-----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, Ul7Yx+5IUp2sEd/F5rxJEq7KWqTcIu/jxPF6rN7kayUWRd+oEWWAoBqIEbrh20bG vnvggUojw1bjpH+5roI7tQ== 0000950123-99-002788.txt : 19990402 0000950123-99-002788.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950123-99-002788 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99580277 BUSINESS ADDRESS: STREET 1: 415 SECOND AVE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 BUSINESS PHONE: 5163525050 MAIL ADDRESS: STREET 1: 415 SECOND AVENUE CITY: NEW HYDE PARK STATE: NY ZIP: 11040 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, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ____________ Commission File Number 0-24176 MARISA CHRISTINA, INCORPORATED (Exact name of Registrant as specified in its charter) Delaware 11-3216809 (State 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, 1999, 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 million based on the average closing price of the Common Stock as reported by Nasdaq National Market on March 24, 1999. 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, 1999 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................................................................ 7 Item 3. Legal Proceedings......................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders....................... 8 -- Executive Officers of Registrant.......................................... 8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................... 10 Item 6. Selected Financial Data................................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 12 Item 7a. Quantitative and Qualitative Disclosure about Market Risk................. 17 Item 8. Consolidated Financial Statements and Supplementary Data.................. 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 42 Part III Item 10. Directors and Executive Officers of Registrant............................ 42 Item 11. Executive Compensation.................................................... 42 Item 12. Security Ownership of Certain Beneficial Owners and Management............ 42 Item 13. Certain Relationships and Related Transactions............................ 42 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 43
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) and Adrienne Vittadini(TM) labels 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. 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 four primary labels: Marisa Christina (Classics), Marisa Canvas, 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 are becoming a more important factor in Marisa Christina's overall offering. 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 Adrienne Vittadini Adrienne Vittadini sportswear appeals to a wide range of women who look to the brand for more of a casual expression that goes beyond basics to encompass stylish and flattering designs. The Adrienne Vittadini customer base encompasses young women in their middle thirties to more mature women in their sixties. The Company positions its product lines in two divisions: the Adrienne Vittadini bridge collection and the Vittadini better-priced line. The bridge collection reflects casual career dressing, as well as sweaters in novelty yarn, stitches and textures. Vittadini is a knitwear-driven, better priced line that includes casual weekend and weekday dressing alternatives. It includes many of the fashion looks that consumers have come to expect from Adrienne Vittadini, combined with high quality and competitive pricing. Adrienne Vittadini has established the image of a "lifestyle designer" and has built a label that is not just about product but about taste level. This has led to various licensing agreements that include swimwear, fragrance, footwear, scarves and handbags, among others. Flapdoodles Flapdoodles offers casual yet fashionable clothing for children featuring vibrant colors, all-natural fabrics, unique prints and textile designs. Flapdoodles products consist of infant's 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. 2 5 Marisa Christina has a staff of six 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. Adrienne Vittadini has a design and merchandising team of eleven people. Located in New York City, these artists and designers create the styles and inspiration that culminate in a wide variety of clothing and licensed products. A significant amount of research and worldwide travel insure that the latest fashion concepts are reflected in Adrienne Vittadini products. The staff is informally divided into two teams. One is responsible for the Adrienne Vittadini bridge collection, another for the Vittadini better line. The bridge collection has four offerings per year and the better line opens four times a year. Design concepts are integrated with yarn, fabric color and print ideas and sent to a variety of overseas agents and factories where they are produced as prototype samples. These are reviewed in New York, after which corrections are sent abroad and finished sales samples are executed and returned to the New York sales office. This entire process can take up to four months. In addition, the design staff works closely with all licensees to insure that all products bearing the Vittadini name maintain the high quality and fashion sensibility associated with Adrienne Vittadini. 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 and 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. 3 6 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. AVE has adopted similar buying philosophies as those used by Marisa Christina to stabilize margins and control excess inventory. 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. In 1998, Turkey became a significant source of supply to Marisa Christina. Adrienne Vittadini sources yarn and fabrics from many different countries including Italy, Japan, Portugal, Turkey, Korea and China. While most raw materials are purchased directly by Vittadini's overseas manufacturers there are instances when the yarn or fabric is purchased directly by Vittadini. In an effort to minimize inventory risk most orders are placed after market weeks (initial sales presentations to customers) when the Adrienne Vittadini sales staff is able to form judgments concerning the strength of various styles and groupings. The majority of Vittadini products are produced in Hong Kong, China and Turkey. The Company's operations with respect to Marisa Christina and Adrienne Vittadini products may be significantly affected by economic, political, governmental and labor conditions in Hong Kong and 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 seven 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. Adrienne Vittadini's sales offices are headquartered in New York City. A vice president of sales and four account executives work with the division's major department and specialty store accounts. Independent sales representatives service regional specialty stores by traveling to the customer and exhibiting at the major markets such as Dallas. In addition, five retail specialists work with retailers on product knowledge, implementing in-store shops and special events. In the international markets, Canada and Mexico are areas presently retailing Adrienne Vittadini products in a meaningful way. Through increased focus and the 4 7 introduction of licensed products the Company hopes to continue to grow in these areas. National and regional advertising, public relations, in-store shops and personal appearances are some of the methods used to promote the Adrienne Vittadini image. Flapdoodles maintains seven corporate sales offices and showrooms in the following markets: New York, Boston, Atlanta, Charlotte, Dallas, Los Angeles and San Francisco. In addition to the eleven salespeople who staff the showrooms, six account representatives located at corporate headquarters in Newark, Delaware provide sales and customer service support. Sales to customers are accomplished at either showrooms, national or regional trade shows and 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 twelve outlet stores. TRADEMARKS The Company owns all rights, title and interest in the Marisa Christina, Adrienne Vittadini 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, China, Israel, Italy, Japan, Switzerland and Mexico. Flapdoodles' trademarks are registered in the U.S., Canada and Japan. Adrienne Vittadini's trademarks are protected in the U.S., Canada and in the following countries: Algeria, Argentina, Australia, Austria, Bahamas, Bahrain, Benelux, Bermuda, Bolivia, Brazil, British Virgin Islands, Chile, China, Colombia, Costa Rica, Denmark, Dominican Republic, Ecuador, Egypt, El Salvador, Finland, France, Germany, Greece, Haiti, Honduras, Hungary, Iceland, India, Indonesia, Iran, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Lebanon, Malaysia, Mauritius, Mexico, Morocco, New Zealand, Nicaragua, Norway, Pakistan, Panama, Paraguay, Peru, Philippines, Portugal, Qatar, Russia, Saint Lucia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Tangiers, Thailand, Trinidad & Tobago, Turkey, United Kingdom, Uruguay, and Venezuela. 