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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, 1998_____________________________
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
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Marisa Christina, Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-3216809
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
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(Address of principal executive offices) (Zip Code)
(201)-758-9800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__X__ No_____
The number of shares outstanding of the Company's Common Stock on April 30,
1998 were 8,159,769.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
Page
----
PART I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive Income
for the Three Months Ended March 31, 1997 and 1998 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Three
Months Ended March 31, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
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PART I: Financial Information
ITEM 1: Consolidated Financial Statements
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
December 31, March 31,
Assets 1997 (1) 1998
------------ ------------
Current assets:
Cash and cash equivalents $ 1,007,153 $ 1,149,952
Accounts receivable, less allowance for doubtful
accounts of $200,104 in 1997 and $531,519 in 1998 9,174,602 11,014,818
Inventories 12,006,285 10,869,356
Income taxes recoverable 3,653,933 3,092,501
Prepaid expenses and other current assets 3,597,237 3,160,750
------------ ------------
Total current assets 29,439,210 29,287,377
Property and equipment, net 3,186,404 3,116,656
Goodwill, less accumulated amortization of
$4,615,719 in 1997 and $5,073,495 in 1998 31,294,348 30,836,572
Other assets 1,276,819 1,283,410
------------ ------------
Total assets $ 65,196,781 $ 64,524,015
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Loans payable to bank $ 6,500,000 $ 10,930,000
Accounts payable 7,578,832 4,053,728
Accrued expenses and other current liabilities 3,419,528 2,763,722
------------ ------------
Total current liabilities 17,498,360 17,747,450
Other liabilities 503,274 503,274
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Total liabilities 18,001,634 18,250,724
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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,
8,586,769 shares issued in 1997 and 1998 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Accumulated other comprehensive income (57,924) (47,979)
Retained earnings 18,421,447 17,599,026
Treasury stock, 402,000 and 427,000 common shares
in 1997 and 1998 at cost (2,907,430) (3,016,810)
------------ ------------
Total stockholders' equity 47,195,147 46,273,291
------------ ------------
Total liabilities and stockholders' equity $ 65,196,781 $ 64,524,015
============ ============
(1) Accounts were derived from the audited consolidated balance sheet as of
December 31, 1997.
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income
For the three months ended
March 31, 1997 and 1998
(Unaudited)
1997 1998
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Net sales $ 25,570,195 $ 20,019,644
Cost of goods sold 17,520,873 14,271,242
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Gross profit 8,049,322 5,748,402
Selling, general and administrative 7,897,067 7,056,308
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Operating earnings (loss) 152,255 (1,307,906)
Other income, net 737,432 318,002
Interest expense, net (78,078) (163,517)
----------------------------
Earnings (loss) before income tax expense (benefit) 811,609 (1,153,421)
Income tax expense (benefit) 321,014 (331,000)
----------------------------
Net earnings (loss) 490,595 (822,421)
----------------------------
Other comprehensive income, net of tax:
Foreign currency translation adjustment -- 9,945
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Comprehensive income (loss) $ 490,595 $ (812,476)
============================
Net earnings (loss) per share:
Basic $ 0.06 $ (0.10)
Diluted $ 0.06 $ (0.10)
============================
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the three months ended March 31, 1998
(Unaudited)
Accumulated
Common stock Additional other
------------------------ paid-in comprehensive Retained Treasury
Shares Amount capital income earnings stock Total
------------- -------- ----------- ------------- ------------ --------- -----------
Balance at December 31, 1997 8,586,769 $ 85,868 $31,653,186 $(57,924) $ 18,421,447 (2,907,430) $47,195,147
Net loss
- - - - (822,421) - (822,421)
Other comprehensive loss - - - 9,945 - - 9,945
Treasury stock - - - - - (109,380) (109,380)
---------- --------- ----------- -------- ------------- ---------- -----------
Balance at March 31, 1998 8,586,769 $ 85,868 $31,653,186 $(47,979) $ 17,599,026 (3,016,810) $46,273,291
========== ========= =========== ======== ============= ========== ===========
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, 1997 and 1998
(Unaudited)
1997 1998
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Cash flows from operating activities:
Net earnings (loss) $ 490,595 $ (822,421)
Adjustments to reconcile net earnings (loss) to net cash used
in operating activities:
Depreciation and amortization 645,975 644,982
Changes in assets and liabilities:
Accounts receivable (1,649,190) (1,840,216)
Due from factor (1,113,705) --
Inventories 315,496 1,136,929
Prepaid expenses and other current assets (636,429) 436,487
Other assets 89,040 (6,591)
Accounts payable (191,741) (3,515,159)
Income taxes recoverable (297,825) 561,432
Accrued expenses and other current liabilities (39,754) (655,806)
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Net cash used in operating activities (2,387,538) (4,060,363)
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Cash flows used in investing activities:
Acquisitions of property and equipment (187,893) (117,458)
Other (175,000) --
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Net cash used in investing activities (362,893) (117,458)
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Cash flows from financing activities:
Borrowings under line of credit facilities, net 3,300,000 4,430,000
Acquisition of treasury stock -- (109,380)
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Net cash provided by financing activities 3,300,000 4,320,620
----------- -----------
Net increase in cash and cash equivalents 549,569 142,799
Cash and cash equivalents at beginning of period 1,044,094 1,007,153
----------- -----------
Cash and cash equivalents at end of period $ 1,593,663 $ 1,149,952
=========== ===========
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, 1997 and 1998
(Unaudited)
(1) Basis of Presentation and Reorganization
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its wholly owned subsidiaries
(the "Company"). Significant intercompany accounts and transactions are
eliminated in consolidation.
