10-K 1 y95382e10vk.txt MARISA CHRISTINA, INCORPORATED 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, 2003 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] The aggregate market value of the registrant's common stock as of June 30, 2003, the last business day of the registrant's most recently completed second fiscal quarter (based upon the closing sale price of Marisa Christina's common stock as reported by NASDAQ National Market on that date), excluding outstanding shares beneficially owned by executive officers and directors of Marisa Christina, was approximately $5.8 million. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] 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 15, 2003 --------------------------------------- ----------------------------- Common stock, par value $0.01 per share 7,295,065 shares
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. PART I ITEM 1. BUSINESS GENERAL DEVELOPMENT OF BUSINESS Marisa Christina, Incorporated (the "Company" or "Marisa") designs, manufactures, sources, and markets a broad line of high quality clothing for women primarily under the Marisa Christina(((TM))) label. The Company operates in one business segment. 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 and December 2000, the Company disposed of substantially all the assets, property and rights of Adrienne Vittadini Enterprises, Inc. and Flapdoodles, Inc., respectively. 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 and (v) emphasize customer service. Principal Product Lines The Company is best known for its high quality sweaters characterized by modern styling, unique details, exciting yarns and textures, and special occasion designs. Marisa Christina's product line has evolved into a true sportswear offerings that also includes a selection of other styles encompassing knitted and casual garments and complementary pieces such as skirts, slacks and jackets, which are also produced in petite and large sizes. Suggested retail prices for Marisa Christina products generally 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 offers four "lines" per year. These are marketed under three primary labels: Marisa Christina, Christina Rotelli and Claire Murray. Each of the three offerings cover 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 season consists of approximately 160 styles organized into approximately fifteen to eighteen groupings. In addition, the Company offers private label and exclusive merchandise under various labels. Exclusive and private label merchandise is an important factor in Marisa Christina's overall offerings. In each selling season, the Company 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 brand identity and signature looks. Design, Production, and Raw Materials The Company has a staff of five 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 and freelancers with expertise in the new product area. Designers are selected based upon their experience, their ability to create interesting and original designs, and their expertise in knitting techniques and technology. The Company believes that its ability to create fresh and original designs while maintaining the "look" of each of its labels is critical for success. 1 The design staff constantly monitors emerging trends in fashions and popular culture and may travel 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 the Company'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. The Company's merchandisers in Hong Kong, as well as agents throughout Europe and Asia, work 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. To minimize inventory risk, the Company normally places orders for the production of the large majority of its merchandise only upon receipt of customer orders. The Company 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 the Company's foreign-based contractors are procured by the contractors in accordance with the Company's specifications. Approximately sixty percent of the garments in the Marisa Christina product line consist of sweaters that have been knit or cut and sewn in The People's Republic of China and Hong Kong. Turkey, Greece and Korea are also significant sources of supply to the Company. The Company's 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. 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 seven full-time salespersons located in its 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 many 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 Canada that sell to various accounts outside the United States on a royalty basis and a licensing arrangement in Japan. Distribution The Company uses a centralized distribution system, under which all merchandise is received, processed, and distributed through the Company's distribution facility located in North Bergen, New Jersey. Merchandise received at the distribution center is promptly inspected to insure expected quality in workmanship and conformity to Company sizing specifications. The merchandise is then packed for delivery and shipped to its customers, principally by common carrier. Trademarks The Company owns all rights, title, and interest in Marisa Christina and its other trademarks. Marisa Christina's trademarks are registered in the U.S. Patent and Trademark Office and also in many foreign countries. The Company diligently and vigorously protects its original designs against infringement. 2 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 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 Fall collection, the Company's largest selling season 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 2003, net sales of the Company's products were $5.3 million in the first quarter, $2.8 million in the second quarter, $10.3 million in the third quarter and $5.0 million in the fourth quarter. Customers The Company's products are currently sold in approximately 3,000 individual stores by over 1,450 retailers. Approximately 54% of the Company's 2003 net sales consisted of sales to specialty stores and specialty store chains, including Talbots and Coldwater Creek, and 37% consisted of sales to department stores, including Saks Incorporated, Dillards and Nordstrom. The balance was sold to catalog merchandisers, off-price retailers and others. In 2003, Talbots, Dillards, Saks Incorporated and Coldwater Creek accounted for approximately 13%, 11%, 10% and 7%, respectively, of the Company's net sales and were the only customers that individually accounted for more than 5% of the Company's net sales. Backlog Orders At January 31, 2004, the Company had unfilled customer orders of approximately $10.2 million compared with $9.8 million at January 31, 2003. 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, 2003, the Company employed approximately 61 people, including three executives, nine persons in sales, retail, marketing, and advertising, 12 persons in design and merchandising, 20 persons in administration, nine persons in quality control and finishing and eight persons in production. All employees are nonunion and management believes its relations with all employees are good. 3 AVAILABLE INFORMATION The Company is currently redesigning its website but, interested persons may obtain copies of filings the Company has made with the Securities and Exchange Commission (SEC) through the SEC website www.sec.gov. Investors and other parties with questions, including requests for the Company's filings with the SEC (available without charge) should direct requests in writing to S.E. Melvin Hecht, Chief Financial Officer, Marisa Christina, Inc., 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601 or mhecht@marisachristina.com. ITEM 2. PROPERTIES The Company's principal executive offices are located at 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601. As of December 31, 2003, 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 Executive offices 8,000 New York, New York Showroom and design offices 13,600 Hong Kong Production and quality control offices 2,300
Marisa Christina has outsourced its 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. 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. ITEM 3. 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. 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 ended December 31, 2003. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION 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, 2003. The quotations in the table represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
2003 ------------- QUARTER HIGH LOW ------- ------ ---- First $ 1.71 1.00 Second 1.78 1.17 Third 1.76 1.26 Fourth 2.49 1.00
2002 ------------- QUARTER HIGH LOW ------- ------ ---- First $ 2.50 0.65 Second 2.65 1.08 Third 1.62 0.85 Fourth 1.55 0.90
HOLDERS OF COMMON STOCK The number of shareholders of record of the Company's Common Stock as of March 10, 2004, was 49. The Company believes there are approximately 543 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 835,000 shares of Common Stock pursuant to this program. DIVIDEND POLICY 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. 5 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The information that follows should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations.