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, 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. In 1998, net sales of the Company's products were $20.0 million in the first quarter, $13.3 million in the second quarter, $23.1 million in the third quarter and $18.2 million in the fourth quarter. 5 8 CUSTOMERS The Company's products are sold in approximately 3,500 individual stores by over 2,000 retailers. Approximately 47% of the Company's 1998 net sales consisted of sales to specialty stores and special store chains, including Talbots and Irresistibles and 40% consisted of sales to department stores, including Dillards, Federated Department Stores, Saks Fifth Avenue, Proffitts and Neiman Marcus. The balance was sold internationally to catalog merchandisers and domestically through twelve outlet store locations. In 1998, Proffitts, Dillards and Talbots accounted for approximately 10.6%, 8.3%, and 8.3%, respectively, of the Company's net sales and were the only customers that accounted for more than 5% of the Company's net sales. BACKLOG ORDERS At February 28, 1999, the Company had unfilled customer orders of approximately $15.4 million compared to $15.0 million at the same date in 1998. 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, 1998, the Company employed approximately 382 people, including 11 executives, 136 persons in sales, retail, marketing and advertising, 31 persons in design and merchandising, 50 persons in administration, 77 persons in quality control and finishing and 77 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. 6 9 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, 1998, 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 and AVE executive offices 8,000 New York, New York Marisa Christina showroom and design offices 18,000 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 New York, New York AVE showroom and design offices 17,000
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; San Francisco, California; Atlanta, Georgia; and Charlotte, North Carolina. Flapdoodles at year end operated twelve 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; and Camarillo, California. Each store is approximately 2,000 square feet. Marisa Christina and AVE have outsourced their receiving, warehousing and shipping functions to a third-party adjacent to their North Bergen facility. Under the outsourcing agreement the Company pays a fixed handling charge per unit with no minimum. 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. 7 10 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 the fiscal year 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 54 Chairman of the Board of Directors, Chief Executive Officer and President Marc Ham 36 President of Flapdoodles and Vice Chairman of the Board of Directors G. Michael Dees 45 Executive Vice-President of Design and Merchandising of Marisa Christina and Director Carole Bieber 44 Executive Vice-President and Design Director of Flapdoodles Christine M. Carlucci 41 Vice-President of Administration and Operations, Secretary and Director S. E. Melvin Hecht 64 Chief Financial Officer, Treasurer 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 and 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. 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. Prior to joining Marisa Christina, Mr. Dees was Divisional Merchandise Manager of ladies' sportswear for Belk 8 11 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, and has served as the Vice-President of Administration and Operations since that time 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. 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 a partner at Touche Ross & Co. 9 12 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, 1998. The quotations in the table represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
1997 ------------------------ QUARTER HIGH LOW - ------------ --------- ------- First 10 7-3/4 Second 11-3/8 9-1/4 Third 8-1/2 5 Fourth 7 4-1/8
1998 ------------------------ QUARTER HIGH LOW - ------------ --------- ------- First 6-3/8 4 Second 5 2-1/16 Third 3-1/2 11/16 Fourth 2-1/8 7/8
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, 1999, was 66. The Company believes there are approximately 1,000 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. 10 13 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years ended December 31, --------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- -------- -------- -------- Net sales $76,213 $86,763 $115,537 $ 91,400 $ 74,607 Gross profit 31,612 34,694 39,952 20,164 19,230 Selling, general and administrative expenses 17,909 19,474 29,468 30,002 24,953 Restructuring charges -- -- -- 1,263 3,750 Asset impairment charge -- -- -- -- 16,525 Operating earnings (loss) 13,703 15,220 10,484 (11,101) (25,998) Earnings (loss) before income tax expense (benefit) 13,924 16,634 11,920 (8,980) (24,535) Income tax expense (benefit) -- 6,486 4,543 (2,988) (8,227) Net earnings (loss) -- 10,148 7,377 (5,992) (16,308) Comprehensive income (loss) -- 10,148 7,377 (6,067) (16,307) Pro forma income tax expense (1) 5,470 -- -- -- -- Pro forma earnings before extraordinary item (1) 8,454 -- -- -- -- Pro forma net earnings (1) 8,161 -- -- -- -- Per share amounts: Basic earnings (loss) per share -- 1.20 .87 (.72) (2.03) Diluted earnings (loss) per share -- 1.20 .86 (.72) (2.03) Pro forma basic and diluted earnings before extraordinary item per share (1) 1.20 -- -- -- -- Pro forma basic and diluted earnings per share (1) 1.16 -- -- -- -- Supplemental pro forma basic and diluted earnings per share (1)(2) 1.12 -- -- -- -- Weighted average shares outstanding Basic 7,062 8,434 8,494 8,369 8,053 Diluted 7,089 8,461 8,552 8,369 8,053
December 31, ----------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- Working capital $25,147 $35,788 $17,626 $11,941 $ 8,912 Total assets 40,709 54,009 66,200 65,197 44,429 Stockholders' equity 36,072 46,223 54,215 47,195 30,163
