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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 June 30, 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
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 August 1,
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 June 30, 1998 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income for the Three and Six Months Ended June 30, 1997
and 1998 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 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 4: Submission of Matters to a Vote of Security Holders 11
Item 6: Exhibits and Reports on Form 8-K 11
SIGNATURE 12
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PART I: FINANCIAL INFORMATION
ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, JUNE 30,
ASSETS 1997(1) 1998
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 1,007,153 $ 727,956
Accounts receivable, less allowance for doubtful
accounts of $200,104 in 1997 and $550,490 in 1998 9,174,602 5,679,932
Inventories 12,006,285 11,486,286
Prepaid expenses and other current assets 3,597,237 3,122,916
Income taxes recoverable 3,653,933 3,823,979
------------ ------------
Total current assets 29,439,210 24,841,069
Property and equipment, net 3,186,404 2,964,582
Goodwill, less accumulated amortization of $4,615,719
in 1997 and $5,531,271 in 1998 31,294,348 30,378,796
Other assets 1,276,819 1,239,754
------------ ------------
Total assets $ 65,196,781 $ 59,424,201
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 6,500,000 $ 7,700,000
Accounts payable 7,578,832 4,129,765
Accrued expenses and other current liabilities 3,419,528 2,393,142
------------ ------------
Total current liabilities 17,498,360 14,222,907
Other liabilities 503,274 503,274
------------ ------------
Total liabilities 18,001,634 14,726,181
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 1997 and 1998 85,868 85,868
Additional paid in capital 31,653,186 31,653,186
Accumulated other comprehensive loss (57,924) (57,410)
Retained earnings 18,421,447 16,033,186
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 44,698,020
------------ ------------
Total liabilities and stockholders' equity $ 65,196,781 $ 59,424,201
============ ============
(1) Amounts 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 AND SIX MONTHS ENDED
JUNE 30, 1997 AND 1998
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
Net sales $ 19,600,192 $ 13,279,958 $ 45,170,387 $ 33,299,602
Cost of goods sold 13,600,899 10,143,155 31,121,772 24,414,397
------------ ------------ ------------ ------------
Gross profit 5,999,293 3,136,803 14,048,615 8,885,205
Selling, general and administrative 5,889,458 5,734,335 13,786,525 12,790,643
------------ ------------ ------------ ------------
Operating earnings (loss) 109,835 (2,597,532) 262,090 (3,905,438)
Other income, net 760,245 558,075 1,497,677 876,077
Interest expense, net (86,964) (156,783) (165,042) (320,300)
------------ ------------ ------------ ------------
Earnings (loss) before
income tax expense
(benefit) 783,116 (2,196,240) 1,594,725 (3,349,661)
Income tax expense (benefit) 308,886 (630,400) 629,900 (961,400)
------------ ------------ ------------ ------------
Net earnings (loss) 474,230 (1,565,840) 964,825 (2,388,261)
Other comprehensive income (loss),
net of tax - foreign currency
translation adjustment -- (9,431) -- 514
------------ ------------ ------------ ------------
Comprehensive income
(loss) $ 474,230 $ (1,575,271) $ 964,825 $ (2,387,747)
============ ============ ============ ============
Net earnings (loss) per share:
Basic $ 0.06 $ (0.19) $ 0.12 $ (0.29)
Diluted $ 0.06 $ (0.19) $ 0.12 $ (0.29)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
Accumulated
Common stock Additional other
-------------------------- paid-in comprehensive Retained Treasury
Shares Amount capital loss 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 -- -- -- -- (2,388,261) -- (2,388,261)
Other comprehensive
income -- -- -- 514 -- -- 514
Treasury stock -- -- -- -- -- (109,380) (109,380)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1998 8,586,769 $ 85,868 $ 31,653,186 $ (57,410) $ 16,033,186 $ (3,016,810) $ 44,698,020
============ ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(UNAUDITED)
1997 1998
----------- -----------
Cash flows from operating activities:
Net earnings (loss) $ 964,825 $(2,388,261)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,333,858 1,279,240
Changes in assets and liabilities:
Accounts receivable 1,476,676 3,494,670
Inventories (287,611) 519,999
Prepaid expenses and other current assets (1,192,289) 474,321
Other assets 94,534 37,065
Accounts payable (180,862) (3,448,553)
Accrued expenses and other current liabilities (516,191) (1,026,386)
Income taxes recoverable (662,652) (170,046)