YEARS ENDED DECEMBER 31 -------------------------------------------------------- 2003 2002 2001 2000 1999 -------- -------- -------- -------- -------- Net sales (1, 2) $ 23,393 26,975 34,126 57,985 62,508 Gross profit 7,125 9,243 10,817 12,194 15,788 Selling, general, and administrative expenses 7,952 8,451 10,422 16,703 20,036 Outlet store closing costs -- -- -- 1,005 -- Operating income (loss) (826) 792 395 (5,515) (4,248) Income (loss) before income tax expense (benefit) (641) 1,045 629 (13,725) (3,128) Income tax expense (benefit) (210) (6,249) (17) 437 5,151 Net income (loss) (431) 7,294 646 (14,162) (8,279) Basic and diluted net income (loss) per weighted average common share amounts (0.06) 1.00 0.09 (1.82) (1.07) Basic and diluted weighted average common shares outstanding 7,295 7,295 7,298 7,761 7,766
DECEMBER 31 ----------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- Working capital $ 8,725 9,224 7,373 6,556 13,235 Total assets 16,476 17,167 9,199 10,355 30,532 Stockholders' equity 14,768 15,201 7,907 7,268 21,884
(1) Net sales for the year ended December 31, 1999 include net sales of $8.0 million from the Company's Adrienne Vittadini Division, which the Company sold in September 1999. (2) Net sales for the years ended December 31, 2000 and 1999 include net sales of $18.7 million and $20.0 million, respectively, from the Company's Flapdoodles division, which the Company sold in December 2000. 6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with Marisa Christina's consolidated financial statements and the notes thereto that follow in this Form 10-K. FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Marisa Christina in this document that are not historical in nature, particularly those that utilize terminology such as "may," "will," "should," "likely," "expects," "anticipates," "estimates," "believes" or "plans," or comparable terminology, are forward-looking statements based on current expectations about future events, which Marisa Christina has derived from information currently available. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied in such forward-looking statements. Those risks include, among others, risks associated with the apparel industry, the dependence on senior management, 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. OVERVIEW Over the past three years, the Company has undertaken a number of initiatives to focus resources, improve profitability and return the Company to its core business and history of success. During that period, net sales have decreased by $11 million primarily as the result of closing two unprofitable divisions, which had combined net sales of $7 million for the year ended December 31, 2001, and due to a general downturn in the economy. These initiatives had returned the Company to profitable operations in 2001 and 2002, but softer demand for the Company's product in 2003 led to an operating loss. The softer economy has hurt margins during this period as customers required greater discounts and markdowns to move the product at the retail level. The Company has reduced selling, general and administrative expenses by $2.5 million over the last three years, primarily related to the closing of two unprofitable divisions, but also to reducing operating costs commensurate with the size of the business. Over most of the past three years, the Company's focus has been to eliminate unprofitable lines and reduce operating costs. During 2003, the senior management sharpened its focus on rebuilding the volume of the core business. In this regard, the sales function was restructured by hiring a new group of highly experienced people and realigning the sales function by dividing it into the Company's three main distribution segments (i.e., department stores, specialty stores and private label customers). The Company's new sales leadership is establishing tools to analyze profitability by customer for each of its selling locations in order to provide merchandise mixes for each retail location based on their consumer profile. Management believes that these initiatives together with a stronger economy will enable the Company to return to profitable operations in 2004. While the Company's plans for the future are not dependent on one single strategy, the possible failure of a large number of our new initiatives could have an adverse impact on profitability. In addition, the Company's results are heavily dependent upon demand for its Fall and Holiday product lines. In 2003, sales of Fall and Holiday product represented 59% of the Company's net sales. Should the Company's customers not react positively to styles offered by the Company for the 2004 Fall and Holiday seasons or should the economy not improve, the Company may not be able to return to profitable operations in 2004. Furthermore, management believes the Company's balance sheet is strong. Cash at December 31, 2003 was over $4.8 million and total liabilities were $1.7 million. At December 31, 2003, the Company had no outstanding long-term debt and available borrowings of $3.9 million under a line of credit arrangement. During 2003, the Company had borrowings outstanding under the line of credit for approximately 24 days and, at its peak, 7 borrowings were under $1 million. In addition, the Company has a Federal tax loss carryforward of approximately $29.8 million, which can be utilized in various amounts through 2023. This should meaningfully limit the amount of cash taxes the Company will owe on its taxable earnings, significantly enhancing future cash flows. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. The Company's most critical accounting policies relate to estimates related to allowances for uncollectible receivables, customer sales allowances, valuation of inventories and valuation allowances for deferred tax assets. Receivables Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. Events or changes in market conditions that adversely impact our customers or the Company's ability to generate sales, could impact management's estimates of uncollectible receivables or require the Company to offer greater sales incentives, which could negatively impact sales or profits in the future. As of December 31, 2003, the Company has allowances for bad debts of approximately $296.0 thousand and allowances for sales incentives, promotional activities and trade discounts of approximately $1.3 million. Inventories Inventories are stated at the lower of cost, by the first-in, first-out method, or market. In assessing the market value of its inventories, particularly those with slower turnover, the Company considers the estimated sales value less costs to dispose and a reasonable profit margin and assesses the likelihood of realizing the recorded amounts of inventory. Changes in market conditions could impact the Company's ability to achieve sales at the estimated selling prices and could negatively impact the carrying value of the Company's inventory. Valuation of Deferred Tax Assets Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Management makes a regular assessment of the realizability of the Company's deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income of the Company in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax assets to net realizable value. At December 31, 2003, the Company's deferred tax assets related primarily to a U.S. net operating loss carryforward of $29.8 million which expires in various amounts over the next twenty years. Based on the Company's recent operating results and projections of future profitability, management believes it is more likely than not that the Company will generate sufficient taxable income to recover $6.5 million of its deferred tax assets. The recovery of the remaining net deferred tax assets is significantly less certain and, accordingly, the Company has established a valuation allowance for the balance of its deferred tax assets of $4.9 million. If future taxable income is less than management's estimates, the amount of the net deferred tax assets on the Company's consolidated balance sheet will require an additional valuation allowance. Additionally, if the Company is able to realize higher taxable income the valuation allowance could be reduced. 8 RESULTS OF OPERATIONS The following table sets forth the Company's operating results for the years ended December 31, 2003, 2002, and 2001.
PERCENTAGE PERCENTAGE PERCENTAGE OF NET OF NET OF NET 2003 SALES 2002 SALES 2001 SALES ------------ ---------- ------------ ---------- ------------ ---------- Net sales $ 23,393,152 100.0% $ 26,975,402 100.0% $ 34,125,556 100.0% ------------ ----- ------------ ----- ------------ ----- Gross profit 7,125,323 30.5 9,242,637 34.3 10,816,962 31.7 Selling, general, and administrative expenses 7,951,734 34.0 8,450,776 31.3 10,422,146 30.5 ------------ ----- ------------ ----- ------------ ----- Operating income (loss) (826,411) (3.5) 791,861 2.9 394,816 1.2 Interest income (expense), net 21,490 0.1 63,570 0.2 (28,603) -- Other income, net 163,850 0.7 189,953 0.7 262,991 0.8 Income tax benefit (209,703) (0.9) (6,248,900) (23.2) (17,162) -- ------------ ----- ------------ ----- ------------ ----- Net income (loss) $ (431,368) (1.8)% $ 7,294,284 27.0% $ 646,366 2.0% ============ ===== ============ ===== ============ =====
YEAR ENDED DECEMBER 31, 2003 COMPARED WITH YEAR ENDED DECEMBER 31, 2002 Net sales. Net sales decreased 13.3%, from $27.0 million in 2002 to $23.4 million in 2003, primarily as a result of flat or slightly lower sales to existing customers and partially due to the closing of a division. Three customers accounted for 34% of the Company's net sales in 2003 and two customers accounted for 29% of the Company's net sales in 2002. Gross profit. Gross profit decreased 22.8%, from $9.2 million in 2002 to $7.1 million in 2003. As a percentage of net sales, gross profit deceased from 34.3% in 2002 to 30.5% in 2003, primarily as a result of higher markdowns and discounts. Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 5.9%, from $8.5 million in 2002 to $8.0 million in 2003, primarily as a result of continuous cost reduction initiatives and closing of a division. As a percentage of net sales, SG&A increased from 31.3% in 2002 to 34.0% in 2003. Interest income, net. Interest income, net changed from $63.6 thousand of income in 2002 to $21.5 thousand of income in 2003, primarily as the result of lower average invested cash balances and lower interest rates. Other income, net. Other income, net, which consists primarily of royalty and licensing income, decreased 13.7% from $190.0 thousand in 2002 to $163.9 thousand in 2003 due to lower licensee sales. Income tax benefit. Income tax benefit was $209.7 thousand in 2003. Income tax benefit in 2003 relates principally to additional deferred tax assets created by the Company's 2003 net operating loss offset by current state income taxes. The Company does not have current federal tax expense due to its net operating loss carrryforwards, which were approximately $29.8 million at December 31, 2003 and will be used to offset future taxable income through 2023. Over the past several years, the Company has implemented a number of initiatives which have returned the Company to profitability. Based on the Company's recent operating results and projections of future profitability, management believes it is more likely than not that the Company will be able to recover $6.6 million of its net deferred tax assets and has reduced its valuation allowance to $4.9 million at December 31, 2003. 9 Net income (loss). Net income was $7.3 million in 2002 compared to net loss of $431.4 thousand in 2003 due to factors discussed above. YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001 Net sales. Net sales decreased 21.0%, from $34.1 million in 2001 to $27.0 million in 2002, primarily as a result of discontinuing an unprofitable label and a general downturn in the economy. Two customers accounted for 29% of the Company's net sales in 2002 and three customers accounted for 19% of the Company's net sales in 2001. Gross profit. Gross profit decreased 14.6%, from $10.8 million in 2001 to $9.2 million in 2002. As a percentage of net sales, gross profit increased from 31.7% in 2001 to 34.3% in 2002, primarily as a result of improved pricing on selected products. Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 20.0%, from $10.4 million in 2001 to $8.5 million in 2002, primarily as a result of reduced fixed overhead and discontinuance of an unprofitable label. As a percentage of net sales, SG&A increased from 30.5% in 2001 to 31.3% in 2002. Interest income (expense), net. Interest income (expense), net changed from $28.6 thousand of expense in 2001 to $63.6 thousand of income in 2002, primarily as the result of higher average invested cash balances and lower interest rates on amounts borrowed. Other income, net. Other income, net, which consists primarily of royalty and licensing income, decreased 27.8% from $263.0 thousand in 2001 to $190.0 thousand in 2002 due to lower licensee sales. Income tax expense (benefit). Income tax benefit was $6.2 million in 2002 primarily as a result of the Company decreasing the valuation allowance related to its deferred tax assets. The Company utilized net operating loss carryforwards to offset its taxable income in 2002. Income tax benefit of $17.2 thousand in 2001 relates to state income tax refunds realized. Net income. Net income was $646.4 thousand in 2001 compared to net income of $7.3 million in 2002 as a result of the aforementioned items. Excluding the impact of the reduction in its deferred tax asset valuation allowance, the Company's net income for 2002 would have been $1.1 million. 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 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 Fall collection, the Company's largest selling season, and Holiday, the Company's next largest season, are shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume seasons, is shipped primarily in the first two quarters. In addition, prices of products in Resort, Spring/Summer and Early Fall collections average 5% to 50% lower than in other selling seasons. 10 LIQUIDITY AND CAPITAL RESOURCES The Company has a $17.5 million line of credit facility with a finance company, 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 trade accounts receivable and inventories, and bear interest at the prime rate plus 0.75%. The arrangement expires on June 14, 2004. Management expects to enter into a new credit facility in 2004. There were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility at December 31, 2003. Available borrowings at December 31, 2003 were $3.9 million. The Company expects to have sufficient financing and funds generated by operations, if any, to meet its working capital needs throughout 2004. During 2003, the Company had capital expenditures of approximately $56 thousand, primarily to upgrade computer systems. Capital expenditures for 2004 are expected to be $120 thousand. These capital expenditures will be funded by internally generated funds and, if necessary, borrowings under the Company's line of credit facility. The following table summarizes the Company's contractual cash obligations as of December 31, 2003:
CONTRACTUAL OBLIGATIONS ------------------------------------------------------- LESS THAN 1 - 3 3 - 5 MORE THAN 1 YEAR YEARS YEARS 5 YEARS TOTAL ----------- --------- --------- --------- --------- Long-term debt $ -- -- -- -- -- Operating leases (A) 520,000 1,075,000 1,074,000 2,738,000 5,407,000 Purchase obligations for inventory (B) 2,000,000 -- -- -- 2,000,000 ----------- --------- --------- --------- --------- $ 2,520,000 1,075,000 1,074,000 2,738,000 7,407,000 =========== ========= ========= ========= =========
(A) See note 8 to the consolidated financial statements. (B) The Company generally does not make unconditional, noncancelable purchase commitments for goods and services other than inventory. The Company enters into other purchase orders in the normal course of business, but they do not exceed one-year terms. Other purchase OFF-BALANCE SHEET ARRANGEMENTS The Company did not enter into any off-balance sheet arrangements during 2003 or 2002, nor did The Company have any off-balance sheet arrangements outstanding at December 31, 2003 or 2002. 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. 11 ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major market risk exposure is to changing interest rates. However, interest expense was not and is not expected to be a material 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, 2003, there were no borrowings under its credit facility and there was no interest expense in 2003. 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 United States dollars and the Company's investment in its foreign subsidiary was $140,000 at December 31, 2003. 12 ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report 14 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 2003 and 2002 15 Consolidated Statements of Operations and Comprehensive Income (Loss) -- Years ended December 31, 2003, 2002, and 2001 16 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2003, 2002, and 2001 17 Consolidated Statements of Cash Flows -- Years ended December 31, 2003, 2002 and 2001 18 Notes to Consolidated Financial Statements 19
13 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 15(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 auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. 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 Baltimore, Maryland February 26, 2004 14 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2003 and 2002
2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 4,845,410 4,721,614 Trade accounts receivable, less allowance for doubtful accounts of $296,043 in 2003 and $348,860 in 2002 1,678,686 3,562,927 Inventories 2,600,595 1,843,190 Deferred taxes 800,000 739,000 Prepaid expenses and other current assets 508,537 322,912 ------------ ------------ Total current assets 10,433,228 11,189,643 Property and equipment, net 235,547 320,061 Noncurrent deferred taxes 5,752,240 5,551,000 Other assets 55,133 106,004 ------------ ------------ Total assets $ 16,476,148 17,166,708 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 1,503,118 1,506,579 Accrued expenses and other current liabilities 205,307 459,499 ------------ ------------ Total current liabilities 1,708,425 1,966,078 ------------ ------------ Stockholders' equity: Preferred stock, $0.01 par value. Authorized 1,000,000 shares; none issued -- -- Common stock, $0.01 par value. Authorized 15,000,000 shares; issued 8,586,769 shares in 2003 and 2002 85,868 85,868 Additional paid-in capital 31,664,680 31,664,680 Accumulated other comprehensive loss (59,721) (58,182) Accumulated deficit (12,818,828) (12,387,460) Treasury stock, 1,291,704 common shares in 2003 and 2002, at cost (4,104,276) (4,104,276) ------------ ------------ Total stockholders' equity 14,767,723 15,200,630 Commitments and contingencies (notes 5, 8, and 13) ------------ ------------ Total liabilities and stockholders' equity $ 16,476,148 17,166,708 ============ ============
