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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended March 31, 1996
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or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-24176
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Marisa Christina, Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 13-3078311
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
415 Second Avenue New Hyde Park, New York 11040
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(Address of principal executive offices) (Zip Code)
(516) 352-5050
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the Company's Common Stock on April 30,
1996 were 8,585,869.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996 (Unaudited) 2
Consolidated Statements of Earnings for the Three Months
Ended March 31, 1995 and 1996 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Three Months
Ended March 31, 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
ASSETS 1995 (1) 1996
------ -------- ----
Current assets:
Cash and cash equivalents $ 20,512,918 $ 1,840,412
Accounts receivable, less allowance for doubtful
accounts of $136,199 in 1995 and $125,723 in 1996 12,055,079 13,899,849
Inventories 9,325,223 9,288,805
Prepaid expenses and other current assets 1,553,225 3,811,496
---------- ----------
Total current assets 43,446,445 28,840,562
Property and equipment, net 2,181,767 2,681,509
Goodwill, less accumulated amortization of $990,473
in 1995 and $1,439,009 in 1996 8,038,798 34,286,257
Other assets 342,429 1,291,430
---------- ----------
Total assets $ 54,009,439 $ 67,099,758
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Loans payable to banks $ -- $ 7,998,434
Accounts payable 5,504,140 4,352,361
Income taxes payable 757,101 1,213,944
Accrued expenses and other current liabilities 1,397,335 2,452,763
---------- ----------
Total current liabilities 7,658,576 16,017,502
Other liabilities 128,000 128,000
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Total liabilities 7,786,576 16,145,502
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Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 8,434,250 shares in 1995 and 8,584,479
in 1996 issued and outstanding 84,343 85,845
Additional paid-in capital 29,084,978 31,616,626
Retained earnings 17,036,930 19,235,173
Cumulative translation adjustment 16,612 16,612
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Total stockholders' equity 46,222,863 50,954,256
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Total liabilities and stockholders' equity $ 54,009,439 $ 67,099,758
========== ==========
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1995.
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996
(UNAUDITED)
1995 1996
---- ----
Net sales $ 19,480,456 $ 28,261,906
Cost of goods sold 11,681,982 17,947,391
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Gross profit 7,798,474 10,314,515
Selling, general and administrative expenses 4,301,427 7,090,547
---------- ----------
Operating earnings 3,497,047 3,223,968
Other income, net 280,931 518,763
Interest income (expense), net 164,405 (142,004)
---------- ----------
Earnings before provision for income taxes 3,942,383 3,600,727
Provision for income taxes 1,603,497 1,402,484
---------- ----------
Net earnings $ 2,338,886 $ 2,198,243
========== ==========
Weighted average shares outstanding 8,434,000 8,582,041
========== ==========
Earnings per share $ .28 $ .26
========== ==========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
COMMON STOCK ADDITIONAL CUMULATIVE
------------------- PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------- -------- ---------- -----
Balance at December 31,
1995 8,434,250 $ 84,343 $ 29,084,978 $17,036,930 $ 16,612 $ 46,222,863
Issuance of common
stock in acquisition
of Adrienne
Vittadini, Inc. 147,679 1,477 2,498,523 -- -- 2,500,000
Proceeds from exercise
of stock options
for 2,550 shares 2,550 25 33,125 -- -- 33,150
Net earnings for the three
months ended
March 31, 1996 -- -- -- 2,198,243 -- 2,198,243
-------- ----- ---------- --------- ------ ----------
Balance at March 31,
1996 8,584,479 $ 85,845 $ 31,616,626 $19,235,173 $ 16,612 $ 50,954,256
========= ====== ========== ========== ====== ==========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
1995 1996
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Cash flows from operating activities:
Net earnings $ 2,338,886 $ 2,198,243
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 203,971 626,291
Provision for doubtful accounts 27,802 109,866
Changes in assets and liabilities:
Increase in accounts receivable (2,399,355) (704,275)
Decrease in inventories 2,561,898 2,531,800
(Increase) decrease in prepaid expenses and other
current assets 120,959 (1,395,324)
(Increase) decrease in other assets 17,131 (62,089)
Decrease in accounts payable (805,364) (4,445,125)
(Decrease) increase in accrued expenses and other
current liabilities 380,924 (3,952,913)
Increase in income taxes payable 1,092,648 456,843
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Net cash provided by (used in)
operating activities 3,539,500 (4,636,683)
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Cash flows used in investing activities:
Acquisitions of property and equipment (95,673) (28,481)
Acquisition of assets of Adrienne Vittadini, Inc.