The unaudited consolidated financial statements do not include all information
and footnote disclosures normally included in financial statements prepared in
accordance with 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, 1997 and 1998 are not necessarily indicative of the
operating results to be expected for a full year.
(2) Reporting Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income, as of January
1, 1998. SFAS No.130 requires the reporting and display of comprehensive income
and its components and accumulated comprehensive income in a full set of
financial statements. Comprehensive income represents the Company's change in
equity during the periods presented from transactions and other events and
circumstances from nonowner sources. The impact of adoption was not material.
(3) Inventories
Inventories at December 31, 1997 and March 31, 1998 consist of the
following:
1997 1998
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Piece goods $ 2,959,703 $ 3,296,127
Work in process 2,863,727 2,122,950
Finished goods 6,182,855 5,450,279
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$12,006,285 $10,869,356
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(4) 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 prime rate or LIBOR
plus 1% at the Company's option. As of March 31, 1998, $10,930,000 of
borrowings, bearing interest at an average annual rate of 7.0%, and $2,668,000
of commercial letters of credit were outstanding under the credit facilities. At
March 31, 1998, available borrowings under the facilities were $21,402,000.
(5) Earnings Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 Earnings Per Share, as of December 31, 1997, and accordingly,
has restated all prior periods in accordance with the pronouncement. The impact
on adoption was not material. Basic net earnings (loss) per common share is
based on the weighted average number of common shares outstanding which were
8,384,769 and 8,161,436 for the three months ended March 31, 1997 and 1998,
respectively. Diluted earnings (loss) per common share is based on weighted
average number of common shares outstanding and dilutive securities outstanding,
which were 8,384,769 and 8,161,436 for the three months ended March 31, 1997 and
1998, respectively.
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ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
Results for the first quarter of 1998 were below historical levels. While
Flapdoodles continued its profitability, first quarter results were adversely
impacted by weaker sales and customer demand at the Marisa Christina (MC) and
Adrienne Vittadini (AVE) divisions as anticipated. Sales for the Cruise and
Spring seasons at both its MC and AVE divisions were disappointing, which
negatively impacted results for the quarter. Management attributes the decline
in operating results primarily to the change in consumer habits and a shift in
the buying patterns of major department stores to favor a smaller number of
suppliers with very large name brands.
The following table sets forth information with respect to the percentage
relationship to net sales of certain items of the consolidated statements of
operations of the Company for the three months ended March 31, 1997 and 1998.
1997 1998
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Net sales 100.0% 100.0%
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Gross profit 31.5 28.7
Selling, general and administrative expenses 30.9 35.2
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Operating earnings (loss) 0.6 (6.5)
Other income, net 2.9 1.6
Interest expense, net (0.3) (0.8)
Income tax expense (benefit) 1.3 (1.6)
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Net earnings (loss) 1.9% (4.1%)
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Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1998
Net sales. Net sales decreased 21.9% from $25.6 million in 1997, to $20.0
million in 1998. The decrease is attributable primarily to a decline in the
sales of the MC and AVE divisions. Sales in both divisions were adversely
affected by continuing department store consolidation and the stores ever
growing reliance on major brand names. Further, AVE's sales were hurt by
continued softness in the Bridge market and by its new policy to minimize sales
to discounters. MC's sales additionally declined due to a reduction in the
number of its specialty store accounts.