See accompanying notes to consolidated financial statements. 15 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) Years ended December 31, 2003, 2002, and 2001
2003 2002 2001 ------------ ------------ ------------ Net sales $ 23,393,152 26,975,402 34,125,556 Cost of goods sold 16,267,829 17,732,765 23,308,594 ------------ ------------ ------------ Gross profit 7,125,323 9,242,637 10,816,962 Selling, general, and administrative expenses 7,951,734 8,450,776 10,422,146 ------------ ------------ ------------ Operating income (loss) (826,411) 791,861 394,816 Interest income (expense), net 21,490 63,570 (28,603) Other income, net 163,850 189,953 262,991 ------------ ------------ ------------ Income (loss) before income tax benefit (641,071) 1,045,384 629,204 Income tax benefit (209,703) (6,248,900) (17,162) ------------ ------------ ------------ Net income (loss) (431,368) 7,294,284 646,366 Other comprehensive loss, net of tax - foreign currency translation adjustment (1,539) (258) (1,324) ------------ ------------ ------------ Comprehensive income (loss) $ (432,907) 7,294,026 645,042 ============ ============ ============ Basic and diluted net income (loss) per weighted average common share $ (0.06) 1.00 0.09 ============ ============ ============
See accompanying notes to consolidated financial statements. 16 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 2003, 2002, and 2001
ACCUMULATED RETAINED COMMON STOCK ADDITIONAL OTHER EARNINGS ------------------------ PAID-IN COMPREHENSIVE (ACCUMULATED TREASURY SHARES AMOUNT CAPITAL LOSS DEFICIT) STOCK TOTAL ----------- ----------- ----------- ------------- ----- ------ ----------- ----------- Balance at December 31, 2000 8,586,769 $ 85,868 31,664,680 (56,600) (20,328,110) (4,097,992) 7,267,846 Net income -- -- -- -- 646,366 -- 646,366 Other comprehensive loss -- -- -- (1,324) -- -- (1,324) Purchase of treasury stock, at cost -- -- -- -- -- (6,284) (6,284) ----------- ----------- ----------- ------------- ------------ ----------- ----------- Balance at December 31, 2001 8,586,769 85,868 31,664,680 (57,924) (19,681,744) (4,104,276) 7,906,604 Net income -- -- -- -- 7,294,284 -- 7,294,284 Other comprehensive loss -- -- -- (258) -- -- (258) ----------- ----------- ----------- ------------- ------------ ----------- ----------- Balance at December 31, 2002 8,586,769 85,868 31,664,680 (58,182) (12,387,460) (4,104,276) 15,200,630 Net loss -- -- -- -- (431,368) -- (431,368) Other comprehensive loss -- -- -- (1,539) -- -- (1,539) ----------- ----------- ----------- ------------- ------------ ----------- ----------- Balance at December 31, 2003 8,586,769 $ 85,868 31,664,680 (59,721) (12,818,828) (4,104,276) 14,767,723 =========== =========== =========== ============= ============ =========== ===========
See accompanying notes to consolidated financial statements. 17 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 2003, 2002, and 2001
2003 2002 2001 ----------- ---------- ---------- Cash flows from operating activities: Net income (loss) $ (431,368) 7,294,284 646,366 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 141,028 149,213 222,287 Deferred income tax benefit (262,240) (6,290,000) -- Bad debt expense 280,000 159,321 295,034 Changes in assets and liabilities: Trade accounts receivable 1,604,241 (561,975) 178,062 Inventories (757,405) (100,355) 729,090 Prepaid expenses and other assets (134,754) 131,437 59,124 Trade accounts payable (3,461) 673,142 (1,749,482) Accrued expenses and other current liabilities (255,810) 945 (46,674) ----------- ---------- ---------- Net cash provided by operating activities 180,231 1,456,012 333,807 ----------- ---------- ---------- Cash flows from investing activities: Acquisitions of property and equipment (56,435) (65,000) (336,973) Proceeds from sale of trademark -- -- 100,000 ----------- ---------- ---------- Net cash used in investing activities (56,435) (65,000) (236,973) ----------- ---------- ---------- Cash flows used in acquisition of treasury stock -- -- (6,284) ----------- ---------- ---------- Net increase in cash and cash equivalents 123,796 1,391,012 90,550 Cash and cash equivalents at beginning of year 4,721,614 3,330,602 3,240,052 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 4,845,410 4,721,614 3,330,602 =========== ========== ========== Cash paid during the year for: Income taxes $ 45,400 41,100 6,200 =========== ========== ========== Interest $ 4,600 -- 93,755 =========== ========== ==========
See accompanying notes to consolidated financial statements. 18 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS Marisa Christina, Incorporated and subsidiaries (the Company) designs, manufactures, sources and markets a broad line of high quality "better" clothing for women under the Marisa Christina(((TM))) label and other labels. (b) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Marisa Christina, Incorporated 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 and risk of ownership transfers to the customer, which is when the product is shipped to the customer. Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. As of December 31, 2003 and 2002, the Company's allowances for sales incentives, promotional activities and trade discounts were approximately $1,328,000 and $1,163,000, respectively. Such amounts are recorded as reductions to accounts receivable. (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 is calculated on the straight-line method over 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 and repairs are charged to operations as incurred. Total depreciation for the years ended December 31, 2003, 2002 and 2001 was approximately $141,000, $149,000 and $222,000, respectively, which was recorded in selling, general, and administrative expense each year. (Continued) 19 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (g) LONG-LIVED ASSETS Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. (h) 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 and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured 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. 