net of cash acquired (note 3) -- (17,804,994)
------------ -----------
Net cash used in investing activities (95,673) (17,833,475)
------------ -----------
Cash flows from financing activities:
Borrowings from banks, net -- 3,767,397
Proceeds from issuance of common stock -- 33,150
Other (2,563) (2,895)
------------ -----------
Net cash provided by (used in)
financing activities (2,563) 3,797,652
------------ -----------
Net increase (decrease) in cash and cash equivalents 3,441,264 (18,672,506)
Cash and cash equivalents at beginning of period 10,832,472 20,512,918
------------ -----------
Cash and cash equivalents at end of period $ 14,273,736 $ 1,840,412
============ ===========
Cash paid during the period for:
Income taxes $ 506,138 $ 888,459
============ ===========
Interest $ 1,074 $ 208,644
============ ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
(1) BASIS OF PRESENTATION AND REORGANIZATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated (the "Company") and its wholly-owned
subsidiaries. Significant intercompany accounts and transactions are
eliminated in consolidation.
The unaudited consolidated financial statements do not include all
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles. For
further information, such as the significant accounting policies followed by
the Company, refer to the notes to the Company's audited consolidated financial
statements.
In the opinion of management, the unaudited consolidated financial
statements include all necessary adjustments (consisting of normal, recurring
accruals), for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results of
operations for the three months ended March 31, 1995 and 1996 are not
necessarily indicative of the operating results to be expected for a full year.
(2) INVENTORIES
Inventories at December 31, 1995 and March 31, 1996 consist of the
following:
1995 1996
---- ----
Piece goods $ 2,624,956 $ 2,676,544
Work in process 1,528,643 1,551,137
Finished goods 5,171,624 5,061,124
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$ 9,325,223 $ 9,288,805
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(3) ACQUISITION OF ADRIENNE VITTADINI, INC.
On January 18, 1996, the Company acquired, through a newly formed
subsidiary, Adrienne Vittadini Enterprises, Inc. ("AVE"), substantially all of
the assets and assumed certain liabilities of Adrienne Vittadini, Inc. ("AVI")
and acquired the trademarks of Vittadini, Ltd., which relate to the business
and operations of AVI for cash in the aggregate of $18,830,000 and 147,679
shares of the Company's common stock valued at $2,500,000. Additional
consideration may be paid to AVI by the Company based upon profitability
achieved by AVE in 1998 and 2000, up to a maximum additional purchase price of
$39 million. For the six-year period beginning January 1, 1996, the Company
will pay AVI 10% of net royalty and commission income received by AVE plus 10%
of net earnings before interest, income taxes and amortization of goodwill of
AVE over $3,000,000 per year. In addition, upon retirement of the two majority
shareholders of AVI from the Company, AVI will receive, in the aggregate,
royalties equal to .825% of net sales of AVE and its trademark licensees for a
period ending on the latter of December 31, 2005 or five years after the death
of the last such shareholder.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
The acquisition occurred on January 18, 1996, but was based on asset
values at December 31, 1995. Accordingly, operating results related to the AVI
assets acquired commenced on January 1, 1996 and are consolidated with those of
the Company from that date forward. The acquisition has been accounted for
using the purchase method of accounting. Amounts payable to AVI based on net
sales will be charged to earnings annually. Contingent consideration payable
based on 1998 and 2000 results of AVE will be considered as part of the
purchase price and allocated to goodwill.