(1) In connection with the Company's reorganization on June 22, 1994 Marisa Christina ceased to be an "S" Corporation and Flapdoodles ceased to be taxed as a "Limited Liability Company." The pro forma amounts present the Company's results of operations as if Marisa Christina and Flapdoodles had been taxed as "C" Corporations for the entire year. (2) Supplemental pro forma earnings per share is based upon the weighted average number of common shares used in the calculation of pro forma earnings per share (7,062,000) plus the weighted average number of shares (252,000) sold by the Company in the initial public offering, at $13 per share, necessary to fund the Company's $6.9 million cash distribution of previously taxed "S" Corporation earnings. 11 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview Results for 1998 were below historical levels. The Company's results were adversely impacted by weaker sales and customer demand at all three of the Company's operating divisions; Marisa Christina (MC), Adrienne Vittadini (AVE) and Flapdoodles. Management attributes the decline in operating results primarily to the change in consumer habits and a shift in the buying patterns of major department stores to favor a smaller number of suppliers with very large name brands. Sales were also negatively impacted by a conscious decision to reduce sales to discounters, as well as unfavorable year to date sales by retail customers. In order to reverse the trend of declining sales and profits the Company has undertaken a number of initiatives in the prior 18 months to reduce overhead, replace certain sales and marketing personnel and exit unprofitable product lines. Certain of these initiatives are described as follows: - Effective September 30, 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 Adrienne Vittadini Enterprises, Inc. Under such employment agreements, entered into in January 1996 in connection with the acquisition of AVE, the Company had agreed to provide certain base and bonus compensation as well as certain benefits to the Vittadinis. The Termination Agreement settles all amounts due under the employment agreements and amends certain provisions of the January 1996 acquisition agreement. Other amounts payable to the Vittadinis under the January 1996 acquisition agreement are generally unaffected by the Termination Agreement; however, future payments are likely to be limited to an .825% royalty on future licensee sales commencing in January 2001. As a result of the Termination Agreement, the Company recognized a restructuring charge of approximately $3.8 million in the consolidated statement of operations in 1998, of which approximately $3.2 million had been paid to the Vittadinis by December 31, 1998. The Company expects annual cost savings to be approximately $1.2 million as a result of these terminations. - As a result of the termination of the Vittadinis, operating losses of the AVE division during 1997 and 1998 and the prospects for additional losses by the AVE division for the foreseeable future, management of the Company assessed the recoverability of AVE's long-lived assets including goodwill. Based on management's best estimate of future operating results for the AVE division, 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, in the third quarter, the Company recognized an asset impairment charge with respect to goodwill of approximately $16.5 million in the consolidated statement of operations in 1998. The charge was based upon an independent appraisal, based on discounted cash flows, of the fair value of the AVE division as of September 30, 1998. - In connection with the restructuring described above, the Company also discontinued a handbag joint venture between AVE and a third party and recorded a charge of $500 thousand related to its investment and advances to the joint venture partner which it deemed were no longer recoverable. 12 15 - In 1997, the Company instituted a set of initiatives to strengthen its management team as well as cut costs and streamline operations. These initiatives, some of which resulted in non-recurring charges in 1997, included (i) the hiring of a president and a new vice president of sales for the AVE division (ii) the hiring of a new vice president of sales for the MC division and (iii) the consolidating of the administrative and warehousing facilities of AVE and MC. Results for 1997 include the expenses with respect to these initiatives of approximately $1.3 million including costs associated with executive search firms, the consolidation of warehouses, severance costs, including settlement of union related issues, and other related matters. Annual cost savings resulting from the consolidation of the two administrative and warehousing facilities is expected to be approximately $1.3 million. 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, 1996, 1997 and 1998.
1996 1997 1998 ------ ------ ------ Net sales 100.0% 100.0% 100.0% ------ ------ ------ Gross profit 34.6 22.1 25.7 Selling, general and administrative expenses 25.5 32.8 33.4 Restructuring charges -- 1.4 5.0 Asset impairment charge -- -- 22.1 ------ ------ ------ Operating earnings (loss) 9.1 (12.1) (34.8) Other income, net 2.0 2.8 2.9 Interest expense, net (0.8) (0.5) (0.9) Income tax expense (benefit) 3.9 (3.2) (11.0) ------ ------ ------ Net earnings (loss) 6.4% (6.6)% (21.8)% ====== ====== ======
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 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. 13 16 Selling, general and administrative expenses. Selling, general and administrative expenses 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 relates to the writedown of goodwill associated with the AVE division 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 Adrienne Vittadini licensees for the year. Interest expense, net. Interest expense, net increased 66.4% from $410 thousand in 1997 to $683 thousand in 1998, primarily as the result of higher average outstanding borrowings and higher interest rates being charged. Income tax expense (benefit). Income tax expense (benefit) changed from ($3.0) million benefit in 1997 to ($8.2) million benefit 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. Net earnings (loss). Net earnings (loss) increased from net loss of ($6.0) million in 1997 to net loss of ($16.3) million in 1998 as a result of the aforementioned items. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales. Net sales decreased by 20.9% from $115.5 million in 1996 to $91.4 million in 1997. This decrease was primarily attributable to a significant decline in the sales at the MC and AVE divisions principally due to the poor retail environment for women's apparel as well as extremely poor acceptance of the fall and holiday lines at the retail level. Net sales of the AVE division declined 23.8% from $39.2 million in 1996 to $29.9 million in 1997. Net sales of the MC division declined 38.0% from $46.7 million in 1996 to $28.9 million in 1997. These declines were partially offset by increased sales at the Flapdoodles division, where sales increased by 9.8% from $29.6 million in 1996 to $32.6 million in 1997. Gross profit. Gross profit decreased 49.5%, from $40.0 million in 1996 to $20.2 million in 1997. As a percentage of net sales, gross profit decreased from 34.6% in 1996 to 22.1% in 1997. The decline in gross profit was attributable to lower margins due to markdowns at the MC and AVE divisions as a result of the poor demand for the divisions' products at the retail level as well as write-downs of approximately $2.6 million for inventory on hand and committed to for the Fall 97, Holiday 97 and Spring 98 seasons. 14 17 Selling, general and administrative expenses. Selling, general and administrative expenses increased 1.7%, from $29.5 million in 1996 to $30.0 million in 1997. During 1997 the Company increased advertising expenses at the AVE and MC divisions by approximately $1.3 million. The Company anticipates returning to 1996 advertising levels in 1998. As a percentage of net sales of the Company, selling, general and administrative expenses increased from 25.5% in 1996 to 32.8% in 1997. This increase in percentage is primarily attributable to the decreased volume of sales without a proportionate corresponding decrease in expenses. Restructuring charges. Restructuring charges represent certain costs related to the Company's administrative and warehouse consolidation of the AVE and MC divisions. Other income, net. Other income, net consists of royalty, licensing and copyright infringement income. Other income increased 10.4% from $2.3 million in 1996 to $2.5 million in 1997. This increase is attributed to increased licensing revenue earned by the AVE division. Interest expense, net. Interest expense, net decreased 49.6%, from $857 thousand in 1996 to $410 thousand in 1997 primarily due to a decrease in average outstanding debt and slightly lower interest rates. Income tax expense (benefit). Income tax expense (benefit) changed from $4.5 million expense in 1996 to ($3.0) million benefit in 1997 as the result of the significant loss incurred in 1997. The Company's effective income tax (benefit) rates for 1996 and 1997 were 38.1% and (33.3%), respectively. In computing income taxes for 1997, management provided a valuation allowance of approximately $700 thousand principally related to state net operating loss carryforwards of MC and AVE. Net earnings (loss). Net earnings (loss) declined from net earnings of $7.4 million in 1996 to net loss of ($6.0) million in 1997 as a result of the lower net sales and gross margins achieved by the MC and AVE divisions, as well as the restructuring charges described above. 