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. (i) ADVERTISING The Company expenses advertising as incurred. Advertising expense was $298,000 in 2003, $164,000 in 2002 and $209,500 in 2001. (j) SHIPPING AND HANDLING EXPENSE Shipping and handling costs are included as a component of selling, general and administrative expenses. (k) NET INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE Basic and diluted net income (loss) per weighted average common share is based on the weighted average number of common shares outstanding, which were 7,295,065 for 2003 and 2002 and 7,298,043 for 2001. The effect of stock options outstanding were not included in the computation of diluted net income (loss) per share because the effect would have been antidilutive. (l) FOREIGN CURRENCY TRANSLATION The functional currency for the Company's foreign operation is the local currency. The translation of the foreign currency 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. (Continued) 20 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (m) STOCK OPTION PLAN The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards for 2003, 2002 and 2001:
2003 2002 2001 --------- ---------- -------- Net income (loss), as reported $(431,368) 7,294,284 646,366 Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax (136,000) (130,000) (81,000) --------- ---------- -------- Pro forma net income (loss) $(567,368) 7,164,284 565,366 ========= ========== ======== Basic and diluted net income (loss) per weighted average common share As reported $ (0.06) 1.00 0.09 Pro forma $ (0.08) 0.98 0.08 ========= ========== ========
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments, consisting of cash and cash equivalents, trade accounts receivable and trade accounts payable, approximate their carrying values due to the short-term maturities of such instruments. (o) USE OF ESTIMATES The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from these and other estimates. (Continued) 21 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (2) INVENTORIES Inventories at December 31, 2003 and 2002 consist of the following:
2003 2002 ---------- --------- Piece goods $ 86,495 68,900 Finished goods 2,514,100 1,774,290 ---------- --------- $2,600,595 1,843,190 ========== =========
Based on management's assumptions and estimates relating to future operations, the Company has reduced its inventory value for slow moving inventory at December 31, 2003 and 2002. Actual results could differ from those estimates. (3) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 2003 and 2002 consist of the following:
2003 2002 -------- ------- Prepaid expenses $371,889 166,486 Nontrade receivables 136,648 156,426 -------- ------- $508,537 322,912 ======== =======
(4) PROPERTY AND EQUIPMENT Property and equipment at December 31, 2003 and 2002 consist of the following:
2003 2002 -------- -------- Computer equipment and software $338,862 287,690 Furniture and fixtures 136,382 164,005 Leasehold improvements 251,012 245,512 -------- -------- Total 726,256 697,207 Less accumulated depreciation and amortization 490,709 377,146 -------- -------- $235,547 320,061 ======== ========
(5) CREDIT FACILITY The Company has a $17.5 million line of credit facility with a finance company, 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 trade accounts receivable and inventories, and bear interest at the prime rate plus 0.75%. The Company is required to pay an annual commitment fee of approximately $50,000. The credit facility contains various covenants that require minimum levels of working capital and tangible net worth. (Continued) 22 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 As of December 31, 2003, there were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility. Available borrowings at December 31, 2003 were approximately $3.9 million. The arrangement expires on June 14, 2004 and is cancelable by either party with 90 days' written notice. Management expects the Company to enter into a new credit arrangement in 2004. The Company expects to have sufficient financing to meet its working capital needs throughout 2004. There were no borrowings outstanding at December 31, 2002. (6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at December 31, 2003 and 2002 consist of the following:
2003 2002 -------- ------- Accrued compensation $ 27,172 106,267 Other accrued expenses 178,135 353,232 -------- ------- $205,307 459,499 ======== =======
(7) RETIREMENT PLAN The Company sponsors a 401(k) profit sharing plan for the benefit of all eligible employees. Profit sharing expense was $63,255 in 2003, $67,599 in 2002 and $101,100 in 2001. (8) LEASES The Company is committed under various noncancelable operating leases for office, showroom and design space. The leases expire on various dates through 2013. Future annual minimum lease payments under noncancelable operating leases as of December 31, 2003 are as follows: 2004 $ 519,682 2005 529,061 2006 546,344 2007 547,912 2008 526,491 Thereafter 2,737,930 ---------- $5,407,420 ==========
Total rent expense charged to operations was $703,000 in 2003, $624,000 in 2002 and $631,000 in 2001. (9) STOCK OPTION PLAN The Company sponsors an incentive stock ownership plan (Plan) that provides for the grant of up to 900,000 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. At December 31, 2003, there were 138,460 additional shares available for grant and 894,910 shares reserved for issuance under the plan. (Continued) 23 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 A summary of the changes in options outstanding and exercisable under the Plan, including the weighted average exercise prices per share follows:
WEIGHTED AVERAGE NUMBER OF PER SHARE PRICE SHARES ---------------- --------- December 31, 2000 $ 1.88 508,850 Forfeited 1.88 (40,400) ------- December 31, 2001 1.88 468,450 Granted 1.43 259,000 Forfeited 1.43 (5,000) ------- December 31, 2002 1.72 722,450 Granted 1.39 79,000 Forfeited 1.78 (45,000) ------- December 31, 2003 $ 1.68 756,450 ======= Options exercisable: December 31, 2001 $ 1.88 258,510 December 31, 2002 $ 1.88 330,450 December 31, 2003 $ 1.83 420,250