----------- -----------
Net cash provided by (used in) operating activities 1,030,288 (1,227,951)
----------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment (544,219) (141,866)
Other (184,801) --
----------- -----------
Net cash used in investing activities (729,020) (141,866)
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) under line of credit facilities, net (200,000) 1,200,000
Acquisition of treasury stock -- (109,380)
----------- -----------
Net cash provided by (used in) financing activities (200,000) 1,090,620
----------- -----------
Net increase (decrease) in cash and cash equivalents 101,268 (279,197)
Cash and cash equivalents at beginning of period 1,044,094 1,007,153
----------- -----------
Cash and cash equivalents at end of period $ 1,145,362 $ 727,956
=========== ===========
Supplemental information:
Cash paid during the period for:
Income taxes $ 1,280,717 $ 43,521
=========== ===========
Interest $ 184,741 $ 323,363
=========== ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(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 and six months ended June 30, 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 June 30, 1998 consist of the following:
1997 1998
----------- -----------
Piece goods $ 2,959,703 $ 3,003,183
Work in process 2,863,727 1,320,800
Finished goods 6,182,855 7,162,303
----------- -----------
$12,006,285 $11,486,286
=========== ===========
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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. 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 June 30, 1998, $7,700,000 of borrowings, bearing interest at an
average rate of 6.82%, and $1,209,165 of commercial letters of credit were
outstanding under the credit facilities. The credit facilities expired on June
30, 1998 and have been extended while the Company negotiates new arrangements
with the banks.
(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 8,160,602 for the six months ended June 30, 1997 and 1998,
respectively. Diluted earnings (loss) per common share is based on weighted
average number of shares outstanding and dilutive securities outstanding, which
were 8,384,769 and 8,160,602 for the six months ended June 30, 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 half of 1998 were below historical levels. While
Flapdoodles continued its profitability, first half 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. Sales were also negatively impacted by a
conscious decision to reduce sales to discounters, as well as unfavorable year
to date sales by retailers' comparisons. The Company expects this trend to
continue.
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 six month periods ended June 30, 1997
and 1998.
Three Months Six Months
Ended Ended
June 30, June 30,
--------------------- ---------------------
1997 1998 1997 1998
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Gross profit 30.6 23.6 31.1 26.7
Selling, general and administrative expenses 30.1 43.2 30.5 38.4
------ ------ ------ ------
Operating earnings (loss) 0.5 (19.6) 0.6 (11.7)
Other income, net 3.9 4.2 3.3 2.6
Interest expense, net (0.4) (1.2) (0.4) (1.0)
Income tax expense (benefit) 1.6 (4.8) 1.4 (2.9)
------ ------ ------ ------
Net earnings (loss) 2.4% (11.8)% 2.1% (7.2)%
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net sales. Net sales decreased 32.1%, from $19.6 million in 1997 to $13.3
million in 1998. The decrease is attributable primarily to a decline in sales of
the AVE and the MC divisions.
Gross Profit. Gross profit decreased 48.3%, from $6.0 million in 1997 to $3.1
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 30.6% in 1997 to 23.6% in 1998. The
decline in the gross profit percentage for the 1998 quarter was attributable
primarily to the impact that certain fixed costs associated with design and
production had on a significantly lower sales volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 3.4%, from $5.9 million in 1997 to $5.7
million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 30.1% in 1997 to 43.2% in 1998. The
decrease in dollar amount is primarily attributable to variable expenses related
to lower sales volume and also to the Company's ongoing efforts to reduce
operating expenses. The percentage of net sales increase was attributable to
certain fixed costs on a lower sales volume.
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Other Income, Net. Other income consists of royalty, licensing and copyright
infringement income. The amount has declined as a result of lower sales by
Adrienne Vittadini licenses.
Interest Expense, Net. Interest expense increased from $87,000 in 1997 to
$157,000 in 1998, principally as the result of higher average outstanding
borrowings.
