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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended September 30, 1997
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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
(Address of principal executive offices) (Zip Code)
(201) 758-9800
(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 October
31, 1997 were 8,384,769.
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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, 1996
and September 30, 1997 (Unaudited) 2
Consolidated Statements of Earnings for the Three and Nine Months
Ended September 30, 1996 and 1997 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1997 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 (1) 1997
------ ------------ -------------
Current assets:
Cash and cash equivalents $ 1,044,094 $ 993,241
Accounts receivable, less allowance for doubtful
accounts of $73,344 in 1996 and $213,822 in 1997 9,080,251 13,296,774
Due from factor, net of allowances 5,967,379 7,930,643
Inventories 10,097,123 12,056,286
Prepaid expenses and other current assets 3,144,683 4,323,436
------------ ------------
Total current assets 29,333,530 38,600,380
Property and equipment, net 2,672,823 2,972,007
Goodwill, less accumulated amortization of $2,784,616
in 1996 and $3,945,422 in 1997 32,940,650 31,779,844
Other assets 1,252,930 1,348,435
------------ ------------
Total assets $ 66,199,933 $ 74,700,666
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Loans payable to banks $ 3,500,000 $ 8,800,000
Accounts payable 5,601,769 7,743,493
Income taxes payable 662,652 43,516
Accrued expenses and other current liabilities 1,942,725 2,022,306
------------ ------------
Total current liabilities 11,707,146 18,609,314
Other liabilities 278,000 278,000
------------ ------------
Total liabilities 11,985,146 18,887,314
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued
Common stock, $.01 par value; 15,000,000 shares
authorized, 8,586,769 shares issued and outstanding
in 1996 and 1997 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Retained earnings 24,413,471 26,012,035
Cumulative translation adjustment 16,612 16,612
Treasury stock, 202,000 shares of common stock, at cost (1,954,750) (1,954,350)
------------ ------------
Total stockholders' equity 54,214,787 55,813,351
------------ ------------
Total liabilities and stockholders' equity $ 66,199,933 $ 74,700,666
============ ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1996.
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
Net sales $ 33,148,541 $ 28,375,373 $ 82,797,236 $ 73,545,760
Cost of goods sold 21,524,340 19,975,115 53,581,250 51,096,887
------------ ------------ ------------ ------------
Gross profit 11,624,201 8,400,258 29,215,986 22,448,873
Selling, general and administrative
expenses 8,650,426 7,725,774 22,551,814 21,512,299
------------ ------------ ------------ ------------
Operating earnings 2,973,775 674,484 6,664,172 936,574
Other income, net 803,931 484,520 1,722,247 1,982,197
Interest expense, net (288,836) (111,537) (644,988) (276,579)
------------ ------------ ------------ ------------
Earnings before provision
for income taxes 3,488,870 1,047,467 7,741,431 2,642,192
Provision for income taxes 1,388,341 413,728 3,015,156 1,043,628
------------ ------------ ------------ ------------
Net earnings $ 2,100,529 $ 633,739 $ 4,726,275 $ 1,598,564
============ ============ ============ ============
Weighted average shares
outstanding 8,422,128 8,384,769 8,530,076 8,384,769
============ ============ ============ ============
Earnings per share $ 0.25 $ 0.08 $ 0.55 $ 0.19
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
--------- ------- ----------- ----------- ----------- ----------- -----------
Balance at
December 31,
1996 8,586,769 $85,868 $31,653,186 $24,413,471 $16,612 $(1,954,350) $54,214,787
Net earnings for
the nine
months ended
September 30,
1997 -- -- -- 1,598,564 -- -- 1,598,564
--------- ------- ----------- ----------- ------- ----------- -----------
Balance at
September 30,
1997 8,586,769 $85,868 $31,653,186 $26,012,035 $16,612 $(1,954,350) $55,813,351
========= ======= =========== =========== ======= =========== ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
1996 1997
------------ -----------
Cash flows from operating activities:
Net earnings $ 4,726,275 $ 1,598,564
Adjustments to reconcile net earnings to net cash
used by operating activities:
Depreciation and amortization 1,926,191 1,970,083
Changes in assets and liabilities:
Accounts receivable (1,464,478) (6,179,787)
Inventories (1,723) (1,959,163)
Prepaid expenses and other current
assets (380,742) (1,178,753)
Other assets 55,706 (95,505)
Accounts payable (1,412,597) 2,141,724
Accrued expenses and other current liabilities (3,617,412) 79,581
Income taxes payable (496,946) (619,136)
------------ -----------
Net cash used by operating activities (665,726) (4,242,392)
------------ -----------
Cash flows used in investing activities:
Acquisitions of property and equipment (479,137) (928,249)
Acquisition of Adrienne Vittadini, Inc. net of cash
acquired (note 3) (17,804,994) --
Other -- (180,212)
------------ -----------
Net cash used in investing activities (18,284,131) (1,108,461)
------------ -----------
Cash flows from financing activities:
Borrowings from banks, net 1,768,963 5,300,000
Proceeds from issuance of common stock 62,920 --
Acquisition of treasury stock (1,954,350) --
Other 1,931 --
------------ -----------
Net cash provided by (used in) financing activities (120,536) 5,300,000
------------ -----------
Net decrease in cash (19,070,393) (50,853)
Cash at beginning of period 20,512,918 1,044,094
------------ -----------
Cash at end of period $ 1,442,525 $ 993,241
============ ===========
Cash paid during the period for:
Income taxes $ 3,447,425 $ 1,586,564
============ ===========
Interest $ 716,264 $ 298,231
============ ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
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 have been
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 nine months ended September 30, 1996 and 1997 are not
necessarily indicative of the operating results to be expected for a full year.