Weighted average characteristics of outstanding and exercisable stock options as of December 31, 2003 were as follows:
AVERAGE NUMBER REMAINING NUMBER EXERCISE OF OPTIONS CONTRACTUAL OF OPTIONS PRICE OUTSTANDING LIFE EXCISABLE -------- ----------- ----------- ---------- $ 1.88 433,450 4.5 years 371,450 1.43 244,000 8.0 years 48,800 1.39 79,000 9.5 years --
In October 1999, the Company repriced 153,450 options to $1.88 per share. The per share weighted average fair value of the stock options granted during 2003 and 2002, using the Black Scholes option-pricing model with the following weighted average assumptions, was $1.03 and $1.11 per share, respectively.
2003 2002 ------- ------- Risk-free interest rate 1.0% 2.0% Volatility 83% 89% Expected life 7 years 7 years Expected dividend yield 0% 0%
(Continued) 24 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (10) INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 are as follows:
2003 2002 2001 ------------ ------------ ------------ Current: Federal $ -- -- -- State and local 52,537 41,100 (17,162) ------------ ------------ ------------ 52,537 41,100 (17,162) ------------ ------------ ------------ Deferred: Federal (217,076) (5,786,416) -- State and local (45,164) (503,584) -- ------------ ------------ ------------ (262,240) (6,290,000) -- ------------ ------------ ------------ $ (209,703) (6,248,900) (17,162) ============ ============ ============
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, 2003 and 2002 are as follows:
2003 2002 ------------ ----------- Deferred tax assets: Uniform inventory capitalization $ 44,056 48,688 Accrued expenses and other assets and liabilities 567,586 459,027 Federal and state net operating losses 10,795,728 10,642,090 ------------ ----------- Total gross deferred tax assets 11,407,370 11,149,805 Valuation allowance (4,855,130) (4,855,130) ------------ ----------- Net deferred tax asset 6,552,240 6,294,675 Deferred tax liabilities: Depreciation on property and equipment -- (4,675) ------------ ----------- Net deferred tax asset $ 6,552,240 6,290,000 ============ ===========
At December 31, 2003, the Company had Federal net operating loss carryforwards of approximately $29.8 million, which expire in various amounts through 2023. The Company's deferred tax assets relate principally to net operating losses. 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. Based on the Company's operating results over the past three years and projections of future profitability, management believes it is more likely than not that the Company will be able to recover $6.5 million of its net deferred tax assets and has recorded a valuation allowance of $4.8 million at December 31, 2003 and 2002. During the year ended December 31, 2002, the Company reduced its valuation allowance by $6.6 million. (Continued) 25 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 A reconciliation of the income tax benefit and the amounts computed by applying the Federal income tax rate of 34% to income (loss) before income tax benefit is as follows for the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001 ----------- ---------- -------- Income tax (benefit) on income (loss) before income tax expense computed at statutory rate $ (217,964) 355,431 213,929 State and local income tax 4,868 41,100 (17,162) Change in valuation allowance -- (6,612,142) (302,992) Other 3,393 (33,289) 89,063 ----------- ---------- -------- $ (209,703) (6,248,900) (17,162) =========== ========== ========
(11) BUSINESS RISKS AND CREDIT CONCENTRATIONS A significant amount of the Company'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 can be found. The Company's products are sold principally in the United States to apparel retailers operating in the department and specialty store segments. Three customers accounted for 34% of the Company's net sales in 2003, two customers accounted for 29% of the Company's net sales in 2002 and three customers accounted for 19% of the Company's net sales in 2001. Receivables from two customers represented approximately 28% and 36% of accounts receivable at December 31, 2003 and 2002, respectively. Two customer balances exceeded $256,000 at December 31, 2003. 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 uncollectible receivables. (Continued) 26 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2003, 2002 and 2001 (12) UNAUDITED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
THREE MONTHS ENDED YEAR --------------------------------------------- ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31 -------- ------- ------------ ----------- ----------- 2003: Net sales $ 5,306 2,753 10,347 4,987 23,393 Operating income (loss) (344) (1,249) 1,639 (872) (826) Net income (loss) (287) (706) 1,085 (523) (431) Basic and diluted net income (loss) per common share (0.04) (0.10) 0.15 (0.07) (0.06) 2002: Net sales $ 6,264 3,260 10,529 6,922 26,975 Operating income (loss) 213 (1,457) 1,863 173 792 Net income (loss) 248 (1,368) 1,877 6,537 7,294 Basic and diluted net income (loss) per common share 0.03 (0.19) 0.26 0.90 1.00
The fourth quarter of 2002, includes the $6.6 million benefit from the reduction in the Company's deferred income tax valuation allowance (see note 10). (13) 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. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in accountants or disagreements on any matter of accounting principle or financial statement disclosure. ITEM 9A. CONTROLS AND PROCEDURES As of the end of the period covered by this Annual Report on Form 10-K (the "Effective Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14, promulgated under the Securities and Exchange Act of 1934. Based upon that evaluation, the Company's President and Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the Effective Date in alerting them timely to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. PART III ITEM 10. EXECUTIVES OF THE REGISTRANT The following table sets forth the names of the principal executive officers of Marisa Christina, Incorporated, their positions with the Company, and their principal business experience for the last five years.
