-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DPGxRcDEFHMl25hMox7d1gf/iPIRTpPbOUx1nKbmXgNxpNVN4IsICq9KxhgotDK7 OzsGMnNzWNXWUmgPwXWogw== 0000950123-00-003167.txt : 20000403 0000950123-00-003167.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950123-00-003167 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARISA CHRISTINA INC CENTRAL INDEX KEY: 0000923149 STANDARD INDUSTRIAL CLASSIFICATION: KNIT OUTERWEAR MILLS [2253] IRS NUMBER: 133078311 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-24176 FILM NUMBER: 591100 BUSINESS ADDRESS: STREET 1: 8101 TONNELLE AVE CITY: NORTH BERGEN STATE: NJ ZIP: 07047-4601 BUSINESS PHONE: 5163525050 MAIL ADDRESS: STREET 1: 8101 TONNELLE AVE CITY: NORTH BERGEN STATE: NJ ZIP: 07047-4601 10-K405 1 MARISA CHRISTINA, INCORPORATED 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------- FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 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 of Incorporation) (I.R.S. Employer Identification No.) 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 758-9800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 Per Share (the "Common Stock")
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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X As of March 24, 2000, the aggregate market value of the outstanding shares of the Registrant's Common Stock, par value $0.01 per share, held by non-affiliates was approximately $6.5 million based on the average closing price of the Common Stock as reported by Nasdaq National Market on March 24, 2000. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose. Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the most recent practicable date.
Class Outstanding at March 24, 2000 ----- ----------------------------- Common stock, par value $0.01 per share 7,765,769 shares
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. 2 TABLE OF CONTENTS
PAGE Part I Item 1. Business........................................................... 1 Item 2. Properties......................................................... 6 Item 3. Legal Proceedings.................................................. 7 Item 4. Submission of Matters to a Vote of Security Holders................ 7 -- Executive Officers of Registrant................................... 7 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 9 Item 6. Selected Financial Data............................................ 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 11 Item 7a. Quantitative and Qualitative Disclosure about Market Risk.......... 16 Item 8. Consolidated Financial Statements and Supplementary Data........... 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................. 37 Part III Item 10. Directors and Executive Officers of Registrant..................... 37 Item 11. Executive Compensation............................................. 37 Item 12. Security Ownership of Certain Beneficial Owners and Management..... 37 Item 13. Certain Relationships and Related Transactions..................... 37 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 38
3 PART I ITEM 1. BUSINESS OVERVIEW Marisa Christina, Incorporated (the "Company") designs, manufactures, sources and markets a broad line of high quality clothing for women primarily under the Marisa Christina(TM) label and for children under the Flapdoodles(TM) label. Founded in 1971, the Company had several ownership changes prior to its public offering in 1994. The Company acquired Flapdoodles, Inc. in 1993 and Adrienne Vittadini Enterprises, Inc. in 1996. In September 1999, the Company disposed of substantially all the assets, property and rights of Adrienne Vittadini Enterprises, Inc. The Company's business strategy is to: (i) offer distinctive products that reflect consumer preferences, (ii) introduce new products, (iii) expand distribution through new and existing channels, (iv) minimize inventory risk, (v) emphasize customer service, and (vi) add product lines through selective acquisitions. PRINCIPAL PRODUCT LINES Marisa Christina Marisa Christina is best known for its high quality sweaters characterized by classic, timeless styling, unique details, exciting yarns and textures, and special occasion designs. Marisa Christina's product line also includes a selection of other "classic look" garments encompassing knitted and casual sportswear and complementary pieces such as skirts, slacks and jackets, many of which are also produced in large sizes. Suggested retail prices for Marisa Christina products range from $80.00 to $140.00 for a sweater, $40.00 to $60.00 for a specialty T-shirt and $50.00 to $100.00 for a woven skirt or pants. Marisa Christina offers four "lines" per year. Each offering covers various seasons, i.e., fall, holiday, resort and spring. Fabrications vary from cotton and linen blends to synthetic and wool blends depending upon the season. Each line consists of approximately 150 different styles organized into twelve to eighteen groupings. These are marketed under three primary labels: Marisa Christina, Mary Jane Marcasiano and Christina Rotelli. In addition, the Company offers large sizes, as well as private label and exclusive merchandise under various labels. Exclusive and private label merchandise is becoming a more important factor in Marisa Christina's overall offerings. In each selling season, Marisa Christina also offers a selection of complementary blouses, skirts, pants and jackets, which when combined with sweaters, creates complete outfits. The Company estimates that approximately 90% of Marisa Christina customers order complementary pieces, and it is Marisa Christina's policy to ship these orders as a group so that it can create a single, unified display of merchandise. In addition, certain designs and colors are designated as exclusive merchandise for customers seeking to differentiate themselves from other retailers by creating broad identity and signature looks. 1 4 Flapdoodles Flapdoodles offers casual yet fashionable clothing for children featuring vibrant colors, all-natural fabrics, unique prints and textile designs. Flapdoodles products consist of infants' and children's sportswear in sizes six months through size 14, swimwear, outerwear and accessories. Five seasons per year are offered and there are deliveries of new style groupings every 30-45 days to ensure a fresh flow of merchandise to Flapdoodles' accounts. Retail prices range from $10-$50 for sportswear, $15-35 for swimwear, $50-$100 for outerwear and $4-$20 for accessories. Within each seasonal offering, the Flapdoodles line consists of between approximately six and fifteen fashion groups. Fashion groups, usually consisting of four to eight styles per group, may be based on special seasonal fabrics, such as novelty knits, yarn-dyed knits and wovens, or jacquards, based around a specific print theme. These fresh, original print and textile designs are custom developed by Flapdoodles' design staff and then produced according to its specifications. Basics are core styles, such as leggings, turtlenecks, T-shirts, sweatshirts and sweat pants, that are made primarily from Flapdoodles key fabrics, including jersey, rib, fleece and French terry. Because these styles are considered less seasonal, customers tend to maintain inventories of these garments throughout the year. Accordingly, Flapdoodles maintains an inventory of Basics in order to fill customer orders and reorders quickly. DESIGN, PRODUCTION AND RAW MATERIALS Each of the Company's product lines has its own design team, which is responsible for the creation of new and original designs for that product line. The Company believes that its ability to create fresh and original designs while maintaining the "look" of each of its product lines is one of the most important factors to its success. Marisa Christina has a staff of seven designers and merchandisers located in New York City and seven merchandisers located in Hong Kong. The staff is divided into independent teams, each of which is responsible for certain labels and for creating several groupings each season, which include knitwear and complementary pieces. As the Company expands its product line to incorporate new design and merchandising concepts, it hires designers with expertise in the new product area. Designers are selected on their experience, their ability to create interesting and original designs, and their expertise in knitting techniques and technology. The design staff constantly monitors emerging trends in fashions and popular culture and travels to Europe during the year in order to stay abreast of new designs and trends. The Company also subscribes to design services that summarize fashion trends worldwide. The design process generally requires ten to twelve weeks from the initial concept stage to completion of sample garments for a seasonal offering. The process begins with concept boards, developed by Marisa Christina's design staff, showing style and color ideas. After review by senior executives and sales staff, certain concept boards are selected for further development. From these selections, new boards are created showing detailed designs for garments and, after further review, drawings are selected to be produced as prototype samples. Marisa Christina's merchandisers in Hong Kong work together with manufacturers in executing and correcting all prototype samples. Prototype samples are reviewed by the design staff, as well as senior executives and sales staff, before final showroom samples are created, which generally requires six to eight weeks. 