(2) INVENTORIES
Inventories at December 31, 1996 and September 30, 1997 consist of the
following:
1996 1997
----------- -----------
Piece goods $ 3,028,686 $ 3,386,529
Work in process 1,612,459 1,572,523
Finished goods 5,455,978 7,097,234
----------- -----------
$10,097,123 $12,056,286
=========== ===========
(3) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating
$35,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. The credit facilities
expire on June 30, 1998 when the Company expects the facilities to be renewed.
Borrowings under the credit facilities are secured by the Company's accounts
receivable and imported inventory and bear interest at the bank's prime rate or
LIBOR plus 1% at the Company's options. As of September 30, 1997, $8,800,000 of
borrowings and $4,592,360 of commercial letters of credit were outstanding under
the credit facilities. At September 30, 1997, available borrowings under the
facility were $21,607,640.
One of the Company's subsidiaries has a factoring arrangement with a bank
whereby the Company's subsidiary assigns and sells substantially all of its
trade accounts receivable to a factor, without recourse as to credit risk but
with recourse for any claims by the customer for adjustments in the normal
course of business. At September 30, 1997, the subsidiary had amounts due from
factor related to such arrangement of $7,930,643, net of allowances. The Company
terminated the factoring arrangement as of this date.
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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 AND CURRENT PLANS
Results for the remainder of 1997, as well as the first half of 1998 will
be below historical levels. While Flapdoodles continued its growth and strong
profitability, third quarter results were adversely impacted by weaker sales and
customer demand at the Marisa Christina and Adrienne Vittadini divisions. Sales,
as well as bookings for the Fall, Holiday, Cruise and Spring seasons at both its
Marisa Christina and Adrienne Vittadini divisions have been disappointing, which
will negatively impact results for the next three quarters. In addition, to the
extent the Company's customers experience weaker demand at the retail level, the
Company may have to provide additional markdown allowances as well as provisions
for losses on excess purchase commitments for Cruise and Spring 1998
merchandise. The combination of these factors could result in the Company
recording a fourth quarter charge of up to $6 million for inventory and markdown
reserves. Management will not be able to quantify the required provisions until
completion of discussions with major customers as to their sell through for the
retail selling seasons and the final tally of orders for Spring 98 goods, which
cannot be totally completed until mid first quarter of 1998.
In addition, the decline in operating results of the Adrienne Vittadini
Division will require management to evaluate the future prospects of the
division to determine if there has been any impairment in the goodwill recorded
in the acquisition of the Adrienne Vittadini Division in January 1996. This
assessment will not be made until after year end.
In order to meet the challenges of changing consumer habits and a shift in
the buying patterns of major department stores to megabrands, the Company is
aggressively instituting a set of initiatives to strengthen its management team
as well as cut costs and streamline operations. These initiatives, some of which
are expected to result in non-recurring charges during the fourth quarter of
1997, are summarized as follows:
- The Company has commenced a search for a President of the Adrienne
Vittadini Division, as well as a new Vice President of Sales. The
Marisa Christina Division recently completed a search for a new Vice
President of Sales. The search fees and related costs will
approximately $300,000.
- In October, the Company consolidated the administrative and
warehousing facilities of Adrienne Vittadini and Marisa Christina, as
well as conformed their computer and information systems, thus
eliminating the need to maintain Adrienne Vittadini's hardware and
software. Costs associated with the move, including severance costs,
settling union related issues, and other related matters will result
in a charge of approximately $1 million dollars most of which will be
incurred and paid in the fourth quarter. Cost savings resulting from
the consolidation of the two facilities could reach approximately
$800,000 in 1998.
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- The Company is investigating the possibility of terminating or
renegotiating the Adrienne Vittadini and Marisa Christina showroom
leases with the goal of moving into less expensive and contiguous
showrooms. If realized, the termination of existing leases and
write-offs of the related leasehold improvements could result in a
fourth quarter charge of approximately $1.5 million. Cost savings
under new lease arrangements could be up to $750,000 annually.
Based on the current forecasts for the fourth quarter, encompassing the
impact of all the factors enumerated, (including markdowns as well non-recurring
charges), net sales for 1997 are likely to be in the range of approximately $90
million with the Company having a net loss of up to $3.8 million or $.45 per
share, or other than any charge for the impairment of goodwill.
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 and nine months periods ended September
30, 1996 and 1997.