Gross Profit. Gross profit decreased 27.5% from $8.0 million in 1997, to $5.8
million in 1998. As a percentage of net sales, gross profit declined from 31.5%
in 1997 to 28.7% in 1998. Gross profit was negatively impacted by higher
provisions for markdowns as well as the fact that certain fixed costs associated
with design and production represented a higher percentage of net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 10.1%, from $7.9 million in 1997 to $7.1
million in 1998. As a percentage of net sales of the Company, selling, general
and administrative expenses increased from 30.9% in 1997 to 35.2% in 1998. The
decrease in expenses is primarily attributable to the planned reduction in
advertising and other cost savings.
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Other Income, Net. Other income, net consists of royalty, licensing and
copyright infringement income. The decrease of $420,000 is due principally to
the AVE division, which had net royalty income of approximately $293,000 in
1998. The reduction is primarily a result of timing. Additional factors include
the closing of certain unprofitable overseas licensing arrangements as well as
an increase in licensing expenses.
Interest Expense, Net. Interest expense, net increased from $78,000 in 1997
to $164,000 in 1998, principally as the result of higher average outstanding
borrowings.
Income Tax Expense (Benefit). Income tax expense (benefit) changed from $321,000
expense in 1997 to ($331,000) benefit in 1998 as the result of the loss incurred
in 1998. The Company's effective income tax rates for the three months ended
March 31, 1997 and 1998 were 39.5% and (28.7%), respectively. The lower
effective tax rate in 1998 is the result of valuation allowances established for
operating losses in certain states.
Net Earnings (Loss). Net earnings (loss) declined from net earnings of $491,000
in 1997 to net loss of ($822,000) in 1998 as a result of lower net sales and
gross margins.
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
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 Fall
and Holiday season garments, which generally require more costly materials than
the Spring/Summer and Resort seasons. Merchandise from the Back-to-School and
Fall collections, the Company's largest selling seasons and Holiday, the
Company's next largest season, is 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 the Resorts, Spring/Summer and Early Fall collections average 5% to
10% lower than in other selling seasons.
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 prime rate or LIBOR plus 1% at the Company's
option. As of March 31, 1998, $10,930,000 of borrowings and $2,668,000 of
commercial letters of credit were outstanding under the credit facilities. At
March 31, 1998, available borrowings under the facilities were $21,402,000.
During 1998, the Company has planned capital expenditures of approximately
$500,000, primarily to upgrade computer systems and open new outlet stores.
These capital expenditures will be funded by internally generated funds and, if
necessary, bank borrowings under the Company's line of credit facilities.
Capital expenditures during the three months ended March 31, 1998 were
approximately $117,000.
The Company believes that funds generated by operations, if any, and the line of
credit facilities are expected to provide financial resources sufficient to meet
all of its working capital and letter of credit requirements for at least the
next twelve months.
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Exchange Rates
Although it is Company policy to contract for the purchase of imported
merchandise in United States dollars, reductions in the value of the dollar
could result in the Company paying higher prices for its products. During the
last three fiscal years, however, currency fluctuations have not had an 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.
Accounting Matters
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS
No. 130); and No. 131, Disclosures About Segments of an Enterprise and Related
Information, (SFAS No. 131). These pronouncements generally require additional
disclosure and are not expected to have any effect on the Company's financial
position or results of operations. The Company adopted SFAS No. 130 on January
1, 1998 and will adopt SFAS No. 131 on December 31, 1998. The Company is
currently evaluating the impact, if any, that SFAS No. 131 will have on their
financial statement disclosures.
Year 2000
In 1997, the Company developed a plan to deal with the Year 2000 problem and
began converting its computer systems to be Year 2000 compliant. The plan
provides for the conversion efforts to be completed by the end of 1999. The Year
2000 problem is the result of computer programs being written using two digits
rather than four to define the applicable year. The total cost of the project is
estimated to be $100,000 and is being funded through operating cash flows. The
Company will be expensing all costs associated with these system changes as the
costs are incurred. In 1998, the Company has initiated communications with
suppliers and customers to determine the extent to which the Company may be
vulnerable to such parties' failure to remediate their own Year 2000 issue.
Forward Looking Information
Except for historical information contained herein, the statements in this form
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 included, 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. These 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
Reports on Form 8-K - no reports on Form 8-K were filed by the Company during
the quarter ended March 31, 1998.
Exhibit 27.1 - Financial Data Schedule.
Exhibit 27.2 - Financial Data Schedule.
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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 14, 1998 /s/ S. E. Melvin Hecht
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S. E. Melvin Hecht
Chief Financial Officer and Treasurer
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