2 5 Flapdoodles' merchandising and design staff of ten people creates all Flapdoodles products. The design team is responsible for all aspects of product development, including fabric research and sourcing, textile and print design, color selection and body and silhouette styling. Flapdoodles selects designers who have the ability to understand and interpret the Flapdoodles concept and a strong appreciation for consumer preferences and market factors. In addition to regularly soliciting feedback from the sales and customer service departments regarding customer and consumer preferences, Flapdoodles designers also stay abreast of fashion and market trends by attending trade shows or subscribing to periodicals and fashion and color forecasting services. This information is then synthesized and incorporated into designs that maintain the unique style of Flapdoodles products. To minimize inventory risk, the Company normally places orders for the production of substantially all Marisa Christina merchandise only upon receipt of customer orders. Flapdoodles' inventory risk is minimized by utilizing the garment-dye process whereby garments are sewn in basic white fabrics and then dyed, allowing Flapdoodles to make commitments to colors later in the selling season after a portion of customer orders have been received. Marisa Christina separately negotiates with suppliers for the purchase of all raw materials required for use by its United States contractors, in accordance with its specifications and based on orders taken for the upcoming season. Raw materials required for use by Marisa Christina's foreign-based contractors are procured by the contractors in accordance with Marisa Christina's specifications. Approximately one-third of the garments in the Marisa Christina product line consist of sweaters that have been knit in The People's Republic of China. Turkey is also a significant source of supply to Marisa Christina. The Company's operations with respect to Marisa Christina products may be significantly affected by economic, political, governmental and labor conditions in The People's Republic of China until alternate sources of production can be found. Flapdoodles separately negotiates with suppliers for the purchase of required raw materials, in accordance with its specifications. The majority of its products are manufactured in the United States. Management of the Company believes raw materials to be readily available and can be provided from a number of alternative suppliers. SALES AND MARKETING Marisa Christina has a direct sales force of eight full-time salespersons located in the New York showroom who are compensated on a salaried basis. The direct sales force is responsible for Marisa Christina's large department store and specialty store chain accounts. Marisa Christina also utilizes independent sales representatives who market Marisa Christina products to independent specialty stores and boutiques and are compensated on a commission basis. In some cases, these representatives also market products of other non-competing apparel companies that have been approved by the Company. In addition, Marisa Christina has arrangements with independent distributors in Mexico and Canada that sell to various accounts outside the United States on a royalty basis and a licensing arrangement in Japan. 3 6 Flapdoodles maintains seven corporate sales offices and showrooms in the following markets: New York, Boston, Atlanta, Charlotte, Dallas, Los Angeles and Chicago. In addition to the nine salespeople who staff the showrooms, five account representatives located at its corporate headquarters in Newark, Delaware provide sales and customer service support. Sales to customers are accomplished at either showrooms, national or regional trade shows or market weeks. All sales persons are compensated on a salaried basis with additional bonus compensation based on performance. Flapdoodles also sells to accounts in Japan through an exclusive distributor. In order to promote its products, Flapdoodles uses national trade magazine advertising, in-store posters, gifts-with-purchases and marketing events such as "Flapdoodles Days" and fashion shows. Flapdoodles also operates thirteen outlet stores. TRADEMARKS The Company owns all rights, title and interest in the Marisa Christina and Flapdoodles trademarks. Marisa Christina's trademarks are registered in the U.S. Patent and Trademark Office and also in the following countries: Australia, Canada, Dominican Republic, Israel, Italy, Japan, Switzerland and Mexico. Flapdoodles' trademarks are registered in the U.S., Canada and Japan. The Company diligently and vigorously protects its original designs against infringement. 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, are shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume selling seasons, are 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 the other selling seasons. In 1999, net sales of the Company's products were $14.3 million in the first quarter, $10.7 million in the second quarter, $20.4 million in the third quarter and $17.1 million in the fourth quarter. Net sales in 1999 included sales of AVE, which was sold in September 1999, of $2.6 million in the first quarter, $2.3 million in the second quarter and $3.1 million in the third quarter. CUSTOMERS The Company's products are sold in approximately 4,700 individual stores by over 2,500 retailers. Approximately 37.4% of the Company's 1999 net sales consisted of sales to specialty stores and special store chains, including Talbots and Irresistibles and 47.1% consisted of sales to department stores, including Dillards, Federated Department Stores, Saks Incorporated, Proffitts and Neiman Marcus. The balance was sold internationally to catalog merchandisers and domestically through thirteen outlet store locations. In 1999, Sam's Club, Dillards and Saks Incorporated accounted for approximately 14.4%, 10.0%, and 6.2%, respectively, of the Company's net sales and were the only customers that accounted for more than 5% of the Company's net sales. 4 7 BACKLOG ORDERS At February 29, 2000, the Company had unfilled customer orders of approximately $17.7 million compared with $9.9 million at February 28, 1999, excluding AVE. Because the amount of backlog at a particular time is a function of a number of factors, including scheduling of independent contractors and the shipping of orders to the Company's customers, a comparison of backlog from period to period is not necessarily meaningful or indicative of actual sales. In addition, actual sales resulting from backlog may be reduced by trade discounts and allowances. The Company's experience has been that cancellations, rejections and returns of orders do not materially reduce the amount of sales realized from its backlog. COMPETITION The sectors of the apparel industry in which the Company competes are intensely competitive. The Company competes with numerous manufacturers, some of which are larger, more diversified and have greater financial and marketing resources than the Company. The Company competes on the basis of quality, design, price and customer service. Management believes that the Company's competitive advantages are its well-established brand names, reputation for customer service and ability to provide consumers with fresh and original designs. GOVERNMENT REGULATION The Company does not expect existing Federal, state and local regulations relating to the workplace and the discharge of materials into the environment to have a material effect on the Company's financial or operating results, and cannot predict the impact of any future changes in such regulations. EMPLOYEES As of December 31, 1999, the Company employed approximately 303 people, including 6 executives, 116 persons in sales, retail, marketing and advertising, 17 persons in design and merchandising, 36 persons in administration, 48 persons in quality control and finishing and 80 persons in production. The Company hires temporary workers during peak production and distribution periods. All other employees are nonunion and management believes its relations with all employees are good. 5 8 ITEM 2. PROPERTIES The Company's principal executive offices, and the offices of Marisa Christina, are located at 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601. Flapdoodles' principal executive offices are located at 725 Dawson Drive, Newark, Delaware 19713. As of December 31, 1999, the general location, use and approximate size of the Company's principal properties, all of which are leased, are set forth below:
Approximate Location Function Square Footage North Bergen, New Jersey Marisa Christina executive offices 8,000 New York, New York Marisa Christina showroom and design 16,000 offices Hong Kong Marisa Christina production and quality control offices 2,300 Newark, Delaware Flapdoodles corporate headquarters, distribution center and dyehouse 67,000 Newark, Delaware Flapdoodles cutting and storage 27,000
In addition, Flapdoodles leases seven showrooms of approximately 250 to 2,700 square feet each in the following locations: New York, New York; Los Angeles, California; Boston, Massachusetts; Dallas, Texas; Chicago, Illinois; Atlanta, Georgia; and Charlotte, North Carolina. At December 31, 1999, Flapdoodles operated thirteen outlet stores totaling approximately 24,000 square feet located in Woodbury, New York; Lancaster, Pennsylvania; Destin, Florida; Gilroy, California; Orlando, Florida; Dillon, Colorado; Clinton, Connecticut; Dawsonville, Georgia; Riverhead, New York; Wrentham, Massachusetts; Flemington, New Jersey; Camarillo, California and Potomac Mills, Virginia. Each store is approximately 2,000 square feet. Marisa Christina has outsourced their receiving, warehousing and shipping functions to a third party adjacent to its North Bergen facility. Under the outsourcing agreement the Company pays a fixed handling charge per unit with no minimum rent. Flapdoodles leases its corporate headquarters, distribution center and dyehouse located in Newark, Delaware, from Mr. Marc Ham and Ms. Carole Bieber, officers of the Company. The Company believes that the terms contained in the lease are at least as favorable as could be obtained in an arm's-length transaction from an independent third party. The Company believes that its existing facilities are well maintained, in good operating condition and that its existing facilities will be adequate for the foreseeable future. 6 9 ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999 covered by this report. EXECUTIVE OFFICERS OF REGISTRANT The following table sets forth the names of the principal executive officers of Marisa Christina, Incorporated, their positions with Marisa Christina, Incorporated, and their principal business experience for the last five years.