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Gross profit 35.1 29.6 35.3 30.5
Selling, general and administrative expenses 26.1 27.2 27.2 29.3
------ ------ ------ ------
Operating earnings 9.0 2.4 8.1 1.3
Other income, net 2.4 1.8 2.0 2.7
Interest expense, net (0.9) (0.4) (0.8) (0.4)
Provision for income taxes (4.2) (1.5) (3.6) (1.4)
------ ------ ------ ------
Net earnings 6.3% 2.2% 5.7% 2.2%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Net sales. Net sales decreased by 14.2% from $33.1 million in 1996 to
$28.4 million in 1997. This decrease was primarily attributable to sales
declines in the Marisa Christina and Adrienne Vittadini divisions as a result of
a downturn experienced in the retail environment.
Gross Profit. Gross profit decreased 27.6%, from $11.6 million in 1996 to
$8.4 million in 1997. As a percentage of net sales, gross profit decreased from
35.1% in 1996 to 29.6% in 1997. The decline in the gross profit percentage for
the quarter was attributable to lower margins due to markdowns at Marisa
Christina and Adrienne Vittadini divisions as a result of the poor retail
environment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 10.7%, from $8.6 million in 1996 to $7.7
million in 1997. As a percentage of net sales of the Company, selling, general
and administrative expenses increased from 26.1% in 1996 to 27.2% in 1997 due to
the decreased volume of sales without a corresponding decrease in expenses.
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Other Income, Net. Other income, net consists of royalty, licensing and
copyright infringement income. Other income decreased by approximately $319,000
in 1997 compared to 1996 primarily as a result of the timing of license income.
Interest Expense, Net. Interest expense, net decreased from approximately
$289,000 in 1996 to $112,000 in 1997, principally as the result of lower average
outstanding borrowings.
Income Taxes. Income taxes decreased from $1.4 million in 1996 to
$414,000 in 1997 as the result of lower earnings. The Company effective income
tax rate for the three months ended September 30, 1997 was 39.5% compared to
39.8% during the same period in 1996.
Net earnings. Net earnings decreased by $1.5 million in 1997 and 1996
principally as a result of lower sales and lower gross margins.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales decreased 11.2%, from $82.8 million in 1996 to $73.6
million in 1997. This decrease was primarily attributed to sales declines in the
Marisa Christina and Adrienne Vittadini divisions as a result of the poor retail
environment.
Gross Profit. Gross profit decreased 23.2%, from $29.2 million in 1996 to
$22.5 million in 1997. As a percentage of net sales, gross profit decreased from
35.3% in 1996 to 30.5% in 1997. The decline in the gross profit percentage was
attributable to lower margins due to markdowns at Marisa Christina and Adrienne
Vittadini divisions as a result of the poor retail environment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 4.6%, from $22.6 million in 1996 to $21.5
million in 1997. As a percentage of net sales of the Company, selling, general
and administrative expenses increased from 27.2% in 1996 to 29.3% in 1997. This
increase is primarily attributable to decreased volume of sales without a
corresponding decrease in expenses.
Other Income, Net. Other income, net consists of royalty, licensing and
copyright infringement income. Other income increased by $260 million in 1997
compared to 1996.
Interest Expense, net. Interest expense, net decreased from approximately
$645,000 in 1996 to $277,000 in 1997, principally as the result of lower average
outstanding borrowings.
Income Taxes. Income taxes decreased from $3.0 million in 1996 to $1
million in 1997 as the result of lower earnings. The Company's effective income
tax rate for the nine months ended September 30, 1997 was 39.5% compared to
38.9% during the same period in 1996.
Net Earnings. Net earnings declined by $3.1 million in 1997 over 1996
principally as a result of lower sales and lower gross margins.
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
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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 Company has line of credit facilities with two banks, aggregating
$35,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
credit facilities are secured by the Company's accounts receivable and imported
inventory and bear interest at the bank's prime rate or LIBOR plus 1% at the
Company's options. As of September 30, 1997, $8,800,000 of borrowings and
$4,592,360 of commercial letters of credit were outstanding under the credit
facilities. At September 30, 1997, available borrowings under the facility were
$21,607,640.
During 1997, the Company has planned capital expenditures of approximately
$1,300,000, primarily to upgrade warehouse and computer systems, leasehold
improvements and in-store shops. 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 nine months
ended September 30, 1997 were approximately $928,000.
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 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 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.
FORWARD LOOKING INFORMATION
Except for historical information contained herein, the statements in this
release are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, risks
associated with the success of future advertising and marketing programs, the
receipt and timing of future customer orders, 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. Those and other risks are described in the Company's filings
with the Securities and Exchange Commission (SEC), copies of which are available
from the SEC or may be obtained upon request from the Company.
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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
Exhibits:
27 Financial Data Schedule
99 Press Release of November 11, 1997
Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1997 /s/ S. E. Melvin Hecht
-------------------------------- ------------------------
S. E. Melvin Hecht
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
27 Financial Data Schedule
99 Press Release of November 11, 1997