The aggregate initial purchase price for the assets of AVI is as follows:
Cash paid to AVI $ 10,080,000
Cash used to retire supplier note payable 8,750,000
Fair value, based on quoted market price,
of 147,679 shares of the Company's
common stock issued to AVI 2,500,000
Liabilities assumed 11,535,619
Transaction costs 1,000,000
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Initial purchase price $ 33,865,619
==========
The Company funded the cash portion of the initial purchase price with
accumulated cash reserves.
The initial purchase price was allocated to the assets acquired based on
their fair value as follows:
Cash $ 1,025,006
Accounts receivable 1,250,361
Inventory 2,495,382
Prepaid expenses and other current assets 862,947
Property and equipment 649,016
Goodwill and other intangible assets 26,695,995
Other assets 886,912
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Initial purchase price $ 33,865,619
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)
Pro forma consolidated net sales, net earnings and earnings per share for
the three months ended March 31, 1995 assuming the acquisition had occurred on
January 1, 1995 are as follows:
Net sales $ 24,540,000
==========
Net earnings $ 1,606,000
==========
Earnings per common share $ .19
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(4) CREDIT FACILITIES
The Company has a $20,000,000 line of credit facility with a bank which
may be utilized for commercial letters of credit, banker's acceptances,
commercial loans and letters of indemnity. Borrowings under the credit
facility are secured by the Company's accounts receivable and imported
inventory and bear interest at the bank's prime rate. As of March 31, 1996,
outstanding commercial letters of credit and loans amounted to $4,426,463 and
available borrowings under the facility were $15,573,537.
In connection with the acquisition of the assets of Adrienne Vittadini,
Inc., described in note 3, AVE assumed and retained a credit facility and
factoring arrangement whereby AVE assigns and sells substantially all of its
trade accounts receivable to a bank, without recourse as to credit risk but
with recourse for any claims by the customer for adjustments in the normal
course of business. The credit facility provides for the bank, at AVE's
request and the bank's discretion, to make advances to AVE, subject to the
bank's right to withhold reserves. Such advances amounted to $4,998,434 at
March 31, 1996. Advances bear interest at an annual rate equal to the bank's
prime rate. Such advances are collateralized by all of AVE's assets and a
guarantee of the Company. Amounts outstanding under the factoring arrangement
and borrowed under the credit facility cannot exceed $15 million.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On January 18, 1996, the Company acquired, through a newly formed
subsidiary, Adrienne Vittadini Enterprises, Inc. ("AVE"), substantially all of
the assets and assumed certain liabilities of Adrienne Vittadini, Inc. ("AVI")
and acquired the trademarks of Vittadini, Ltd., which relate to the business
and operations of AVI for cash in the aggregate of $18,830,000 and 147,679
shares of the Company's common stock valued at $2,500,000. Additional
consideration may be paid to AVI by the Company based upon profitability
achieved by AVE in 1998 and 2000, up to a maximum additional purchase price of
$39 million. The acquisition occurred on January 18, 1996, but was based on
asset values at December 31, 1995. Operating results related to the AVI assets
acquired on January 1, 1996 are consolidated with those of the Company from
that date forward. Accordingly, results for the three months ended March 31,
1996 are not directly comparable to those for the three months ended March 31,
1995. (See note 3 to consolidated financial statements).
The following table sets forth information with respect to the percentage
relationship to net sales of certain items of the consolidated statements of
earnings of the Company for the three months ended March 31, 1995 and 1996.
1995 1996
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Net sales 100.0% 100.0%
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Gross profit 40.0 36.5
Selling, general and administrative expenses 22.0 25.1
----- -----
Operating earnings 18.0 11.4
Other income, net 1.4 1.8
Interest income (expense), net 0.8 (0.5)
Provision for income taxes (8.2) (4.9)
----- -----
Net earnings 12.0% 7.8%
===== =====
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net sales. Net sales increased 45.1%, from $19.5 million in 1995 to $28.3
million in 1996. This increase was primarily attributable to sales of AVE,
which was acquired in January 1996. Net sales excluding AVE were $19.1
million. The slight decrease is attributable to the timing of spring shipments
in 1995 versue 1996 whereby the Company shipped spring 1996 goods earlier.