Name Age Position Michael H. Lerner 55 Chairman of the Board of Directors, Chief Executive Officer and President Marc Ham 37 President of Flapdoodles and Vice Chairman of the Board of Directors G. Michael Dees 46 President of Marisa Christina Apparel and Director Carole Bieber 45 Executive Vice-President and Design Director of Flapdoodles Christine M. Carlucci 42 Executive Vice-President of Administration and Operations, Secretary and Director S. E. Melvin Hecht 65 Vice Chairman of the Board of Directors, Chief Financial Officer and Treasurer
Michael H. Lerner joined Marisa Christina in August 1986, and has served as Chief Executive Officer, President and Chairman since that time. Prior to joining Marisa Christina, Mr. Lerner was President of TFM Industries, Inc. ("TFM"), a maker of moderate priced sportswear. He is also a director of Apparel Ventures, Inc. an affiliate of The Jordan Company as well as a director of Educational Housing Services, Inc. Marc Ham joined Marisa Christina as a Director in July 1993 and as Vice Chairman in 1997 in connection with the Flapdoodles acquisition and serves as President of Flapdoodles. Mr. Ham, together with Ms. Bieber, co-founded Flapdoodles in 1985 and has served as its president since that time. 7 10 G. Michael Dees joined Marisa Christina in September 1986 and has served as a Director of the Company and Executive Vice-President of Design and Merchandising of Marisa Christina since that time. In April 1999, he was named President of Marisa Christina Apparel. Prior to joining Marisa Christina, Mr. Dees was Divisional Merchandise Manager of ladies' sportswear for Belk Stores, Inc. Mr. Dees also serves as Vice-President for the Board of Directors for Miracle House, a New York nonprofit charity. Carole Bieber joined Marisa Christina in July 1993 in connection with the Flapdoodles Acquisition and serves as Executive Vice-President and Design Director of Flapdoodles. Ms. Bieber co-founded Flapdoodles in 1985 and has served as its Executive Vice-President and Design Director since that time. Christine M. Carlucci joined Marisa Christina in September 1986 and served as a Vice-President and Chief Financial Officer until December 1993, served as the Vice-President of Administration and Operations and has served as Executive Vice-President since April 1999 and is the Secretary and a Director of the Company. Prior to joining Marisa Christina, Ms. Carlucci was an associate of Mr. Lerner at TFM. S.E. Melvin Hecht, C.P.A., joined Marisa Christina in December 1993, and has served as Chief Financial Officer and Treasurer since that time. In April 1999, he was also named Vice Chairman of the Board of Directors. From 1978 until 1991, Mr. Hecht was a partner at Hertz, Herson & Company, certified public accountants and, since 1991, has served as a financial consultant to various companies. Prior to 1978, Mr. Hecht was an Executive Office partner at Touche Ross & Co., a predecessor company to Deloitte & Touche, LLP. 8 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded over-the-counter and is quoted on the Nasdaq National Market under the symbol ("MRSA"). The table below presents the high and low bid prices for the Common Stock for each quarter during the two years ended December 31, 1999. The quotations in the table represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1998 ------------------ HIGH LOW QUARTER - --------- -------- ------- First 6-3/8 4 Second 5 2-1/16 Third 3-1/2 11/16 Fourth 2-1/8 7/8
1999 ------------------ QUARTER HIGH LOW - --------- -------- ------- First 2 1-1/8 Second 1-7/8 1/2 Third 13/16 9/16 Fourth 2-5/16 1-7/16
The Company has not paid and does not anticipate paying any cash dividends on the Common Stock for the foreseeable future. From time to time, the Board of Directors intends to review the Company's dividend policy. Any payment of dividends will be at the direction of the Board of Directors and will be dependent on the earnings and financial requirements of the Company and other factors, including the restrictions imposed by the General Corporation Law of the State of Delaware and such other factors as the Board of Directors deems relevant. The number of shareholders of record of the Company's Common Stock as of March 24, 2000, was 63. The Company believes there are approximately 600 beneficial holders of the Company's Common Stock. On December 14, 1994, the Company announced an open market purchase program for its Common Stock. The Company has purchased 821,000 shares of Common Stock pursuant to this program. 9 12 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------ ------- ----------- --------- -------- Net sales (1) $86,763 $115,537 $ 91,400 $ 74,607 $ 62,508 Gross profit 34,694 39,952 20,164 19,230 15,788 Selling, general and administrative expenses 19,474 29,468 30,002 24,953 20,036 Restructuring charges -- -- 1,263 3,750 -- Asset impairment charge -- -- -- 16,525 -- Operating earnings (loss) 15,220 10,484 (11,101) (25,998) (4,248) Earnings (loss) before income tax expense (benefit) 16,634 11,920 (8,980) (24,535) (3,128) Income tax expense (benefit) 6,486 4,543 (2,988) (8,227) 5,151 Net earnings (loss) 10,148 7,377 (5,992) (16,308) (8,279) Comprehensive income (loss) 10,148 7,377 (6,067) (16,307) (8,279) Per share amounts: Basic earnings (loss) per share 1.20 0.87 (0.72) (2.03) (1.07) Diluted earnings (loss) per share 1.20 0.86 (0.72) (2.03) (1.07) Weighted average shares outstanding Basic 8,434 8,494 8,369 8,053 7,766 Diluted 8,461 8,552 8,369 8,053 7,766
DECEMBER 31, ------------------------------------------------------------- 1995 1996 1997 1998 1999 ------ ------- -------- --------- -------- Working capital $35,788 $17,626 $11,941 $ 8,912 $13,235 Total assets 54,009 66,200 65,197 44,429 30,532 Stockholders' equity 46,223 54,215 47,195 30,163 21,884
(1) Net sales for the years ended December 31, 1996, 1997, 1998 and 1999 include net sales of $39.2 million, $29.9 million, $19.7 million and $8.0 million, respectively, from the Company's Adrienne Vittadini Division, which the Company sold in September 1999. 10 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview In order to reverse the trend of declining sales and profits the Company has undertaken a number of initiatives over the past three years to reduce overhead, replace certain sales and marketing personnel and exit unprofitable product lines. Results for 1999, while still not profitable, were improved over those for 1997 and 1998, excluding the impact of restructuring and asset impairment charges in those years. In 1999 Marisa Christina Division (MC) showed improvements over 1998 in net sales and operating earnings while Flapdoodles was impacted by lower sales and customer demand. In September 1999, the Company completed the sale of substantially all of the assets, properties and rights of AVE to de V & P, Inc. for $10.4 million in cash and the assignment of certain liabilities of AVE. Cash proceeds of $9.0 million net of transaction and related costs were used by the Company to pay down borrowings under its bank credit facility. The Company recognized a pre-tax gain of approximately $646.0 thousand on the sale. AVE contributed approximately $2.2 million of the Company's $4.2 million operating loss in 1999. Management believes that the Company's prospects for profitability are better in 2000 due to the improving results of MC and the disposition of AVE. In addition, management is taking steps to improve margins and reduce operating costs at Flapdoodles in order to position this division to return to profitability. Failure to achieve profitability could negatively impact the recoverability or the carrying value of assets, including goodwill. The following table sets forth information with respect to the percentage relationship to net sales of certain items in the consolidated statements of operations of the Company for the years ended December 31, 1997, 1998 and 1999.
