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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, 1999
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 April 30,
1999 were 7,765,769.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets December 31, 1998
and March 31, 1999 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Loss-- Three months ended March 31, 1998 and 1999 (Unaudited) 3
Consolidated Statement of Stockholders' Equity -- Three months
ended March 31, 1999 (Unaudited) 4
Consolidated Statements of Cash Flows -- Three months
ended March 31, 1998 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk 11
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: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
ASSETS 1998 (1) 1999
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 981,329 $ 769,969
Accounts receivable, less allowance for doubtful
accounts of $379,581 in 1998 and $316,903 in 1999 8,694,364 9,567,626
Inventories 8,600,980 7,919,395
Income taxes recoverable 2,955,492 2,955,492
Prepaid expenses and other current assets 1,945,826 1,762,421
------------ ------------
Total current assets 23,177,991 22,974,903
Property and equipment, net 2,726,150 2,705,226
Goodwill, less accumulated amortization of $4,707,325 in
1998 and $4,925,605 in 1999 13,177,435 12,959,155
Other assets 487,596 508,231
Deferred tax assets 4,859,392 5,636,745
------------ ------------
Total assets $ 44,428,564 $ 44,784,260
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to bank $ 9,850,000 $ 12,400,000
Accounts payable 3,204,799 2,569,938
Accrued expenses and other current liabilities 1,210,918 1,092,704
------------ ------------
Total current liabilities 14,265,717 16,062,642
------------ ------------
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 1998 and 1999 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Retained earnings 2,113,228 663,238
Accumulated other comprehensive loss (57,000) (48,239)
Treasury stock, 821,000 common shares
in 1998 and 1999 at cost (3,632,435) (3,632,435)
------------ ------------
Total stockholders' equity 30,162,847 28,721,618
------------ ------------
Total liabilities and stockholders' equity $ 44,428,564 $ 44,784,260
============ ============
(1) Accounts were derived from the audited consolidated balance sheet as of
December 31, 1998.
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
1998 1999
------------ ------------
Net sales $ 20,019,644 $ 14,264,241
Cost of goods sold 14,271,242 11,424,196
------------ ------------
Gross profit 5,748,402 2,840,045
Selling, general and administrative expenses 7,056,308 5,244,825
------------ ------------
Operating loss (1,307,906) (2,404,780)
Other income, net 318,002 422,678
Interest expense, net (163,517) (197,888)
------------ ------------
Loss before income tax benefit (1,153,421) (2,179,990)
Income tax benefit (331,000) (730,000)
------------ ------------
Net loss (822,421) (1,449,990)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 9,945 8,761
------------ ------------
Comprehensive loss $ (812,476) $ (1,441,229)
============ ============
Net loss per share:
Basic $ (0.10) $ (0.19)
Diluted $ (0.10) $ (0.19)
============ ============
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL LOSS EARNINGS STOCK TOTAL
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance at December 31, 1998 8,586,769 $ 85,868 $31,653,186 $ (57,000) $ 2,113,228 (3,632,435) $ 30,162,847
Net loss -- -- -- -- (1,449,990) -- (1,449,990)
Other comprehensive income -- -- -- 8,761 -- -- 8,761
----------- ----------- ----------- ----------- ----------- ------------- -----------
Balance at March 31, 1999 8,586,769 $ 85,868 $31,653,186 $ (48,239) $ 663,238 (3,632,435) $ 28,721,618
=========== =========== =========== =========== =========== ============= ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
1998 1999
----------- -----------
Cash flows from operating activities:
Net loss $ (822,421) $(1,449,990)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 644,982 362,903
Write off of property and equipment -- 3,862
Deferred tax benefit -- (777,353)
Changes in assets and liabilities:
Accounts receivable (1,840,216) (873,262)
Inventories 1,136,929 681,585
Prepaid expenses and other current assets 436,487 183,405
Other assets (6,591) (20,635)
Income taxes recoverable 561,432 --
Accounts payable (3,515,159) (626,100)
Accrued expenses and other current liabilities (655,806) (118,214)
----------- -----------
Net cash used in operating activities (4,060,363) (2,633,799)
----------- -----------
Net cash flows used in investing activities -- acquisitions
of property and equipment (117,458) (127,561)
----------- -----------
Cash flows from financing activities:
Borrowings under line of credit facilities, net 4,430,000 2,550,000
Acquisition of treasury stock (109,380) --
----------- -----------
Net cash provided by financing activities 4,320,620 2,550,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 142,799 (211,360)
Cash and cash equivalents at beginning of period 1,007,153 981,329
----------- -----------
Cash and cash equivalents at end of period $ 1,149,952 $ 769,969
=========== ===========
See accompanying notes to consolidated financial statements.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
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, included in its Annual Report
on Form 10-K for the year ended December 31, 1998 .
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, 1998 and
1999 are not necessarily indicative of the operating results to be
expected for a full year.