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 line of credit facilities with two banks, aggregating $23 million, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the facilities are secured by certain of the Company's assets and bear interest at the banks' prime rate plus 0.25% to 1.0% or LIBOR plus 2.5%, at the Company's option. The facilities expire on June 30, 1999. As of December 31, 1998, $9.85 million of borrowings, bearing interest at an average rate of 7.64% and $2.77 million of commercial letters of credit were outstanding under the credit facilities. Available 15 18 borrowings at December 31, 1998 were $10.38 million. The Company expects the banks to renew the facilities in 1999. During 1998, the Company had capital expenditures of approximately $434 thousand, primarily to upgrade warehouse and computer systems. During 1999, the Company has planned capital expenditures of approximately $400 thousand primarily to upgrade computer systems and open new outlet stores. These capital expenditures will be funded by internally generated funds and, if necessary, bank borrowings under the Company's line of credit facilities. The Company believes that funds generated by operations, if any, and the line of credit facilities will provide financial resources sufficient to meet all of its working capital and letter of credit requirements for at least the next twelve months. 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 2000, in accordance with the pronouncement, and is currently evaluating the impact, if any, that SFAS No. 133 will have on its consolidated financial statements. During 1998, the American Institute of Certified Public Accountants issued Statements of Position ("SOP") No. 98-5, Reporting on the Costs of Start-Up Activities. SOP No. 98-5 requires that costs incurred during a start-up activity be expensed as incurred and that the initial application of the SOP, as of the beginning of the year in which the SOP is adopted, be reported as a cumulative effect of a change in accounting principle. The Company expects to adopt SOP 98-5 in 1999, and currently believes that adoption will have no impact on its consolidated financial statements. 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. 16 19 INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE The Year 2000 issue results from a programming convention in which computer programs use two digits rather than four to define the applicable year. The inability of computer programs to recognize a year that begins with "20" could result in system failures, miscalculations or errors causing disruptions of operations or other business activities. The Company has undertaken a program to address the Year 2000 issue with respect to (i) the Company's information systems, (ii) the Company's non-information systems, and (iii) certain systems of the Company's major customers and suppliers. As described below, the Company's Year 2000 program includes (i) assessment of the problem, (ii) development of remedies, (iii) testing of such remedies and (iv) the preparation of contingency plans to deal with worst case scenarios. Information Systems - The Company maintains information systems at each of its three operating divisions. Information systems at the Company's MC and AVE divisions have been remediated, tested and have been determined by management to be Year 2000 compliant. The Company is in the process of remediating information systems at the Flapdoodles division. The Company expects to have this system remediated and tested by June 1999. Non-Information Systems - The Company has not completed its assessment of the Year 2000 issue with respect to critical non-information systems. However, management believes that such issues, if any, would be limited to the Company's telephone systems. The Company expects to complete this assessment by December 1998. Remediation required, if any, is expected to be completed by June 1999. Customer and Supplier Systems - The Company has begun informal discussions with major customers and suppliers with respect to the Year 2000 issue. The Company currently has limited electronic interfaces with customers and vendors and, accordingly, is focused on its customers' and vendors' ability to operate following January 1, 2000. The Company intends to make formal inquiries of its key customers and suppliers during 1999 to complete this assessment and establish contingency plans as necessary. Costs Related to the Year 2000 Issue - To date the Company has incurred less than $70 thousand to remediate its Year 2000 information systems issues and expects to incur an additional $80 thousand to complete the remediation and testing of the Flapdoodles information systems. Costs, if any, to remediate the non-information systems are not expected to be material. Risk Related to the Year 2000 Issue - Although the Company's Year 2000 efforts are intended to minimize the adverse effects of the Year 2000 issue on the Company's operations, the actual effects of the issue cannot be known until the Year 2000. Failure of the Company and its major customers and suppliers to appropriately remediate the Year 2000 issue could have a material adverse effect on the Company's financial condition and results of operations. ITEM 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, 1998, the Company's floating rate debt is based on LIBOR. The fair market value of the Company's bank debt approximates its face value. 17 20 Currently, the Company does not use foreign currency forward contracts or commodity contracts and does not have any material foreign currency exposure. All purchases from foreign contractors are made in US dollars and the Company's investment in its foreign subsidiary was $140 thousand at December 31, 1998. FORWARD-LOOKING INFORMATION Except for historical information contained herein, the statements in this form are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause the Company's actual results in future periods to differ materially from forecasted results. Those risks include, among others, risks associated with the success of future advertising and marketing programs, the receipt and timing of future customer orders, price pressures and other competitive factors and a softening of retailer or consumer acceptance of the Company's products leading to a decrease in anticipated revenues and gross profit margins. 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. 18 21 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE Independent Auditors' Report 20 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1998 21 Consolidated Statements of Operations and Comprehensive Income (Loss) - Years ended December 31, 1996, 1997 and 1998 22 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1997 and 1998 23 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1997 and 1998 24 Notes to Consolidated Financial Statements 26
19 22 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, 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. KPMG LLP New York, New York March 5, 1999 20 23 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1998