1997 1998 1999 Net sales 100.0 % 100.0 % 100.0 % ------- ------- ------- Gross profit 22.1 25.7 25.3 Selling, general and administrative expenses 32.8 33.4 32.1 Restructuring charges 1.4 5.0 -- Asset impairment charge -- 22.1 -- ------- ------- ------- Operating loss (12.1) (34.8) (6.8) Other income, net 2.8 2.9 2.0 Gain on the sale of AVE -- -- 1.0 Interest expense, net ( 0.5) ( 0.9) (1.2) Income tax expense (benefit) ( 3.2) (11.0) 8.2 ------- ------- ------- Net loss ( 6.6) % (21.8) % (13.2) % ======= ======= =======
11 14 YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998 Net sales. Net sales decreased 16.2%, from $74.6 million in 1998 to $62.5 million in 1999. Higher sales at MC were offset by declines in sales at Flapdoodles and AVE, prior to its disposition. Net sales of MC increased 35.7% from $25.4 million in 1998 to $34.5 million in 1999. Net sales of Flapdoodles declined 32.2% from $29.5 million in 1998 to $20.0 million in 1999. Net sales of AVE declined 59.2% from $19.7 million in 1998 to $8.0 million in 1999. Excluding net sales of AVE, net sales were virtually unchanged from 1998 to 1999. MC's sales improved due to new customers and increased distribution. The decline in sales at Flapdoodles was principally the result of lower sales to department stores as a result of management's decision to no longer sell to certain low margin accounts. Gross profit. Gross profit decreased 17.9%, from $19.2 million in 1998 to $15.8 million in 1999 primarily as a result of lower sales. As a percentage of net sales, gross profit decreased from 25.7% in 1998 to 25.3% in 1999. The decline in the gross profit percentage was attributable primarily to the impact that certain fixed costs, associated with design and production, had on lower sales volume. Gross profit of MC and Flapdoodle's for 1999 was $14.7 million in the aggregate or 26.9% of their combined net sales. Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 19.7%, from $25.0 million in 1998 to $20.0 million in 1999. As a percentage of net sales of the Company, SG&A expenses decreased from 33.4% in 1998 to 32.1% in 1999. The decrease in dollar amount is attributable to the disposition of AVE offset by higher variable expense at MC related to the higher sales volume. SG&A of MC was $7.8 million in 1998 and $8.6 million in 1999. SG&A of AVE was $9.1 million in 1998 and $3.3 million in 1999. SG&A of Flapdoodles was $8.1 million in 1998 and 1999. Restructuring and asset impairment charges. In 1998, the Company entered into an agreement (the "Termination Agreement") to terminate the employment contracts of Adrienne and Gianluigi Vittadini (the "Vittadinis"), the chairman and vice chairman, respectively, of AVE. As a result of the Termination Agreement and the operating results of AVE, the Company recognized a restructuring charge of approximately $3.8 million and an asset impairment charge with respect to goodwill of approximately $16.5 million in the consolidated statement of operations in 1998. Other income, net. Other income, net, which consists of royalty, licensing and copyright infringement income, decreased 42.8% from $2.1 million in 1998 to $1.2 million in 1999. The decrease is attributed to the decline in licensing income and the sale of AVE, which contributed $1.0 million of the licensing income in 1999. Licensing income is expected to decline significantly in future periods as the result of the sale of AVE. Gain on the sale of AVE. Gain on the sale of AVE represents the pretax gain recognized on the disposition of AVE described above. Interest expense, net. Interest expense, net increased 10.3% from $682.6 thousand in 1998 to $753.0 thousand in 1999, primarily as the result of higher average outstanding borrowings and higher interest rates being charged on the Company's bank line facility. 12 15 Income tax expense (benefit). In 1999 the Company had income tax expense of $5.2 million compared with income tax benefit of $8.2 million in 1998. In computing taxes for 1998 and 1999, management increased tax valuation allowances by $1.4 million and $6.1 million, respectively. The 1999 valuation allowance adjustment was recorded during the fourth quarter. At December 31, 1999, the Company has net deferred tax assets of $8.6 million before a valuation allowance of $6.1 million. The Company's deferred tax assets relate principally to net operating loss generated during the past three years by the Adrienne Vittadini division. In assessing the realizability of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible and net operating loss carryforwards are available for use. The Company has approximatey twenty years to realize the majority of its deferred tax assets. Net loss. Net loss decreased from $16.3 million in 1998 to $8.3 million in 1999 as a result of the aforementioned items. On a pro-forma basis, assuming the sale of AVE had occurred on January 1, 1999, the Company's net loss and loss per share in 1999 would have been $1.2 million and $0.16, respectively. YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997 Net sales. Net sales decreased 18.4%, from $91.4 million in 1997 to $74.6 million in 1998. The decrease is attributable to a decline in sales at all three of the Company's operating divisions. Net sales of the AVE division declined 34.1% from $29.9 million in 1997 to $19.7 million in 1998. Net sales of the MC division declined 12.3% from $28.9 million in 1997 to $25.4 million in 1998. Net sales of the Flapdoodles division declined 9.4% from $32.6 million in 1997 to $29.5 million in 1998. The sales declines were caused by the continuing change in the buying patterns of major department stores to favor a small number of suppliers with very large brand names as well as management's decision to reduce sales to discounters. Gross profit. Gross profit decreased 5.0%, from $20.2 million in 1997 to $19.2 million in 1998 primarily as a result of lower sales. As a percentage of net sales, gross profit increased from 22.1% in 1997 to 25.8% in 1998. The increase in the gross profit percentage was attributable primarily to significantly smaller inventory writedowns in 1998, as well as lower customer sales allowances. Selling, general and administrative expenses. SG&A decreased 16.8%, from $30.0 million in 1997 to $25.0 million in 1998. As a percentage of net sales of the Company, selling, general and administrative expenses increased from 32.8% in 1997 to 33.4% 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 control operating expenses as described above. Restructuring charges. Restructuring charges relate primarily to the termination of the Vittadinis described above. Asset impairment charge. Asset impairment charge in 1998 related to the writedown of goodwill associated with AVE described above. Other income, net. Other income, net consists of royalty, licensing and copyright infringement income. The amount has declined as a result of lower sales by AVE licensees. Interest expense, net. Interest expense, net increased 66.4% from $410.2 thousand in 1997 to $682.6 thousand in 1998, primarily as the result of higher average outstanding borrowings and higher interest rates being charged. Income tax benefit. Income tax benefit increased from $3.0 million in 1997 to $8.2 million in 1998 as the result of the loss incurred in 1998. The Company's effective income tax rates for 1997 and 1998 were 33.3% and 33.5%, respectively. In computing taxes for 1997 and 1998, management provided valuation allowances principally related to state net operating losses of MC and AVE. 13 16 Net loss. Net loss increased from $6.0 million in 1997 to net loss of $16.3 million in 1998 as a result of the aforementioned items. 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 selling 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 the other selling seasons. LIQUIDITY AND CAPITAL RESOURCES The Company has a $10.0 million line of credit facility with a bank, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the facility are secured by certain of the Company's assets and bear interest at the bank's prime rate plus 1.0%. The arrangement expires on June 30, 2000. As of December 31, 1999, $4.5 million of borrowings, bearing interest at 9.5% and $1.6 million of commercial letters of credit were outstanding under the credit facility. Available borrowings at December 31, 1999 were $3.9 million. The Company expects to have sufficient bank financing to meet its working capital needs throughout 2000. During 1999, the Company had capital expenditures of approximately $272.0 thousand, primarily to upgrade computer systems and furnish a new outlet store. Capital expenditures for 2000 are expected to be $350.0 thousand. These capital expenditures will be funded by internally generated funds and, if necessary, bank borrowings under the Company's line of credit facility. The Company believes that funds generated by operations, if any, and the expected renegotiated line of credit facility will provide financial resources sufficient to meet all of its working capital and letter of credit requirements for at least the next 12 months. CHANGES IN ACCOUNTING STANDARDS 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 during 2001, in accordance with the pronouncement, and currently does not believe the impact, if any, will be material on its consolidated financial statements. 14 17 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 the Company paying higher prices for its products. During the last three fiscal years, however, currency fluctuations have not had a significant 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. 15 18 ITEM 7A: 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 December 31, 1999, the Company's floating rate debt is based on prime rate. The fair market value of the Company's bank debt approximates its fair value. If the Company's interest rates changed by 100 basis points during the year ended December 31, 1999, interest expense would have changed by approximately $72.0 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 $140.0 thousand at December 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 that 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, maintaining sufficient working capital financing, 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. 16 19 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report 18 Consolidated Financial Statements: Consolidated Balance Sheets - December 31, 1998 and 1999 19 Consolidated Statements of Operations and Comprehensive Loss - Years ended December 31, 1997, 1998 and 1999 20 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1998 and 1999 21 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1998 and 1999 22 Notes to Consolidated Financial Statements 24