(2) INVENTORIES
Inventories at December 31, 1998 and March 31, 1999 consist of the
following:
1998 1999
---------- ----------
Piece goods $2,378,619 $2,040,545
Work in process 1,001,196 1,166,929
Finished goods 5,221,165 4,711,921
---------- ----------
$8,600,980 $7,919,395
========== ==========
(3) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating $23
million, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under
the arrangements are secured by certain of the Company's assets and bear
interest at the banks' prime rate plus 0.25% to 1.0% or LIBOR plus 2.5%,
at the Company's option. The facilities expire on June 30, 1999. As of
March 31, 1999, $12.4 million of borrowings, bearing interest at an
average rate of 8.18% and $2.0 million of commercial letters of credit
were outstanding under the credit facilities. Available borrowings at
March 31, 1999 were $8.6 million. The Company expects the banks to renew
the facilities in 1999.
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MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
(UNAUDITED)
(4) EARNINGS PER SHARE
Basic net loss per common share is based on the weighted average number
of common shares outstanding. Diluted net loss per common share is based
on weighted average number of common shares outstanding and diluted
securities outstanding. Basic and diluted weighted average number of
common shares outstanding for the three months ended March 31, 1998 and
1999 were 8,384,769 and 7,765,769, respectively. The effect of stock
options outstanding during the three months ended March 31, 1998 and
1999 were not included in the computation of diluted loss per common
share because the effect would have been antidilutive.
(5) SEGMENT REPORTING
The divisions of the Company include: Marisa Christina (MC), Adrienne
Vittadini (AVE) and Flapdoodles, for which a summary of each follows:
- MC designs, manufactures and distributes "better" women's
knitwear.
- AVE designs and distributes sportswear for women and maintains
licensees for scarves, swimwear, eyewear, shoes,
cosmetics, travel bags and luggage.
- Flapdoodles designs, manufactures and distributes children's
clothing. Flapdoodles also maintains licensees for footwear
and sleepwear.
The Company evaluates performance based on stand-alone division earnings (loss)
before income taxes. The following information is provided in thousands:
MC AVE FLAPDOODLES ELIMINATION CONSOLIDATION
------------ ------------ ----------- ------------ -------------
As for the three months ended March 31, 1999
Net sales $6,568 2,633 5,063 -- 14,264
Operating loss (553) (1,452) (400) -- (2,405)
Earnings (loss) before taxes (665) (2,052) (694) 1,231 (2,180)
Total assets $16,586 9,601 17,183 1,414 44,784
As for the three months ended March 31, 1998
Net sales $4,706 5,924 9,390 -- 20,020
Operating earnings (loss) (1,027) (1,487) 1,206 -- (1,308)
Earnings (loss) before taxes (589) (2,037) 972 501 (1,153)
Total assets $17,886 31,069 23,879 (8,310) 64,524
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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 1999 were below historical levels. First
quarter results were adversely impacted by weaker sales and customer demand at
the Adrienne Vittadini (AVE) and Flapdoodles divisions as anticipated. The
Marisa Christina division showed an improvement over last year. 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, 1998 and 1999.
1998 1999
------ ------
Net sales 100.0% 100.0%
------ ------
Gross profit 28.7 19.9
Selling, general and administrative expenses 35.2 36.8
------ ------
Operating loss (6.5) (16.9)
Other income, net 1.6 3.0
Interest expense, net (0.8) (1.4)
Income tax benefit (1.6) (5.1)
====== ======
Net loss (4.1%) (10.2%)
====== ======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net sales. Net sales decreased 28.7% from $20.0 million in 1998, to $14.3
million in 1999. The decrease is attributable primarily to a decline in the
sales of the AVE and Flapdoodles divisions. Net sales of the AVE division
declined 56.0% from $5.9 million for the three months ended March 31, 1998 to
$2.6 million for the three months ended March 31, 1999. Net sales of the
Flapdoodles division declined 45.7% from $9.4 million for the three months
ended March 31, 1998 to $5.1 million for the three months ended March 31, 1999.
Net sales of the MC division increased 39.6% from $4.7 million for the three
months ended March 31, 1998 to $6.6 million for the three months ended March
31, 1999. AVE's sales were hurt by continued softness in the bridge market and
by its policy to minimize sales to discounters. Flapdoodles' sales declined
due to a reduction in the number of its specialty store accounts as well as a
decline in sales to department stores. MC's sales improved due to new customers
and increased distribution.
Gross Profit. Gross profit decreased 50.6% from $5.8 million in 1998, to $2.8
million in 1999. As a percentage of net sales, gross profit declined from 28.7%
in 1998 to 19.9% in 1999. Gross profit was negatively impacted by 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 25.7%, from $7.1 million in 1998 to $5.2
million in 1999. As a percentage of net sales of the Company, selling, general
and administrative expenses increased from 35.2% in 1998 to 36.8% in 1999. The
decrease in expenses is primarily attributable to the planned reductions and
other cost savings related to the Company's 1997 and 1998 restructurings. The
increase in expenses as a percentage of sales is attributed to lower sales
volume available to absorb the Company's fixed costs.