Gross Profit. Gross profit increased 32.0%, from $7.8 million in 1995 to
$10.3 million in 1996. As a percentage of net sales, gross profit decreased
from 40.0% in 1995 to 36.5% in 1996. The decline in the gross profit
percentage for the quarter was attributable to increased sales of lower margin
merchandise at Flapdoodles and lower margins at Marisa Christina as a result of
the poor retail environment.
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Selling, General and Administrative Expense. Selling, general and
administrative expense increased 65.1%, from $4.3 million in 1995 to $7.1
million in 1996. Selling, general and administrative expenses related to AVE
represent $2.6 million of the increase. As a percentage of net sales of the
Company, selling, general and administrative expenses increased from 22.0% in
1995 to 25.1% in 1996. This increase is primarily attributable to the AVE's
selling general and administrative expenses, which are higher as a percentage
of revenues, and the amortization of $334,000 of goodwill recorded in the AVI
acquisition.
Other Income, Net Other income consists of royalty, licensing and
copyright infringement income. The increase of $238,000 in 1996 is due
principally to AVE, which had net royalty income of approximately $450,000.
The three months ended March 31, 1995 and 1996 included copyright infringement
income of $222,000 and $27,000, respectively. The timing and amount of future
settlements, if any, is not reasonably predicable by management.
Interest Income (Expense), net. Interest income (expense), net changed
from income of $164,000 in 1995 to expense of $142,000 in 1996 as a result of
the less cash available due to the AVI acquisition as well as interest expense
related to bank loans.
Income Taxes. Income taxes decreased from $1.6 million in 1995 to $1.4
million in 1996 as the result of lower earnings. The Company effective income
tax rate for the three months ended March 31, 1996 was 39%.
SEASONALITY
The Company's business is seasonal, with a substantial portion of its
revenues and earnings accruing during the second half of the year as a result
of the Back-to-School, Fall and Holiday selling seasons. This is due to both a
larger volume of unit sales in these seasons and traditionally higher prices
for these garments, which generally require more costly materials than the
Spring/Summer and Resort seasons. Merchandise from Holiday and Fall, the
Company's largest seasons, are shipped in the last two fiscal quarters.
Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower
volume seasons, are all shipped primarily in the first two quarters. Sales
volume is typically the lowest in the second quarter with shipments for the
Fall season beginning in the last days of the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The AVI acquisition was funded with approximately $17 million existing
cash resources of the Company. In addition the Company has a $20,000,000
credit facility with a bank and AVE has a credit facility and factoring
arrangement with a bank based upon a formula amount not to exceed $15,000,000.
The Company's $20,000,000 line of credit facility with a bank may be
utilized for commercial letters of credit, banker's acceptances, commercial
loans and letters of indemnity. Borrowings under the credit facility are
secured by the Company's accounts receivable and imported inventory and bear
interest at the bank's prime rate. As of March 31, 1996, outstanding
commercial letters of credit and loans amounted to $4,426,463 and available
borrowings under the facility were $15,573,537.
During 1996, the Company has planned capital expenditures of approximately
$1,000,000, primarily to upgrade computer systems. These capital expenditures
will be funded by internally generated funds and, if necessary, bank borrowings
under the Company's line of credit facility. Capital expenditures during the
three months ended March 31, 1996 were approximately $28,000.
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The Company believes that funds generated by operations, if any, and the
bank credit facilities will provide financial resources sufficient to meet all
of its foreseeable working capital and letter of credit requirements.
EXCHANGE RATES
Although it is 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 Company paying higher prices for its products. During the last
three fiscal years, however, currency fluctuations have not had an impact on
the Company's cost of merchandise. The Company does not engage in hedging
activities with respect to such exchange rate risk.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings required to be disclosed in response to Item 103
of Regulation S-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 - Financial Data Schedule.
Reports on Form 8-K - On April 15, 1996, the Company filed Amendment No. 1 to
Form 8-K/A dated January 18, 1996 providing pro forma and audited financial
information required with respect to the acquisition of Adrienne Vittadini,
Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 10, 1996 /s/ S. E. Melvin Hecht
------------------------ ---------------------------------------
S. E. Melvin Hecht
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
Exhibit 27.1 - Financial Data Schedule