NAME AGE POSITION ------------------ --- --------------------------------------------------- Michael H. Lerner 59 Chairman of the Board of Directors, Chief Executive Officer and President S. E. Melvin Hecht 69 Vice Chairman of the Board of Directors, Chief Financial Officer and Treasurer G. Michael Dees 50 President of Marisa Christina Apparel and Director
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. 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, had 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. 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. The remaining information required by Item 10 is incorporated by reference from the Company's definitive proxy statement which will be filed within 120 days from the close of its year ended December 31, 2003. 28 ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by these items is included in the Company definitive proxy statement for the Company's Annual Meeting of Stockholders to be held May 11, 2004, which will be filed within 120 days from the close of its year ended December 31, 2003. 29 PART IV ITEM 15. 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 14 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 2003 and 2002 15 Consolidated Statements of Operations and Comprehensive Income (Loss) -- Years ended December 31, 2003, 2002, and 2001 16 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2003, 2002, and 2001 17 Consolidated Statements of Cash Flows -- Years ended December 31, 2003, 2002, and 2001 18 Notes to Consolidated Financial Statements 19 (a) (2) The following financial statement schedule for the years ended December 31, 2003, 2002, and 2001 is filed as part of this Report: Schedule II -- Valuation and Qualifying Accounts 31
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 (b) Reports on Form 8-K -- The following reports on Form 8-K were furnished during the quarter ended December 31, 2003: Marisa Christina Incorporated New Release dated November 13, 2003. 30 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(a) PERIOD -------------------------------------- ---------- ---------- ------------ ---------- ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS: Year ended December 31, 2003 $ 348,860 280,000 332,817 296,043 Year ended December 31, 2002 365,000 159,321 175,461 348,860 Year ended December 31, 2001 166,824 295,034 96,858 365,000
(a) Deductions represent write-offs of specifically identified accounts.
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD -------------------------------------- ---------- ---------- ---------- ---------- SALES ALLOWANCES FOR TRADE ACCOUNTS: Year ended December 31, 2003 $1,163,000 5,153,115 4,988,115 1,328,000 Year ended December 31, 2002 1,556,000 5,186,868 5,579,868 1,163,000 Year ended December 31, 2001 1,844,400 5,701,973 5,990,373 1,556,000
31 INDEX TO EXHIBITS The following is a list of all exhibits filed as part of this report.
SEQUENTIALLY NUMBERED EXHIBIT NO. DOCUMENT PAGE ----------- -------------------------------------------------------------------------------------------------- ------------ 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.......................... * 3.1 Amended and Restated Certificate of Incorporation of the Company.................................. * 3.2 By-Laws of the Company............................................................................ * 4.3 1994 Stock Option Plan............................................................................ * 10.1+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Michael H. Lerner................................................................. * 10.3+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and G. Michael Dees................................................................... * 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................................................................... * 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................................................................ * 21 Subsidiaries of the Registrant.................................................................... * 23 Consent of Independent Auditors................................................................... (1) 31.1 Michel H. Lerner Section 302(a) Certification..................................................... (1) 31.2 S.E. Melvin Hecht Section 302(a) Certification.................................................... (1) 32 Section 906 Certification......................................................................... (1)
32
SEQUENTIALLY NUMBERED EXHIBIT NO. DOCUMENT PAGE ----------- --------------------------------------------------------------------------------------------------- ------------ ** 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 Annual Report on Form 10-K, filed on April 2, 2001. + 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
33 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 18, 2004 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 ---------------------------- Officer and President March 18, 2004 Michael H. Lerner /s/ S.E. Melvin Hecht Vice Chairman, Chief Financial ---------------------------- Officer and Treasurer March 18 2004 S.E. Melvin Hecht /s/ Robert Davidoff Director ---------------------------- Robert Davidoff March 18, 2004 /s/ Lawrence D. Glaubinger Director ---------------------------- Lawrence D. Glaubinger March 18, 2004 /s/ Brett J. Meyer Director ---------------------------- Brett J. Meyer March 18, 2004
March 17, 2004 35