1997 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 1,007,153 $ 981,329 Accounts receivable, less allowance for doubtful accounts of $200,104 in 1997 and $379,581 in 1998 9,174,602 8,694,364 Inventories 12,006,285 8,600,980 Income taxes recoverable 3,653,933 2,955,492 Prepaid expenses and other current assets 3,597,237 1,945,826 ------------ ------------ Total current assets 29,439,210 23,177,991 Property and equipment, net 3,186,404 2,726,150 Goodwill, less accumulated amortization of $4,615,719 in 1997 and $4,707,325 in 1998 31,294,348 13,177,435 Other assets 1,276,819 487,596 Deferred tax assets -- 4,859,392 ------------ ------------ Total assets $ 65,196,781 $ 44,428,564 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Loans payable to banks $ 6,500,000 $ 9,850,000 Accounts payable 7,578,832 3,204,799 Accrued expenses and other current liabilities 3,419,528 1,210,918 ------------ ------------ Total current liabilities 17,498,360 14,265,717 Other liabilities 503,274 -- ------------ ------------ Total liabilities 18,001,634 14,265,717 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 15,000,000 shares authorized, 8,586,769 shares issued in 1997 and 1998 85,868 85,868 Additional paid-in capital 31,653,186 31,653,186 Retained earnings 18,421,447 2,113,228 Accumulated other comprehensive loss (57,924) (57,000) Treasury stock, 402,000 and 821,000 common shares in 1997 and 1998, at cost (2,907,430) (3,632,435) ------------ ------------ Total stockholders' equity 47,195,147 30,162,847 Commitments (notes 7 and 9) ------------ ------------ Total liabilities and stockholders' equity $ 65,196,781 $ 44,428,564 ============ ============
See accompanying notes to consolidated financial statements. 21 24 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (Loss) Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------- ------------ ------------ Net sales $ 115,536,726 $ 91,400,058 $ 74,607,115 Cost of good sold 75,584,880 71,235,897 55,377,000 ------------- ------------ ------------ Gross profit 39,951,846 20,164,161 19,230,115 Selling, general and administrative expenses 29,467,665 30,002,464 24,952,758 Restructuring charges -- 1,263,056 3,750,000 Asset impairment charge -- -- 16,525,306 ------------- ------------ ------------ Operating earnings (loss) 10,484,181 (11,101,359) (25,997,949) Other income, net 2,293,205 2,532,033 2,145,481 Interest expense, net (857,019) (410,226) (682,558) ------------- ------------ ------------ Earnings (loss) before income tax expense (benefit) 11,920,367 (8,979,552) (24,535,026) Income tax expense (benefit) 4,543,826 (2,987,528) (8,226,807) ------------- ------------ ------------ Net earnings (loss) 7,376,541 (5,992,024) (16,308,219) Other comprehensive income (loss), net of tax -- foreign currency translation adjustment -- (74,536) 924 ------------- ------------ ------------ Comprehensive income (loss) $ 7,376,541 $ (6,066,560) $(16,307,295) ============= ============ ============ Basic earnings (loss) per share $ .87 $ (.72) $ (2.03) ============= ============ ============ Diluted earnings (loss) per share $ .86 $ (.72) $ (2.03) ============= ============ ============
See accompanying notes to consolidated financial statements 22 25 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1997 and 1998
COMMON STOCK ADDITIONAL ACCUMULATED OTHER ----------------------- PAID-IN RETAINED COMPREHENSIVE TREASURY SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) STOCK ---------- --------- ----------- ------------ ----------------- ----------- Balance at December 31, 1995 8,434,250 $ 84,343 $29,084,978 $ 17,036,930 $ 16,612 $ -- Net earnings for the year ended December 31, 1996 -- -- -- 7,376,541 -- -- Issuance of common stock in acquisition of Adrienne Vittadini, Inc. 147,679 1,477 2,498,523 -- -- -- Proceeds from exercise of stock options 4,840 48 62,872 -- -- -- Other -- -- 6,813 -- -- -- Purchase of treasury stock, at cost -- -- -- -- -- (1,954,350) ---------- --------- ----------- ------------ -------- ----------- Balance at December 31, 1996 8,586,769 85,868 31,653,186 24,413,471 16,612 (1,954,350) Net loss for the year ended December 31, 1997 -- -- -- (5,992,024) -- -- Purchase of treasury stock, at cost -- -- -- -- -- (953,080) Other comprehensive loss -- -- -- -- (74,536) -- ---------- --------- ----------- ------------ -------- ----------- Balance at December 31, 1997 8,586,769 85,868 31,653,186 18,421,447 (57,924) (2,907,430) Net loss for the year ended December 31, 1998 -- -- -- (16,308,219) -- -- Purchase of treasury stock, at cost (725,005) Other comprehensive income -- -- -- -- 924 -- ---------- --------- ----------- ------------ -------- ----------- Balance at December 31, 1998 8,586,769 $ 85,868 $31,653,186 $ 2,113,228 $(57,000) $(3,632,435) ========== ========= =========== ============ ======== ===========
TOTAL ------------ Balance at December 31, 1995 $ 46,222,863 Net earnings for the year ended December 31, 1996 7,376,541 Issuance of common stock in acquisition of Adrienne Vittadini, Inc. 2,500,000 Proceeds from exercise of stock options 62,920 Other 6,813 Purchase of treasury stock, at cost (1,954,350) ------------ Balance at December 31, 1996 54,214,787 Net loss for the year ended December 31, 1997 (5,992,024) Purchase of treasury stock, at cost (953,080) Other comprehensive loss (74,536) ------------ Balance at December 31, 1997 47,195,147 Net loss for the year ended December 31, 1998 (16,308,219) Purchase of treasury stock, at cost (725,005) Other comprehensive income 924 ------------ Balance at December 31, 1998 $ 30,162,847 ============
See accompanying notes to consolidated financial statements. 23 26 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------ ----------- ------------ Cash flows from operating activities: Net earnings (loss) $ 7,376,541 $(5,992,024) $(16,308,219) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,633,015 2,613,355 2,324,568 Provision (benefit) for deferred income taxes 224,000 (389,581) (5,128,763) Restructuring charges -- -- 500,000 Asset impairment charge -- -- 16,525,306 Bad debt expense 309,774 353,660 369,779 Changes in asset and liabilities, net of effects from purchase Adrienne Vittadini, Inc. in 1996: Accounts receivable, net 3,915,415 (485,279) 110,459 Due from factor (5,967,379) 5,967,379 -- Inventories 1,723,482 (1,909,162) 3,405,305 Income taxes recoverable (94,449) (4,316,585) 698,441 Prepaid expenses and other current assets (802,511) 162,301 1,417,508 Other assets (23,589) (23,889) 789,223 Accounts payable (6,889,297) 1,939,795 (4,373,109) Accrued expenses and other current liabilities (1,266) 1,476,803 (2,547,461) ------------ ----------- ------------ Net cash provided by (used in) operating activities 2,403,736 (603,227) (2,216,963) ------------ ----------- ------------ Cash flows from investing activities: Acquisitions of property and equipment (680,912) (1,295,833) (433,856) Acquisition of net assets of Adrienne Vittadini, Inc., net of cash acquired (18,575,994) -- -- Other -- (184,801) -- ------------ ----------- ------------ Net cash used in investing activities $(19,256,906) $(1,480,634) $ (433,856) ------------ ----------- ------------
(Continued) 24 27 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1997 and 1998
1996 1997 1998 ------------ ----------- ----------- Cash flows from financing activities: Borrowings (repayments) under line of credit facilities, net $ (731,037) $ 3,000,000 $ 3,350,000 Acquisition of treasury stock (1,954,350) (953,080) (725,005) Issuance of common stock and capital contributions 69,920 -- -- Other (187) -- -- ------------ ----------- ----------- Net cash provided by (used in) financing activities (2,615,654) 2,046,920 2,624,995 ------------ ----------- ----------- Net decrease in cash and cash equivalents (19,468,824) (36,941) (25,824) Cash and cash equivalents at beginning of year 20,512,918 1,044,094 1,007,153 ------------ ----------- ----------- Cash and cash equivalents at end of year $ 1,044,094 $ 1,007,153 $ 981,329 ============ =========== =========== Cash paid during the year for: Income taxes $ 4,334,938 $ 1,718,638 $ 64,384 ============ =========== =========== Interest $ 927,658 $ 451,650 $ 688,994 ============ =========== ===========