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Other Income, Net. Other income, net consists of royalty, licensing and
copyright infringement income. The increase of $105 thousand is due principally
to the AVE division, which had net royalty income of approximately $383 thousand
in 1999. The increase is primarily due to a decrease in licensing expense
resulting from the Company's 1998 restructuring.
Interest Expense, Net. Interest expense, net increased from $164 thousand in
1998 to $198 thousand in 1999, principally as the result of higher average
outstanding borrowings and higher interest rates being charged in the Company's
bank credit facilities.
Income Tax Benefit. Income tax benefit increased from $331 thousand in 1998 to
$730 thousand in 1999 as the result of the increase in loss before income taxes.
The Company's effective income tax rates for the three months ended March 31,
1998 and 1999 were 28.7% and 33.5%, respectively.
Net Loss. Net loss increased from $822 thousand in 1998 to $1.4 million in
1999, principally 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 $23
million, which may be utilized for commercial letter of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
facilities are secured by certain of the Company's assets and bear interest at
the banks' prime rate plus 0.25% to 1.0% or LIBOR plus 2.5% at the Company's
option. The facilities expire on June 30, 1999. As of March 31, 1999, $12.4
million of borrowings, bearing interest at an average rate of 8.18% and $2.0
million of commercial letters of credit were outstanding under the credit
facilities. Available borrowings at March 31, 1999 were $8.6 million. The
Company expects the banks to renew the facilities in 1999.
During 1999, the Company has planned capital expenditures of approximately $400
thousand 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, 1999 were
approximately $128 thousand.
The Company believes that funds generated by operations, if any, and the 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 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.
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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.
CHANGES IN ACCOUNTING PRINCIPLES
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activity. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The Company expects to adopt SFAS No. 133 on January 1, 2000, in accordance
with the pronouncement, and is currently evaluating the impact, if any, that
SFAS No. 133 will have on its consolidated financial statements.
During 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up
Activities. SOP No. 98-5 requires that costs incurred during a start-up activity
be expensed as incurred and that the initial application of the SOP, as of the
beginning of the year in which the SOP is adopted, be reported as a cumulative
effect of a change in accounting principle. The Company adopted SOP 98-5 on
January 1, 1999, but the adoption had no impact on its consolidated financial
statements.
YEAR 2000
INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year. The
inability of computer programs to recognize a year that begins with "20" could
result in system failures, miscalculations or errors causing disruptions of
operations or other business activities.
The Company has undertaken a program to address the Year 2000 issue with respect
to (i) the Company's information systems, (ii) the Company's non-information
systems, and (iii) certain systems of the Company's major customers and
suppliers. As described below, the Company's Year 2000 program includes (i)
assessment of the problem, (ii) development of remedies, (iii) testing of such
remedies and (iv) the preparation of contingency plans to deal with worst case
scenarios.
Information System -- The Company maintains information systems at each of its
three operating divisions. Information systems at the Company's MC and AVE
divisions have been remediated, tested and have been determined by management to
be Year 2000 compliant. The Company is in the process of remediating information
systems at the Flapdoodles division. The Company expects to have this system
remediated and tested by the third quarter of 1999.
Non-Information Systems -- The Company has not completed its assessment of the
Year 2000 issue with respect to critical non-information systems. However,
management believes that such issues, if any, would be limited to the Company's
telephone systems. Remediation required, if any, is expected to be completed by
the third quarter of 1999.
Customer and Supplier Systems -- The Company has begun informal discussions with
major customers and suppliers with respect to the Year 2000 issue. The Company
currently has limited electronic interfaces with customers and vendors and,
accordingly, is focused on its customers' and vendors' ability to operate
following January 1, 2000. The Company intends to make formal inquiries of its
key customers and suppliers during 1999 to complete this assessment and
establish contingency plans as necessary.
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Costs Related to the Year 2000 Issue -- To date the Company has incurred less
than $75 thousand to remediate its Year 2000 information systems issues and
expects to incur an additional $75 thousand to complete the remediation and
testing of the Flapdoodles information systems. Costs, if any, to remediate the
non-information systems are not expected to be material.
Risk Related to the Year 2000 Issue -- Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's operations, the actual effects of the issue cannot be known until the
Year 2000. Failure of the Company and its major customers and suppliers to
appropriately remediate the Year 2000 issue could have a material adverse effect
on the Company's financial condition and results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However,
interest expense has not been and is not expected to be a material operating
expense of the Company. The Company has implemented management monitoring
processes designed to minimize the impact of sudden and sustained changes in
interest rates. As of March 31, 1999, the Company's floating rate debt is based
on LIBOR. The fair market value of the Company's bank debt approximates its face
value. If the Company's interest rates changed by 100 basis points during the
three months ended March 31, 1999, interest expense would have changed by
approximately $25 thousand.
Currently, the Company does not use foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
All purchases from foreign contractors are made in US dollars and the Company's
investment in its foreign subsidiary was $140 thousand at March 31, 1999.
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, 1999.
Exhibit 27.1 - 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, 1999 /s/ S. E. Melvin Hecht
--------------- ----------------------------------------
S. E. Melvin Hecht
Vice Chairman, Chief Financial Officer
and Treasurer
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