17 20 INDEPENDENT AUDITORS' REPORT The Board of Directors Marisa Christina, Incorporated: We have audited the accompanying consolidated financial statements of Marisa Christina, Incorporated and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedule listed under Item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marisa Christina, Incorporated and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP New York, New York February 29, 2000 18 21 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1999
1998 1999 ---------- ---------- Assets Current assets: Cash and cash equivalents $ 981,329 $ 346,006 Accounts receivable, less allowance for doubtful accounts of $379,581 in 1998 and $253,264 in 1999 8,694,364 8,624,566 Inventories 8,600,980 10,522,363 Income taxes recoverable 2,955,492 11,853 Prepaid expenses and other current assets 1,945,826 2,377,735 ---------- ---------- Total current assets 23,177,991 21,882,523 Property and equipment, net 2,726,150 2,018,232 Goodwill, less accumulated amortization of $4,707,325 in 1998 and $2,938,740 in 1999 13,177,435 6,275,331 Other assets 487,596 355,614 Deferred tax assets 4,859,392 -- ----------- ----------- Total assets $44,428,564 $30,531,700 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans payable to banks $9,850,000 $4,500,000 Accounts payable 3,204,799 3,075,394 Accrued expenses and other current liabilities 1,210,918 1,072,339 ---------- ---------- Total current liabilities 14,265,717 8,647,733 ---------- ---------- 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 85,868 85,868 Additional paid-in capital 31,653,186 31,653,186 Accumulated other comprehensive loss (57,000) (56,600) Retained earnings (deficit) 2,113,228 (6,166,052) Treasury stock, 821,000 common shares in 1998 and 1999, at cost (3,632,435) (3,632,435) ---------- ---------- Total stockholders' equity 30,162,847 21,883,967 Commitments (notes 8 and 10) ------------ ----------- Total liabilities and stockholders' equity $ 44,428,564 $30,531,700 ============ ===========
See accompanying notes to consolidated financial statements. 19 22 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Loss Years ended December 31, 1997, 1998 and 1999
1997 1998 1999 ------------ ----------- ------------ Net sales $ 91,400,058 $ 74,607,115 $ 62,507,833 Cost of good sold 71,235,897 55,377,000 46,719,629 ------------ ----------- ------------ Gross profit 20,164,161 19,230,115 15,788,204 Selling, general and administrative expenses 30,002,464 24,952,758 20,035,812 Restructuring charges 1,263,056 3,750,000 -- Asset impairment charge -- 16,525,306 -- ------------ ----------- ------------ Operating loss (11,101,359) (25,997,949) (4,247,608) Other income, net 2,532,033 2,145,481 1,226,739 Gain on the sale of the Adrienne -- -- 645,899 Vittadini Division Interest expense, net (410,226) (682,558) (752,938) ------------ ----------- ------------ Loss before income tax expense (benefit) (8,979,552) (24,535,026) (3,127,908) Income tax expense (benefit) (2,987,528) (8,226,807) 5,151,372 ------------ ----------- ------------ Net loss (5,992,024) (16,308,219) (8,279,280) Other comprehensive income (loss), net of tax -- foreign currency translation adjustment (74,536) 924 400 ------------ ----------- ------------- Comprehensive loss $(6,066,560) $(16,307,295) $(8,278,880) ============ =========== ============= Basic and diluted net loss per common share $ (.72) $ (2.03) $ (1.07) ============ =========== =============
See accompanying notes to consolidated financial statements. 20 23 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1997, 1998 and 1999
ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE COMMON STOCK PAID-IN INCOME SHARES AMOUNT CAPITAL (LOSS) --------- ------- ---------- ---------- Balance at December 31, 1996 8,586,769 $ 85,868 $ 31,653,186 $ 16,612 Net loss for the year ended December 31, 1997 -- -- -- -- Purchase of treasury stock, at cost -- -- -- -- Other comprehensive loss -- -- -- $ (74,536) --------- ------- ---------- ---------- Balance at December 31, 1997 8,586,769 85,868 31,653,186 (57,924) Net loss for the year ended December 31, 1998 -- -- -- -- Purchase of treasury stock, at cost -- -- -- -- Other comprehensive income -- -- -- 924 --------- ------- ---------- ---------- Balance at December 31, 1998 8,586,769 85,868 31,653,186 (57,000) Net loss for the year ended December 31, 1999 -- -- -- -- Other comprehensive income -- -- -- 400 --------- ------- ---------- ---------- Balance at December 31, 1999 8,586,769 $ 85,868 $ 31,653,186 $ (56,600) ========= ======= ========== ==========
RETAINED EARNINGS TREASURY (DEFICIT) STOCK TOTAL ----------- ---------- ----------- Balance at December 31, 1996 $ 24,413,471 $(1,954,350) $54,214,787 Net loss for the year ended December 31, 1997 (5,992,024) -- (5,992,024) Purchase of treasury stock, at cost -- (953,080) (953,080) Other comprehensive loss -- $ -- (74,536) ----------- ---------- ----------- Balance at December 31, 1997 18,421,447 (2,907,430) 47,195,147 Net loss for the year ended December 31, 1998 (16,308,219) -- (16,308,219) Purchase of treasury stock, at cost -- (725,005) (725,005) Other comprehensive income -- -- 924 ----------- ---------- ----------- Balance at December 31, 1998 2,113,228 (3,632,435) 30,162,847 Net loss for the year ended December 31, 1999 (8,279,280) -- (8,279,280) Other comprehensive income -- -- 400 ----------- ---------- ----------- Balance at December 31, 1999 $(6,166,052) $(3,632,435) $21,883,967 =========== ========== ===========
See accompanying notes to consolidated financial statements. 21 24 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999
1997 1998 1999 ---- ---- ---- Cash flows from operating activities: Net loss $(5,992,024) $ (16,308,219) $ (8,279,280) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,613,355 2,324,568 1,314,379 Gain on the sale of the Adrienne Vittadini division -- -- (645,899) Deferred income tax expense (benefit) (389,581) (5,128,763) 5,038,344 Restructuring charges -- 500,000 -- Asset impairment charge -- 16,525,306 -- Loss on property and equipment retirements -- -- 18,112 Bad debt expense 353,660 369,779 211,324 Changes in asset and liabilities, net of effects from the sale of the Adrienne Vittadini -- -- division: Accounts receivable 5,482,100 110,459 (2,749,898) Inventories (1,909,162) 3,405,305 (2,695,383) Income taxes recoverable (4,316,585) 698,441 2,943,639 Prepaid expenses and other current assets 162,301 1,417,508 (300,405) Other assets (23,889) 789,223 131,982 Accounts payable 1,939,795 (4,373,109) 1,480,234 Accrued expenses and other current liabilities 1,476,803 (2,547,461) 150,463 ----------- ------------ ------------- Net cash used in operating activities (603,227) (2,216,963) (3,382,388) ----------- ------------ ------------- Cash flows from investing activities: Acquisitions of property and equipment (1,295,833) (433,856) (276,419) Proceeds from the sale of the Adrienne Vittadini division -- -- 8,373,484 Other (184,801) -- -- ----------- ------------ ------------- Net cash provided by (used in) investing activities $(1,480,634) $ (433,856) $ 8,097,065 ----------- ------------ -------------
(Continued) 22 25 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999
1997 1998 1999 ----------- -------------- ------------- Cash flows from financing activities: Borrowings (repayments) under bank credit facilities, net $ 3,000,000 $ 3,350,000 $ (5,350,000) Acquisition of treasury stock (953,080) (725,005) -- ----------- -------------- ------------- Net cash provided by (used in) financing activities 2,046,920 2,624,995 (5,350,000) ----------- -------------- ------------- Net decrease in cash and cash equivalents (36,941) (25,824) (635,323) Cash and cash equivalents at beginning of year 1,044,094 1,007,153 981,329 ----------- --------------- -------------- Cash and cash equivalents at end of year $ 1,007,153 $ 981,329 $ 346,006 =========== ============== ============= Cash paid during the year for: Income taxes $ 1,718,638 $ 64,384 $ 61,778 =========== ============== ============= Interest $ 451,650 $ 688,994 $ 765,790 =========== ============== =============
See accompanying notes to consolidated financial statements. 23 26 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1998 and 1999 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Marisa Christina, Incorporated (the Company) designs, manufactures, sources and markets a broad line of high quality "better" clothing for women under the Marisa Christina(TM) label and for children under the Flapdoodles(TM) label. The Company incurred net losses of $2.1 million, $16.3 million and $6.0 million in 1999, 1998 and 1997, respectively. During 1999, the Company disposed of the Adrienne Vittadini division. Management believes that this disposition, together with other initiatives undertaken, will return the Company to profitable operations in 2000. Failure to achieve profitability could negatively impact the recoverability of the carrying value of assets, including goodwill and deferred taxes. (b) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, each of which is wholly owned. Significant intercompany accounts and transactions are eliminated in consolidation. (c) CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (d) REVENUE AND RECEIVABLES Revenue is recognized when title transfers, which is generally when product is shipped to the customer. Allowances are provided for estimated uncollectible receivables and sales returns, based on historical experience and review of specific accounts. (e) INVENTORIES Inventories are stated at the lower of cost, by the first-in, first-out method, or market. (f) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line and accelerated methods at rates based upon the estimated useful lives of the respective assets (which range from five years to seven years) or, where applicable, the term of the lease, if shorter. Additions to property and equipment, as well as major renewals and betterments, are capitalized. The costs of maintenance, repairs, minor renewals and betterments are charged to operations as incurred. When properties are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is recorded in operations. 24 27 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (g) GOODWILL Goodwill is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. When circumstances warrant, the Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired entities. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (h) LONG-LIVED ASSETS The recoverability of long-lived assets, other than goodwill, is assessed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by determining the amount by which the carrying value of the assets exceeds the fair value of the assets. (i) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (j) ADVERTISING The Company expenses advertising as incurred. Advertising expense for 1997, 1998 and 1999 was $2.8 million, $1.1 million and $400.0 thousand, respectively. (k) NET LOSS PER COMMON SHARE Basic and diluted net loss per common share is based on the weighted average number of common shares outstanding, which were 8,368,621, 8,053,120 and 7,765,769 for the years ended December 31, 1997, 1998 and 1999, respectively. The effect of stock options outstanding during 1997, 1998 and 1999 were not included in the computation of diluted earnings per share because the effect would have been antidilutive. 25 28 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (l) FOREIGN CURRENCY TRANSLATION The functional currency for certain of the Company's foreign operations is the local currency. The translation of the foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average rates of exchange prevailing during the year. Adjustments resulting from such translation are included as a separate component of accumulated other comprehensive loss. (m) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies the intrinsic value-based method of accounting for stock-based compensation to employees and directors. (n) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable and loans payable to banks, approximate their carrying values due to the short-term maturities of such instruments. (o) USES OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (p) RECLASSIFICATIONS Certain amounts in 1997 and 1998 have been reclassified to conform to the presentation in 1999. 26 29 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (2) DISPOSITION OF THE ADRIENNE VITTADINI DIVISION On September 2, 1999, the Company completed the sale of substantially all the assets, properties and rights of its Adrienne Vittadini Division ("AVE") to de V & P, Inc. for $9.77 million in cash and the assumption of certain liabilities of AVE. Cash proceeds received at closing of $8.1 million, net of transaction and related costs, were used by the Company to pay down borrowings under its bank credit facility. A post-closing adjustment of approximately $920.0 thousand was also included in the sale price, for which approximately $650.0 thousand was reflected in prepaids and other current assets at December 31, 1999 and subsequently collected in 2000. The Company recognized a pre-tax gain of approximately $646.0 thousand on the sale. The aggregate sale price for the AVE assets sold is as follows:
Cash received $ 9,500,000 Amount due from the buyer 919,534 Liabilities assumed by the buyer 1,898,281 Transaction and related costs (1,400,151) ---------- Net purchase price $ 10,917,664 ==========
The pre-tax gain recognized by the Company based on asset values at September 1, 1999 is as follows:
Net purchase price $ 10,917,664 Less: Accounts receivable (2,608,372) Inventories (774,000) Prepaid expenses and other current assets (335,443) Equipment and leasehold improvements (399,361) Goodwill (6,154,589) ---------- Pre-tax gain $ 645,899 ============
27 30 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 Pro forma consolidated net sales, net loss and diluted loss per common share for the years ended December 31, 1998 and 1999, assuming the disposition had occurred on January 1, 1998, are as follows in thousands:
1998 1999 --------- --------- Net sales $54,917 $ 54,469 Net loss (552) (1,237) Diluted loss per common share (0.07) (0.16) ========= =========
(3) INVENTORIES Inventories at December 31, 1998 and 1999 consist of the following:
1998 1999 ---- ---- Piece goods $ 2,378,619 $ 2,268,287 Work-in-process 1,001,196 1,353,743 Finished goods 5,221,165 6,900,333 --------- --------- $ 8,600,980 $ 10,522,363 ============ ============
Based on management's assumptions and estimates relating to future operations, the Company has provided for slow moving inventory at December 31, 1998 and 1999. Actual results could differ from those estimates. (4) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 1998 and 1999 consist of the following:
1998 1999 ---------- ---------- Prepaid expenses $ 679,837 $383,005 Amount due from the sale of AVE -- 651,569 Other receivables 687,037 943,161 Deferred tax assets 578,952 400,000 ---------- --------- $1,945,826 $2,377,735 ========== ==========
28 31 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (5) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998 and 1999 consist of the following:
1998 1999 --------- ---------- Machinery and equipment $ 2,190,556 $1,985,220 Furniture and fixtures 1,353,217 720,573 Leasehold improvements 1,290,481 1,073,486 Transportation equipment 82,307 82,307 --------- ---------- Total 4,916,561 3,861,586 Less accumulated depreciation and amortization 2,190,411 1,843,354 --------- ---------- $ 2,726,150 $2,018,232 ========= ==========
(6) LOANS PAYABLE TO BANKS The Company has a $10.0 million line of credit facility with a bank, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the facility are secured by certain of the Company's assets, primarily inventory and accounts receivable, and bear interest at the bank's prime rate plus 1.0%. The arrangement expires on June 30, 2000. As of December 31, 1999, $4.5 million of borrowings, bearing interest at 9.5% and $1.6 million of commercial letters of credit were outstanding under the credit facility. Available borrowings at December 31, 1999 were $3.9 million. The Company expects to have sufficient bank financing to meet its working capital needs throughout 2000. (7) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at December 31, 1998 and 1999 consist of the following:
1998 1999 ---------- ---------- Accrued compensation $ 291,122 465,576 Restructuring costs 62,827 -- Other accrued expenses 856,969 606,763 ---------- ---------- $ 1,210,918 $1,072,339 ============ ==========
29 32 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (8) RETIREMENT PLAN The Company sponsors a 401(k) profit sharing plan for the benefit of all eligible employees. Profit sharing expense charged to operations for the years ended December 31, 1997, 1998 and 1999 was $284.0 thousand, $184.0 thousand and $156.0 thousand, respectively. (9) LEASES The Company is committed under various noncancellable operating leases for office, showroom, design, warehouse and retail store space. The Company also leases an office, distribution center and dyehouse in Newark, Delaware from two officers of the Company. The leases expire on various dates through 2006. Future minimum lease payments under noncancellable operating leases as of December 31, 1999 are as follows:
OPERATING LEASES ------------------- RELATED PARTY OTHER -------- --------- 2000 $ 355,000 1,463,355 2001 -- 979,913 2002 -- 754,377 2003 -- 453,717 2004 -- 254,677 Thereafter -- 98,775 ======== ========== $ 355,000 4,004,814 ========== ==========
Total rent expense charged to operations was $3.0 million, $2.8 million and $2.9 million for the years ended December 31, 1997, 1998 and 1999, respectively. (10) OTHER INCOME, NET Other income, net for the years ended December 31, 1997, 1998 and 1999 includes primarily royalty, commission and licensing income of $2.6 million, $2.1 million and $1.2 million, respectively. 30 33 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 (11) INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999 ---------- ---------- ----------- Current: Federal $(2,804,577 $(3,153,436 $ -- State and local 206,630 55,392 113,028 ---------- ---------- ----------- (2,597,947) (3,098,044) 113,028 ---------- ---------- ----------- Deferred: Federal (321,450) (5,131,818) 2,888,857 State and local (68,131) 3,055 2,149,487 ---------- ---------- ------------ (389,581) (5,128,763) 5,038,344 ---------- ---------- ------------ $ (2,987,528) $(8,226,807) $ 5,151,372 ============ =========== ===========
The tax effects of temporary differences between the financial reporting and income tax bases of assets and liabilities that are included in the net deferred tax assets at December 31, 1998 and 1999 are as follows:
1998 1999 ---------- ---------- Deferred tax assets: Amortization of goodwill $ 4,889,273 -- Uniform inventory capitalization 133,367 96,601 Accrued expenses and other assets and liabilities 1,278,985 434,001 Federal and state net operating losses 1,334,211 8,651,989 ---------- ---------- 7,635,836 9,182,591 Valuation allowance (2,088,374) (8,188,664) ------------ ---------- 5,547,462 993,927 Deferred tax liabilities: Amortization of goodwill -- (344,457) Depreciation on property and equipment (109,118) (249,470) ---------- ---------- (109,118) (593,927) Net deferred tax assets $ 5,438,344 $ 400,000 ========== ==========
At December 31, 1999, the Company had net operating loss carryforwards of approximately $19.0 million which expire in various amounts during 2017, 2018 and 2019. 31 34 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 The Company's deferred tax assets relate principally to net operating losses generated during the past three years by the Adrienne Vittadini division. In assessing the realizability of deferred tax assets, management considered whether it was more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible. The Company has approximately twenty years to realize the majority of its deferred tax assets. Management believes that future taxable income of the Company will more likely than not be sufficient to realize the net deferred tax assets. A reconciliation of the provision for income taxes and the amounts computed by applying the Federal income tax rate of 34% to loss before income tax expense (benefit) is as follows for the years ended December 31, 1997, 1998 and 1999:
1997 1998 1999 ------------ ------------ ------------ Income tax on loss before income tax benefit computed at statutory rate $ (3,053,048) $(8,341,909) $(1,063,489) State and local income tax, net of Federal income tax benefit (635,705) (1,322,685) (44,025) Valuation allowance 727,114 1,361,260 6,100,290 Other (25,889) 76,527 158,596 ------------ ------------- ------------ $(2,987,528) $ (8,226,807) $ 5,151,372 ============ ============= ============