See accompanying notes to consolidated financial statements. 25 28 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (1) 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) and Adrienne Vittadini(TM) labels and for children under the Flapdoodles(TM) label. (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) INVENTORIES Inventories are stated at the lower of cost, by the first-in, first-out method, or market. (e) 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. (Continued) 26 29 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (f) GOODWILL Goodwill is amortized on a straight-line basis over the expected periods to be benefited, generally 20 years. 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. (g) LONG-LIVED ASSETS The recoverability of long-lived assets 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. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (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 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. (i) ADVERTISING The Company expenses advertising as incurred. Advertising expense for 1996, 1997 and 1998 was $1.2 million, $2.8 million and $1.1 million, respectively. 27 (Continued) 30 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (j) EARNINGS PER SHARE Basic net earnings (loss) per common share is based on the weighted average number of common shares outstanding, which were 8,493,749, 8,368,621 and 8,053,120 for the years ended December 31, 1996, 1997 and 1998, respectively. Diluted net earnings (loss) per common share is based on the weighted average number of common shares outstanding and dilutive securities outstanding, which were 8,551,980, 8,368,621 and 8,053,120 for the years ended December 31, 1996, 1997 and 1998, respectively. The difference between basic and diluted weighted average shares in 1996 relates to the dilutive effect of stock options. The effect of stock options outstanding during 1997 and 1998 were not included in the computation of diluted earnings per share because the effect would have been antidilutive. (k) 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. (l) ACCOUNTING FOR STOCK-BASED COMPENSATION The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations in accounting for its stock option plan. (m) 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. 28 (Continued) 31 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (n) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on foreign currency translation and is presented in the consolidated statements of operations and comprehensive income (loss) and stockholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. (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 1996 and 1997 have been reclassified to conform to the presentation in 1998. (2) RESTRUCTURINGS Effective September 30, 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 Adrienne Vittadini Enterprises, Inc. (AVE). Under such employment agreements, entered into in January 1996 in connection with the acquisition of AVE, the Company had agreed to provide certain base and bonus compensation as well as certain benefits to the Vittadinis. The Termination Agreement settles all amounts due under the employment agreements and amends certain provisions of the January 1996 acquisition agreement. Other amounts payable to the Vittadinis under the January 1996 acquisition agreement are generally unaffected by the Termination Agreement, however, future payments are likely to be limited to an .825% royalty on future licensee sales commencing in January 2001. As a result of the Termination Agreement, the Company recognized a restructuring charge of approximately $3.8 million in the consolidated statement of operations in 1998, of which approximately $3.2 million had been paid to the Vittadinis as of December 31, 1998. 29 32 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 In connection with the restructuring described above, the Company discontinued a handbag joint venture between AVE and a third party and recorded a charge of $500 thousand related to its investment and advances to the joint venture partner which it deemed were no longer recoverable. As of December 31, 1998, approximately $60 thousand is included in accrued expenses and other current liabilities for other expenses associated with the restructuring and are expected to be paid in 1999. The Company replaced the joint venture with a new licensee. 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, included approximately $800 thousand for facility consolidation and write-off of idle assets and $500 thousand for severance and benefits. As of December 31, 1998, substantially all amounts under this restructuring plan have been paid out. (3) ASSET IMPAIRMENT CHARGE As a result of the termination of the Vittadinis, operating losses of the AVE division during 1997 and 1998 and the prospects for additional losses by the AVE division for the forseeable future, management of the Company assessed the recoverability of AVE's long-lived assets including goodwill. Based on management's best estimate of future operating results for the AVE division, 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, in the third quarter, the Company recognized an asset impairment charge with respect to goodwill in the consolidated statement of operations of approximately $16.5 million in 1998. The charge was based upon an independent appraisal, based on discounted cash flows, of the fair value of the AVE division as of September 30, 1998. 30 33 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (4) INVENTORIES Inventories at December 31, 1997 and 1998 consist of the following:
1997 1998 ----------- ---------- Piece goods $ 2,959,703 $2,378,619 Work-in-process 2,863,727 1,001,196 Finished goods 6,182,855 5,221,165 ----------- ---------- $12,006,285 $8,600,980 =========== ==========
Based on management's assumptions and estimates relating to future operations, the Company has provided for slow moving inventory at December 31, 1997 and 1998. Actual results could differ from those estimates. (5) PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 1997 and 1998 consist of the following:
1997 1998 ---------- ---------- Prepaid expenses $ 717,400 $ 679,837 Other receivables (primarily royalties) 1,551,978 687,037 Deferred tax assets 812,855 578,952 Other 515,004 -- ---------- ---------- $3,597,237 $1,945,826 ========== ==========
31 34 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (6) PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997 and 1998 consist of the following:
1997 1998 ---------- ---------- Machinery and equipment $2,248,831 $2,190,556 Furniture and fixtures 1,697,596 1,353,217 Leasehold improvements 1,727,376 1,290,481 Transportation equipment 107,716 82,307 ---------- ---------- Total 5,781,519 4,916,561 Less accumulated depreciation and amortization 2,595,115 2,190,411 ---------- ---------- $3,186,404 $2,726,150 ========== ==========