Income Tax Expense (Benefit). Income tax expense (benefit) changed from $309,000
expense in 1997 to ($630,000) benefit in 1998 as the result of the loss incurred
in 1998. The Company's effective income tax rates for the six months ended June
30, 1997 and 1998 were 39.4% 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 $474,000
in 1997 to net loss of ($1,566,000) in 1998 as a result of the aforementioned
items.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales decreased 26.3%, from $45.2 million in 1997 to $33.3
million in 1998. The decrease is attributable primarily to a decline in sales of
the AVE and the MC divisions.
Gross Profit. Gross profit decreased 36.4%, from $14.0 million in 1997 to $8.9
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 31.1% in 1997 to 26.7% in 1998. The
decline in the gross profit percentage for the 1998 six months was attributable
primarily to the impact that certain fixed costs associated with design and
production had on lower sales volume.
Selling, General and Administrative Expense. Selling, general and administrative
expenses decreased 7.2%, from $13.8 million in 1997 to $12.8 million in 1998. As
a percentage of net sales of the Company, selling, general and administrative
expenses increased from 30.5% in 1997 to 38.4% in 1998, as a result of the lower
sales volume. The decrease in dollar amount is attributable to variable expenses
related to lower sales volume and also to the Company's ongoing efforts to
reduce operating expenses.
Other Income, Net. Other income consists of royalty, licensing and copyright
infringement income. The amount has declined as a result of lower sales by
Adrienne Vittadini licenses.
Interest Expense Net. Interest expense increased from $165,000 in 1997 to
$320,000 in 1998, principally as the result of higher average outstanding
borrowings.
Income Tax Expense (Benefit). Income tax expense (benefit) changed from $630,000
expense in 1997 to ($961,000) benefit in 1998 as the result of the loss incurred
in 1998. The Company's effective income tax rates for the six months ended June
30, 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 $965,000
in 1997 to net loss of ($2,388,000) in 1998 as a result of the aforementioned
items.
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SEASONALITY
The Company's business is seasonal, with a substantial portion of its revenues
and earnings occruing during the second half of the year as a result of
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 Back-to-School and Fall collections, the
Company's largest selling seasons 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 the
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 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 June 30, 1998, $7,700,000 of borrowings and $1,209,165 of
commercial letters of credit were outstanding under the credit facilities.
The credit facilities expired on June 30, 1998 and have been extended while the
Company negotiates new arrangements with the banks.
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 six months ended June 30, 1998 were
approximately $142,000.
The Company believes that funds generated by operations, if any, and the
expected renegotiated line of credit facilities will provide financial
resources sufficient to meet all of its working capital and letter of credit
requirements for at least the next twelve months.
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 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.
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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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following are the results of the balloting at the Registrant's Annual
Meeting of Stockholders' held on May 20, 1998:
a. Michael H. Lerner, Marc Ham, Adrienne Vittadini, Gianluigi
Vittadini, G. Michael Dees, Christine M. Carlucci, S.E. Melvin
Hecht, Zachary Solomon, Robert Davidoff, Lawrence D.
Glaubinger, Brett J. Meyer, Barry S. Rosenstein and David W.
Zalaznick were elected to serve as directors of the Company
for a one-year term.
Mrs. Carlucci and Messr. Meyer, Ham, Rosenstein, Hecht and
Solomon received 5,625,798 votes for and 15,488 votes
against; Mr. Lerner received 5,623,298 votes for and 17,988
votes against; Messr. Glaubinger, Davidoff and Zalaznick
received 5,622,298 votes for and 18,988 votes against; Mr.
Dees received 5,530,914 votes for and 110,372 votes against;
Mr. Vittadini received 5,518,846 votes for and 110,372 votes
against and Mrs. Vittadini received 5,437,362 votes for and
203,924 votes against.
b. The proposal to reappoint KPMG Peat Marwick LLP as the
Company's independent auditors was adopted.
5,637,786 votes were cast in favor of KPMG Peat Marwick LLP,
1,500 votes against and 2,000 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27. Financial Data Schedules
Exhibit 28. Press release dated August 12, 1998
Reports on Form 8-K - no reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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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: /s/ S. E. Melvin Hecht
S. E. Melvin Hecht
Chief Financial Officer and Treasurer
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