(12) STOCK OPTION PLAN The Company sponsors an incentive stock ownership plan ("Plan") that provides for the grant of up to 650 thousand options to purchase shares of the Company's common stock at fair market value on the dates of grant. Options generally vest over a five-year period and are exercisable over a ten-year period from the dates of grant. In addition, in connection with the acquisition of Flapdoodles in 1994 the Company granted the former minority shareholders of Flapdoodles an evergreen option to purchase 250 thousand shares of common stock at $5.00 per share. At December 31, 1999, there were 95,610 additional shares available for grant under the Plan. The per share weighted-average fair values of stock options granted during 1997, 1998 and 1999 were $3.42, $3.17 and $1.27, respectively, on the dates of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 7.0% (6.6% in 1997 and 1998), expected volatility of 60% (64% in 1997 and 1998) and an expected life of 7 years. 32 35 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 The Company applies APB No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in these financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's 1997 and 1999 net losses would have been increased and the 1998 net loss would have been reduced to the pro forma amounts indicated below:
1997 1998 1999 ---------- ----------- ----------- Net loss - as reported $ (5,992,024) $(16,308,219) $(8,279,280) - pro forma (6,378,000) $(16,081,000) $(8,375,431) Basic and diluted net loss per common share - as reported $ (.72) $ (2.03) $ (1.07) - pro forma $ (.76) $ (2.00) $ (1.08)
Pro forma net earnings reflects only options granted after 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. Changes in options outstanding, options exercisable and shares reserved for issuance pursuant to stock options are as follows:
WEIGHTED AVERAGE PER SHARE NUMBER OF PRICE SHARES ------- ---------- December 31, 1996 $ 14.12 699,650 Granted 5.00 66,350 Forfeited 13.07 (63,870) ---------- December 31, 1997 13.35 702,130 Granted 5.00 100,000 Forfeited 14.36 (259,580) ---------- December 31, 1998 5.00 542,550 Granted 1.90 405,000 Forfeited 4.70 (148,250) ---------- December 31, 1999 $ 2.86 799,300 ========== Options exercisable: December 31, 1997 $ 13.83 412,638 December 31, 1998 5.00 350,912 December 31, 1999 3.97 372,920
33 36 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 At December 31, 1999, the number of outstanding options, having an exercise price of $1.88, and the weighted-average remaining contractual life of such outstanding options were 159,300 options and 6.5 years; 70,000 options and 7.5 years and 320,000 options and 9.5 years. Options to purchase 250,000 shares at $5.00 per share have no expiration date. In May 1998, the Company repriced 408,500 options at $5.00 and in October 1999 repriced 229,300 options at $1.88. (13) RESTRUCTURING CHARGES In 1998, the Company entered into an agreement (the Termination Agreement) to terminate the employment contracts of Adrienne and Gianluigi Vittadini (the Vittadinis), the chairman and vice chairman, respectively, of AVE. As a result of the Termination Agreement, the Company recognized a restructuring charge of $3.75 million in 1998. In 1997, the Company implemented restructuring initiatives that included: the consolidation of warehouse and administrative functions of the AVE and MC divisions, the restructuring of the Company's management and sales functions and the integration of information systems and operations. These initiatives, which resulted in a non-recurring restructuring charge of approximately $1.3 million in 1997. (14) ASSET IMPAIRMENT CHARGE In 1998, as a result of the termination of the Vittadinis and operating losses of AVE during 1997 and 1998, management of the Company assessed the recoverability of AVE's long-lived assets including goodwill. Based on management's best estimate at that time, management concluded that it was not likely the Company could recover all of AVE's long-lived assets on an undiscounted cash flow basis. Accordingly, the Company recognized an asset impairment charge of approximately $16.5 million with respect to goodwill in 1998. (15) BUSINESS RISKS AND CREDIT CONCENTRATIONS A significant amount of the MC's product lines are produced in The People's Republic of China. The Company's operations with respect to these product lines may be significantly affected by economic, political, governmental and labor conditions in The People's Republic of China until alternative sources of production could be found. 34 37 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 The Company's products are sold principally in the United States to apparel retailers operating in the department and specialty store segments. One customer accounted for 14.4% of the Company's sales in 1999, one customer accounted for 11% of the Company's sales in 1998, but no single customer accounted for more than 10% in 1997. MC had two customers in 1999 and two customers in 1998 that represented over 10% of its sales for those years. Sales to the respective customers represented 38.0% and 24% of MC's sales in 1999 and 1998, respectively. Receivables from three customers represented approximately 42.8% of accounts receivable at December 31, 1999. However, no customer balance exceeded $2.9 million. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimates of its bad debts. (16) SEGMENT REPORTING The operating divisions of the Company include: MC, Flapdoodles and AVE, prior to its disposition in September 1999, for which a summary of each follows: - - MC designs, manufactures and distributes "better" women's knitwear. - - Flapdoodles designs, manufactures and distributes comfortable, high-quality, functional children's clothing. Flapdoodles also maintains licensees for footwear and sleepwear. - - AVE designed and distributed relaxed and stylish sportswear for women. AVE also maintained licensees ranging from scarves, swimwear, eyewear and shoes to cosmetics, travel bags and luggage. 35 38 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999 The accounting policies of the operating divisions are the same as those described in the summary of accounting policies (see note 1). The Company evaluates performance based on stand-alone division earnings (loss) before income taxes. The following information is provided in 000's:
MC FLAPDOODLES AVE ELIMINATION CONSOLIDATED -------- ------------ --------- ---------- ------------ 1999 Net sales $34,460 $ 20,009 $8,039 -- $62,508 Depreciation and amortization 67 868 379 -- 1,314 Operating earnings (loss) 321 (2,340) (2,229) -- (4,248) Interest income (expense), net (396) (1,207) (2,789) 3,639 (753) Earnings (loss) before taxes 134 (3,534) (3,367) 3,639 (3,128) Total assets 12,752 17,712 662 (594) 30,532 Long-lived assets 122 8,172 -- -- 8,294 Capital expenditures 49 221 2 -- 272 1998 Net sales $25,393 29,524 $19,690 -- 74,607 Depreciation and amortization 106 874 1,345 -- 2,325 Restructuring and asset impairment charges -- -- 20,275 -- 20,275 Operating earnings (loss) (2,237) 1,315 (25,076) -- (25,998) Interest income (expense), net 212 (1,018) (3,538) 3,661 (683) Earnings (loss) before taxes (1,810) 304 (26,690) 3,661 (24,535) Total assets 16,649 18,733 10,099 (1,052) 44,429 Long-lived assets 134 8,839 6,931 -- 15,904 Capital expenditures 37 323 74 -- 434 1997 Net sales $28,944 $ 32,572 $29,884 -- $ 91,400 Depreciation and amortization 183 780 1,650 -- 2,613 Restructuring charges 845 -- 418 -- 1,263 Operating earnings (loss) (6,261) 3,847 (8,687) -- (11,101) Interest income (expense), net 267 (997) (3,114) 3,434 (410) Earnings (loss) before taxes (5,736) 2,850 (9,528) 3,434 (8,980) Total assets 17,501 22,074 31,673 (6,051) 65,197 Long-lived assets 284 9,414 24,783 -- 34,481 Capital expenditures 50 788 458 -- 1,296
Eliminations consist of intercompany interest charges and intercompany accounts. (17) LEGAL PROCEEDINGS The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. There are no pending material legal proceedings or environmental investigations to which the Company is a party or to which the property of the Company is subject. 36 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in accountants and or disagreements on any matter of accounting principle or financial statement disclosure. PART III ITEMS 10, 11, 12 AND 13. The information required by these Items, other than the information set forth in Part I under the Section entitled "Executive Officers of the Registrant," is hereby incorporated by reference from the Company's definitive proxy statement for the Company's Annual Meeting of Stockholders to be held on May 19, 2000, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. 37 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following are included in Item 8 of Part II:
PAGE Independent Auditors' Report............................................. 18 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 1998 and 1999............. 19 Consolidated Statements of Operations and Comprehensive Loss -- Years ended December 31, 1997, 1998 and 1999....................... 20 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1997, 1998 and 1999....................... 21 Consolidated Statements of Cash Flows -- Years ended December 31, 1997, 1998 and 1999....................... 22 Notes to Consolidated Financial Statements............................ 24 (a) (2)The following is a list of all financial statement schedules for the years ended December 31, 1997, 1998 and 1999 filed as part of this Report: Schedule II -- Valuation and Qualifying Accounts...................... 40 Schedules other than those listed above have been omitted because they are not required or are not applicable, or the required information has been included in the Consolidated Financial Statements or the Notes thereto. (a) (3)See accompanying Index to Exhibits............................. 41 (b) No reports on Form 8-K were filed during the fourth quarter of 1999 (c) See accompanying Index to Exhibits................................ 44 (d) None
38 41 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND DEDUCTIONS END OF PERIOD EXPENSES (A) PERIOD DESCRIPTION Allowance for doubtful accounts: TRADE Year ended December 31, 1997 $ 73,344 353,660 226,900 200,104 Year ended December 31, 1998 $ 200,104 369,779 190,302 379,581 Year ended December 31, 1999 $ 379,581 211,324 337,641 (b) 253,264
(a) Deductions represent write-offs of specifically identified accounts. (b) Includes $15,216 related to the disposition of the Adrienne Vittadini Division. 39 42 INDEX TO EXHIBITS The following is a list of all exhibits filed as part of this report.