(7) CREDIT FACILITIES The Company has line of credit facilities with two banks, aggregating $23 million, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the arrangements are secured by certain of the Company's assets and bear interest at the banks' prime rate plus 0.25% to 1.0% or LIBOR plus 2.5%, at the Company's option. The facilities expire on June 30, 1999. As of December 31, 1998, $9.85 million of borrowings, bearing interest at an average rate of 7.64% and $2.77 million of commercial letters of credit were outstanding under the credit facilities. Available borrowings at December 31, 1998 were $10.38 million. The Company expects the banks to renew the facilities in 1999. Interest expense was $918 thousand, $410 thousand and $689 thousand for the years ended December 31, 1996, 1997 and 1998, respectively. (8) RETIREMENT PLAN The Company sponsors a 401(k) profit sharing plan for the benefit of all nonunion employees. Profit sharing expense charged to operations for the years ended December 31, 1996, 1997 and 1998 was $173 thousand, $284 thousand and $184 thousand, respectively. 32 35 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (9) LEASES The Company is committed under various noncancelable operating leases for factory, showroom, warehouse, office, production, design and retail store space. The leases expire on various dates through 2006. Future minimum lease payments under noncancelable operating leases as of December 31, 1998 are as follows:
YEAR 1999 $ 2,625,583 2000 2,448,332 2001 1,617,344 2002 1,444,814 2003 1,180,862 Thereafter 353,452 ------------- $ 9,670,387 =============
Total rent expense charged to operations was $3.7 million, $3.0 million and $2.8 million for the years ended December 31, 1996, 1997 and 1998, respectively. (10) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities at December 31, 1997 and 1998 consist of the following:
1997 1998 ---------- ---------- Accrued compensation $1,368,566 $ 291,122 Restructuring costs 317,730 62,827 Other accrued expenses 1,733,232 856,969 ---------- ---------- $3,419,528 $1,210,918 ========== ==========
(11) OTHER INCOME, NET Other income, net for the years ended December 31, 1996, 1997 and 1998 includes primarily royalty, commission and licensing income of $2.3 million, $2.6 million and $2.1 million, respectively. 33 36 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (12) INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1996, 1997 and 1998 are as follows:
1996 1997 1998 ----------- ----------- ----------- Current: Federal $ 3,484,124 $(2,804,577) $(3,153,436) State and local 835,702 206,630 55,392 ----------- ----------- ----------- 4,319,826 (2,597,947) (3,098,044) ----------- ----------- ----------- Deferred: Federal 180,500 (321,450) (5,131,818) State and local 43,500 (68,131) 3,055 ----------- ----------- ----------- 224,000 (389,581) (5,128,763) ----------- ----------- ----------- $ 4,543,826 $(2,987,528) $(8,226,807) =========== =========== ===========
At December 31, 1998, the Company had state net operating loss carryforwards of approximately $27 million, which expire in various amounts through 2002. 35 37 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 The tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities that are included in the net deferred tax assets (liabilities) at December 31, 1997 and 1998 are as follows:
1997 1998 ----------- ----------- Deferred tax assets: Amortization of goodwill $ -- $ 4,889,273 Uniform inventory capitalization 252,069 133,367 Accrued expenses and other assets and liabilities 639,316 1,278,985 Net operating losses, principally state 862,349 1,334,211 Depreciation on property and equipment 95,268 -- ----------- ----------- 1,849,002 7,635,836 Valuation allowance (727,114) (2,088,374) ----------- ----------- 1,121,888 5,547,462 Deferred tax liabilities: Amortization of goodwill (812,307) -- Depreciation on property and equipment -- (109,118) =========== =========== Net deferred tax assets $ 309,581 $ 5,438,344 =========== ===========
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 upon the level of historical taxable income, projections for future taxable income over the periods in which the temporary differences are deductible and tax planning strategies that can be implemented by the Company, management has established valuation allowances at December 31, 1997 and 1998, of $727 thousand and $2.1 million, respectively. Management believes that future taxable income of the Company will more likely than not be sufficient to recover the remaining net deferred tax assets. 36 38 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 A reconciliation of the provision for income taxes and the amounts computed by applying the Federal income tax rate of 34% to earnings (loss) before income tax expense (benefit) is as follows for the years ended December 31, 1996, 1997 and 1998:
1996 % 1997 % 1998 % ----------- ---- ----------- ---- ----------- ---- Income tax on earnings (loss) before income tax expense (benefit) computed at statutory rate $ 4,052,925 34.0% $(3,053,048) (34.0%) $(8,341,909) (34.0%) State and local income tax, net of Federal income tax benefit 580,273 4.9 (635,705) (7.1) (1,322,685) (5.4) Valuation allowance -- -- 727,114 8.1 1,361,260 5.5 Other (89,372) (0.8) (25,889) (0.3) 76,527 0.3 ----------- ---- ----------- ---- ----------- ---- $ 4,543,826 38.1% $(2,987,528) (33.3%) $(8,226,807) (33.5%) =========== ==== =========== ==== =========== ====
(13) 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, 1998, there were 352,360 additional shares available for grant under the Plan. The per share weighted-average fair values of stock options granted during 1996, 1997 and 1998 were $10.54, $3.42 and $3.17, 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 6.6%, expected volatility of 85% (64% in 1996 and 1997) and an expected life of 7 years. 37 39 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 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 1996, 1997 and 1998 net earnings (loss) would have been reduced to the pro forma amounts indicated below:
1996 1997 1998 ----------- ------------ -------------- Net earnings (loss) - as reported $ 7,376,541 $ (5,992,024) $ (16,308,219) - pro forma 6,977,000 $ (6,378,000) $ (16,081,000) Basic net earnings (loss) per share - as reported $ .87 $ (.72) $ (2.03) - pro forma $ .82 $ (.76) $ (2.00) Diluted net earnings (loss) per share - as reported $ .86 $ (.72) $ (2.03) - pro forma $ .82 $ (.76) $ (2.00)
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. 38 40 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 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, 1995 $13.00 372,600 Granted $15.30 336,790 Exercised $13.00 (4,840) Forfeited $11.59 (4,900) -------- 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 ======== Options exercisable: December 31, 1996 $13.59 347,144 December 31, 1997 $13.83 412,638 December 31, 1998 $ 5.00 350,912
At December 31, 1998, the weighted-average remaining contractual life of outstanding options was approximately 7.6 years. In May 1998, the Company repriced 408,500 options at $5.00. 39 41 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 (14) BUSINESS RISKS AND CREDIT CONCENTRATIONS A significant amount of the MC and AVE 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. 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 11% of the Company's sales in 1998 but no single customer accounted for more than 10% in 1997 and 1996. The AVE division had three customers in 1998 and 1997 and two customers in 1996, which represented over 10% of its sales for those years. Sales to the respective customers aggregated approximately 56%, 49% and 24% of AVE's sales in 1998, 1997 and 1996, respectively. The MC division had two customers in 1998 and one customer in 1997 that represented over 10% of its sales for those years. Sales to the respective customers represented 24% and 11% of MC's sales in 1998 and 1997, respectively. Receivables from three customers represented approximately 44% of accounts receivable at December 31, 1998. However, no customer balance exceeded $1.8 million. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, and adverse change in those factors could affect the Company's estimates of its bad debts. (15) 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. (16) SEGMENT REPORTING The divisions of the Company include: MC, AVE and Flapdoodles, for which a summary of each follows: - MC designs, manufactures and distributes "better" women's knitwear. - AVE designs and distributes relaxed and stylish sportswear for women. AVE also maintains licensees ranging from scarves, swimwear, eyewear and shoes to cosmetics, travel, bags and luggage. o Flapdoodles design, manufactures and distributes comfortable, high-quality, functional children's clothing. Flapdoodles also maintains licenses for footwear and sleepwear. 40 42 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1997 and 1998 The accounting policies of the operating divisions are the same as those described in the summary of accounting policies. The Company evaluates performance based on stand-alone division earnings (loss) before income taxes. The following information is provided in 000's:
MC AVE FLAPDOODLES ELIMINATION CONSOLIDATED -------- -------- ----------- ----------- ------------ 1998 Net sales $ 25,393 $ 19,690 $ 29,524 -- $ 74,607 Depreciation and amortization 106 1,345 874 -- 2,325 Operating earnings (loss) (2,237) (25,076) 1,315 -- (25,998) Interest income (expense), net 212 (3,538) (1,018) 3,661 (683) Earnings (loss) before taxes (1,810) (26,690) 304 3,661 (24,535) Total assets 16,649 10,099 18,733 (1,052) 44,429 Long-lived assets 134 6,931 8,839 -- 15,904 Capital expenditures 37 74 323 -- 434 1997 Net sales $ 28,944 $ 29,884 $ 32,572 -- $ 91,400 Depreciation and amortization 183 1,650 780 -- 2,613 Operating earnings (loss) (6,261) (8,687) 3,847 -- (11,101) Interest income (expense), net 267 (3,114) (997) 3,434 (410) Earnings (loss) before taxes (5,736) (9,528) 2,850 3,434 (8,980) Total assets 17,501 31,673 22,074 (6,051) 65,197 Long-lived assets 284 24,783 9,414 -- 34,481 Capital expenditures 50 458 788 -- 1,296 1996 Net sales $ 46,663 $ 39,217 $ 29,657 -- $ 115,537 Depreciation and amortization 205 1,628 800 -- 2,633 Operating earnings (loss) 2,233 3,831 4,420 -- 10,484 Interest income (expense), net (75) (2,795) (1,392) 3,405 (857) Earnings before taxes 2,491 2,996 3,028 3,405 11,920 Total assets 17,604 35,550 21,335 (8,290) 66,199 Long-lived assets 400 26,031 9,182 -- 35,613 Capital expenditures 130 343 208 -- 681
Eliminations consist of intercompany interest charges and intercompany accounts. 41 43 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 14, 1999, which will be filed with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. 42 44 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........................................................... 20 Consolidated Financial Statements: Consolidated Balance Sheets -- December 31, 1997 and 1998......................... 21 Consolidated Statements of Operations and Comprehensive Income (Loss) -- Years ended December 31, 1996, 1997 and 1998.................................. 22 Consolidated Statements of Stockholders' Equity -- Years ended December 31, 1996, 1997 and 1998.................................. 23 Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1997 and 1998.............................................. 24 Notes to Consolidated Financial Statements........................................ 26 (a) (2) The following is a list of all financial statement schedules for the years ended December 31, 1996, 1997 and 1998 filed as part of this Report: Schedule II -- Valuation and Qualifying Accounts................................... 44 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........................................... 45 (b) No reports on Form 8-K were filed during the fourth quarter of 1998 (c) See accompanying Index to Exhibits........................................... 45 (d) None
43 45 MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Beginning Costs and Balance at Description of Period Expenses Deductions (a) End of Period - ----------- ---------- ---------- -------------- ------------- Allowance for doubtful accounts: TRADE Year ended December 31, 1996 $ 136,199 309,774 372,629 73,344 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
(a) Deductions represent write-offs of specifically identified accounts. 44 46 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 January 1, 1996, by and among Adrienne Vittadini, Inc. ("AVI"), the Company, and Adrienne Vittadini Enterprises, Inc. ("AVE")................................................................ .** 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..................................................................... *** 4.4 Registration Rights Agreement, dated as of January 1, 1996, by and among the Company, AVI, and the other parties listed on the signature pages thereto............ ** 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........................................................ *** 10.7+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Elliot R. Epstein........................................................ *** 10.8+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between the Company and Robert Davidoff.......................................................... ***
45 47
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................ *** 10.15+ Employment Agreement between the Company and Zachary Solomon, dated February 18, 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............................................ * 10.18 Trademark Assignment Agreement, dated as of January 1, 1996, by and among Vittadini Ltd., the Company and AVE.............................................................. ** 10.19 Trademark Collateral Assignment, dated as of January 1,1 996, by and among AVI, the Company, and AVE........................................................................ ** 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................... **** 10.22 Termination agreement dated September 30, 1998, by and among Adrienne Vittadini, Gianluigi Vittadini, and the Company......................................................................... **** 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. 46 48 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 Report on Form 10-Q, filed on November 12, 1996. ***** Incorporated by reference to the Exhibits filed with the Company's Report on Form 10-Q, filed on November 16, 1998. + 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 47 49 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 24, 1999 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 24, 1999 - ------------------------------ Officer and President Michael H. Lerner /s/ S. E. Melvin Hecht Chief Financial Officer, March 24, 1999 - ------------------------------ Treasurer and Director S. E. Melvin Hecht /s/ Marc Ham Vice Chairman March 24, 1999 - ------------------------------ Marc Ham /s/ G. Michael Dees Director March 24, 1999 - ------------------------------ G. Michael Dees /s/ Christine M. Carlucci Director March 24, 1999 - ------------------------------ Christine M. Carlucci /s/ Robert Davidoff Director March 24, 1999 - ------------------------------ Robert Davidoff /s/ Lawrence D. Glaubinger Director March 24, 1999 - ------------------------------ Lawrence D. Glaubinger /s/ Brett J. Meyer Director March 24, 1999 - ------------------------------ Brett J. Meyer /s/ David W. Zalaznick Director March 24, 1999 - ------------------------------ David W. Zalaznick
Dated: March 24, 1999 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 March 3, 1999, relating to the consolidated balance sheets of Marisa Christina, Incorporated and subsidiaries as of December 31, 1997 and 1998 and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Marisa Christina, Incorporated. KPMG LLP New York, New York March 25, 1999 48 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION FINANCIAL INFORMATION FOR MARISA CHRISTINA, INCORPORATED'S CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 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, 1998. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 981,329 0 9,073,945 (379,581) 8,600,980 23,177,991 4,916,561 (2,190,411) 44,428,564 14,265,717 0 0 0 85,868 30,076,979 44,428,564 74,607,115 74,607,115 55,377,000 45,228,064 0 369,779 682,558 (24,535,026) (8,226,807) (16,308,219) 0 0 0 (16,308,219) (2.03) (2.03)
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