approximately 21% and 28% of
accounts receivable at December 31, 2004 and 2003, respectively. Two
customer balances exceeded $240,000 at December 31, 2004. The Company
estimates an allowance for doubtful accounts based on the creditworthiness
of its customers as well as general economic conditions. Consequently, an
adverse change in those factors could affect the Company's estimates of
its uncollectible receivables.
(12) UNAUDITED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE
INFORMATION)
THREE MONTHS ENDED YEAR
--------------------------------------------------- ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
---------- --------- ------------ ----------- -----------
2004:
Net sales $ 5,621 2,498 8,366 5,547 22,032
Gross profit 1,422 238 3,310 1,653 6,623
Operating income (loss) (426) (1,234) 1,299 (218) (579)
Net loss (276) (748) (5,768) (163) (6,955)
Basic and diluted net loss per
common share (0.04) (0.10) (0.79) (0.02) (0.95)
2003:
Net sales $ 5,306 2,753 10,347 4,987 23,393
Gross profit 1,777 405 3,924 1,019 7,125
Operating income (loss) (344) (1,249) 1,639 (872) (826)
Net income (loss) (287) (706) 1,085 (523) (431)
Basic and diluted net income
(loss) per common share (0.04) (0.10) 0.15 (0.07) (0.06)
The third quarter of 2004, includes the $6.4 million expense from the
increase in the Company's deferred income tax valuation allowance (see
note 10).
(13) 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.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no change in accountants or disagreements on any matter of
accounting principle or financial statement disclosure.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K (the
"Effective Date"), the Company carried out an evaluation, under the supervision
and with the participation of the Company's management, including the Company's
President and Chief Executive Officer along with the Company's Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14,
promulgated under the Securities and Exchange Act of 1934. Based upon that
evaluation, the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the Effective Date in alerting them
timely to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic SEC
filings.
PART III
ITEM 10. EXECUTIVES OF THE REGISTRANT
The following table sets forth the names of the principal executive officers of
Marisa Christina, Incorporated, their positions with the Company, and their
principal business experience for the last five years.
NAME AGE POSITION
- ------------------ ------ ---------------------------------------------------------------
Michael H. Lerner 60 Chairman of the Board of Directors, Chief Executive Officer and
President
S. E. Melvin Hecht 70 Vice Chairman of the Board of Directors, Chief Financial Officer
and Treasurer
G. Michael Dees 51 President of Marisa Christina Apparel and Director
Michael H. Lerner joined Marisa Christina in August 1986, and has served as
Chief Executive Officer, President and Chairman since that time. Prior to
joining Marisa Christina, Mr. Lerner was President of TFM Industries, Inc.
(TFM), a maker of moderate priced sportswear. He is also a director of Apparel
Ventures, Inc. an affiliate of The Jordan Company as well as a director of
Educational Housing Services, Inc.
S.E. Melvin Hecht, C.P.A., joined Marisa Christina in December 1993, and has
served as Chief Financial Officer and Treasurer since that time. In April 1999,
he was also named Vice Chairman of the Board of Directors. From 1978 until 1991,
Mr. Hecht was a partner at Hertz, Herson & Company, certified public accountants
and, since 1991, had served as a financial consultant to various companies.
Prior to 1978, Mr. Hecht was an Executive Office partner at Touche Ross & Co., a
predecessor company to Deloitte & Touche, LLP.
G. Michael Dees joined Marisa Christina in September 1986 and has served as a
Director of the Company and Executive Vice-President of Design and Merchandising
of Marisa Christina since that time. In April 1999, he was named President of
Marisa Christina Apparel. Prior to joining Marisa Christina, Mr. Dees was
Divisional Merchandise Manager of ladies' sportswear for Belk Stores, Inc.
The remaining information required by Item 10 is incorporated by reference from
the Company's definitive proxy statement which will be filed within 120 days
from the close of its year ended December 31, 2004.