Sequentially Numbered Exhibit No. Document Page - ----------- -------- ---- 2.1++ Asset Purchase Agreement dated June 30, 1993, between MCFD Acquisition L.L.C. and Flapdoodles, Inc................................................................. * 2.2++ Agreement and Plan of Reorganization, dated June 22, 1994, among Marisa Christina, Incorporated (the "Company"), Marisa Christina Holding, Inc., Marisa Christina Outlet Holdings, Inc., C.M. Marisa Christina (H.K.) Limited, MF Showroom Holdings, Inc., Flapdoodles, L.L.C. and the Investors in such companies named on the signature pages thereto....................................................... *** 2.3++ Asset Purchase Agreement, dated as of September 2, 1999 by and among Adrienne Vittadini, Inc. ("AVE"), Marisa Christina Incorporated ("Marisa Christina") and de V & P, Inc. ("Purchaser")................................ ***** 3.1 Amended and Restated Certificate of Incorporation of the Company....................... *** 3.2 By-Laws of the Company................................................................. *** 4.1 Option Agreement between the Company and Marc Ham, dated June 30, 1994................. *** 4.2 Option Agreement between the Company and Carole Bieber, dated June 30, 1994............ *** 4.3 1994 Stock Option Plan................................................................. *** 10.1+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Michael H. Lerner.................................................... *** 10.2+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Marc Ham............................................................. *** 10.3+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and G. Michael Dees...................................................... *** 10.4+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Carole Bieber........................................................ *** 10.5+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Christine M. Carlucci................................................ *** 10.6+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and S.E. Melvin Hecht.................................................... *** 10.8+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Robert Davidoff...................................................... ***
40 43
Sequentially Numbered Exhibit No. Document Page - ----------- -------- ---- 10.9+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Lawrence D. Glaubinger................................................ *** 10.10+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and David W. Zalaznick.................................................... *** 10.11+ Employment Agreement between the Company and Michael H. Lerner, dated January 1, 1998... + 10.12+ Amended and Restated Employment Agreement between the Company and Marc Ham, dated January 1, 1998................................................................. + 10.13+ Amended and Restated Employment Agreement between the Company and Carole Bieber, dated January 1, 1998................................................................. + 10.14+ Employment Agreement between the Company and G. Michael Dees, dated January 1, 1998..... + 10.16+ Amended and Restated Employment Agreement, dated June 30, 1993, between the Company and TJC Management Corporation............................................ * 10.17 Lease Agreement, dated July 1, 1993, by and among Marc Ham and Carole Bieber, as trustees, and MCFD Acquisitions L.L.C. together with Subordination, Non-Disturbance and Attornment Agreement dated July 1, 1993 between MCFD Acquisitions L.L.C. and Wilmington Trust Company................................. * 10.20 Credit agreement dated August 21, 1996 by and among the Company, Marisa Christina Apparel, Inc., Flapdoodles, Inc., Adrienne Vittadini Enterprises, Inc. and the Chase Manhattan Bank, N.A. ................................................................... **** 10.21 Credit agreement dated August 29, 1996 by and among the Company, Marisa Christina Apparel, Inc., Flapdoodles, Inc., Adrienne Vittadini Enterprises, Inc. and The Bank of New York ............................................................................... **** 21 Subsidiaries of the Registrant.......................................................... *** 23 Consent of Independent Auditors......................................................... (1) 27 Financial Data Schedule................................................................. N/A
* Incorporated by reference to the exhibits filed with the Company's Form S-1 Registration Statement (File No. 33-78958). ** Incorporated by reference to the exhibits filed with the Company's Report on Form 8-K, filed on February 1, 1996. 41 44 *** Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K, filed on March 22, 1996. **** Incorporated by reference to the Exhibits filed with the Company's Report on Form 10-Q, filed on November 12, 1996. ***** Incorporated by reference to the Exhibits filed with the Company's Report on Form 8-K, filed on September 13, 1999. + This exhibit is a management contract or compensatory plan or arrangement required to be identified in this Form 10-K pursuant to Item 14(a)3 of this report. ++ The schedules (or similar attachments) to these agreements have not been filed pursuant to Item 601(b)(2) of Regulation S-K. Such schedules or attachments will be filed supplementally upon the request of the Securities and Exchange Commission. (1) Filed herewith 42 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. MARISA CHRISTINA, INCORPORATED BY: /s/ Michael H. Lerner ----------------------------------------------- Michael H. Lerner Chairman, Chief Executive Officer and President Dated: March 28, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Michael H. Lerner Chairman, Chief Executive March 28, 2000 - ---------------------------------------- Michael H. Lerner Officer and President /s/ S. E. Melvin Hecht Vice Chairman, Chief Financial March 28, 2000 - ---------------------------------------- S. E. Melvin Hecht Officer and Treasurer /s/ Marc Ham Vice Chairman March 28, 2000 - ---------------------------------------- Marc Ham /s/ G. Michael Dees Director March 28, 2000 - ---------------------------------------- G. Michael Dees /s/ Christine M. Carlucci Director March 28, 2000 - ---------------------------------------- Christine M. Carlucci /s/ Robert Davidoff Director March 28, 2000 - ---------------------------------------- Robert Davidoff /s/ Brett J. Meyer Director March 28, 2000 - ---------------------------------------- Brett J. Meyer /s/ Barry S. Rosenstein Director March 28, 2000 - ---------------------------------------- Barry S. Rosenstein /s/ David W. Zalaznick Director March 28, 2000 - ---------------------------------------- David W. Zalaznick
Dated: March 28, 2000 EX-23 2 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Marisa Christina Incorporated: We consent to the incorporation by reference in the Registration Statements (No. 33-91708 and 33-91080) on Form S-8 of Marisa Christina, Incorporated of our report dated February 29, 2000, relating to the consolidated balance sheets of Marisa Christina, Incorporated and subsidiaries as of December 31, 1998 and 1999 and the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Marisa Christina, Incorporated. /s/ KPMG LLP New York, New York March 29, 2000 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information financial information for Marisa Christina, Incorporated's Consolidated Balance Sheet as of December 31, 1999 and the Consolidated Statement of Operations for the year then ended and is qualified in its entirety by reference to the Company's Form 10-K for the year ended December 31, 1999. 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 346,006 0 8,877,830 253,264 10,522,363 21,882,523 3,861,586 1,843,354 30,531,700 8,647,733 0 0 0 85,868 21,798,099 30,531,700 62,507,833 62,507,833 46,719,629 46,719,629 20,035,812 211,324 752,938 (3,127,908) (5,151,372) (8,279,280) 0 0 0 (8,279,280) (1.07) (1.07)
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