28
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by these items is included in the Company definitive proxy
statement for the Company's Annual Meeting of Stockholders to be held May 17,
2005, which will be filed within 120 days from the close of its year ended
December 31, 2004.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following are included in Item 8 of Part II:
PAGE
Report of Independent Registered Public Accounting Firm 14
Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 2004 and 2003 15
Consolidated Statements of Operations and Comprehensive Income (Loss) -- Years ended
December 31, 2004, 2003, and 2002 16
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2004, 2003, 17
and 2002
Consolidated Statements of Cash Flows -- Years ended December 31, 2004, 2003, and 2002 18
Notes to Consolidated Financial Statements 19
(a)(2) The following financial statement schedule for the years ended December
31, 2004, 2003, and 2002 is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts 31
Schedules other than those listed above have been omitted because they are not
required or are not applicable, or the required information has been included in
the Consolidated Financial Statements or the Notes thereto.
(a)(3) See accompanying Index to Exhibits
30
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (a) PERIOD
- -------------------------------------- ------------ ------------ ------------ -----------
ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS:
Year ended December 31, 2004 $ 296,043 119,000 222,662 192,381
Year ended December 31, 2003 348,860 280,000 332,817 296,043
Year ended December 31, 2002 365,000 159,321 175,461 348,860
(a) Deductions represent write-offs of specifically identified accounts.
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- -------------------------------------- ------------ ------------ ------------ ----------
SALES ALLOWANCES FOR TRADE ACCOUNTS:
Year ended December 31, 2004 $ 1,328,000 3,900,909 4,197,909 1,031,000
Year ended December 31, 2003 1,163,000 5,153,115 4,988,115 1,328,000
Year ended December 31, 2002 1,556,000 5,186,868 5,579,868 1,163,000
31
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGE
- ----------- ----------------------------------------------------------------------------------------------- ------------
2.2++ Agreement and Plan of Reorganization, dated June 22, 1994, among Marisa Christina, Incorporated
(the Company), Marisa Christina Holding, Inc., Marisa Christina Outlet Holdings, Inc.,
C.M. Marisa Christina (H.K.) Limited, MF Showroom Holdings, Inc., Flapdoodles, L.L.C.
and the Investors in such companies named on the signature pages thereto....................... *
3.1 Amended and Restated Certificate of Incorporation of the Company............................... *
3.2 By-Laws of the Company......................................................................... *
4.3 1994 Stock Option Plan......................................................................... *
10.1+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Michael H. Lerner.............................................................. *
10.3+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and G. Michael Dees................................................................ *
10.6+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and S.E. Melvin Hecht.............................................................. *
10.8+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Robert Davidoff................................................................ *
10.9+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Lawrence D. Glaubinger......................................................... *
10.10+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and David W. Zalaznick............................................................. *
21 Subsidiaries of the Registrant................................................................. *
23 Consent of Independent Registered Public Accounting Firm....................................... (1)
31.1 Michel H. Lerner Section 302(a) Certification.................................................. (1)
31.2 S.E. Melvin Hecht Section 302(a) Certification................................................. (1)
32 Section 906 Certification...................................................................... (1)
32
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGE
- ----------- -------- ------------
** Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K, filed on March 22, 1996.
** Incorporated by reference to the Exhibits filed with the Company's
Annual Report on Form 10-K, filed on April 2, 2001.
+ This exhibit is a management contract or compensatory plan or
arrangement required to be identified in this Form 10-K pursuant to
Item 14(a)3 of this report.
++ The schedules (or similar attachments) to these agreements have not
been filed pursuant to Item 601(b)(2) of Regulation S-K. Such
schedules or attachments will be filed supplementally upon the
request of the Securities and Exchange Commission.
(1) Filed herewith
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MARISA CHRISTINA, INCORPORATED
BY: /s/ Michael H. Lerner
-----------------------------------------------
Michael H. Lerner
Chairman, Chief Executive Officer and President
Dated: March 17, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Michael H. Lerner Chairman, Chief Executive
- ------------------------------ Officer and President
Michael H. Lerner March 17, 2005
/s/ S.E. Melvin Hecht Vice Chairman, Chief Financial
- ------------------------------
S.E. Melvin Hecht Officer and Treasurer March 17, 2005
/s/ G. Michael Dees Director
- ------------------------------
G. Michael Dees March 17, 2005
/s/ Robert Davidoff Director
- ------------------------------
Robert Davidoff March 17, 2005
/s/ Lawrence D. Glaubinger Director
- ------------------------------
Lawrence D. Glaubinger March 17, 2005
/s/ David W. Zalaznick Director
- ------------------------------
David W. Zalaznick March 17, 2005
March 17, 2005
34