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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 2002
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or
[] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number: 0-24176
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Marisa Christina, Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 11-3216809
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
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(Address of principal executive offices) (Zip Code)
(201)-758-9800
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Company's Common Stock on August
12, 2002 were 7,295,065.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -- June 30, 2002 (Unaudited)
and December 31, 2001 2
Consolidated Statements of Operations and Comprehensive Loss --
Three and Six Months Ended June 30, 2002 and 2001 (Unaudited) 3
Consolidated Statements of Cash Flows -- Six Months Ended
June 30, 2002 and 2001 (Unaudited) 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 11
Item 4: Submission of Matters to a Vote of Security Holders 11
Item 6: Exhibits and Reports on Form 8-K 11
SIGNATURE 12
PART I: FINANCIAL INFORMATION
ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 2002 2001 (1)
------------ ------------
Current assets: (UNAUDITED)
Cash and cash equivalents $ 3,470,601 $ 3,330,602
Trade accounts receivable, less allowance for doubtful
accounts of $377,296 in 2002 and $365,000 in 2001 1,542,420 3,160,273
Inventories 1,530,860 1,742,835
Prepaid expenses and other current assets 1,015,277 431,419
Total current assets 7,559,158 8,665,129
------------ ------------
Property and equipment, net 372,281 404,274
Other assets 104,192 129,192
------------ ------------
Total assets $ 8,035,631 $ 9,198,595
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 908,996 $ 833,437
Accrued expenses and other current liabilities 339,784 458,554
------------ ------------
Total current liabilities 1,248,780 1,291,991
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued -- --
Common stock, $.01 par value. Authorized 15,000,000
shares; 8,586,769 shares issued 85,868 85,868
Additional paid-in capital 31,664,680 31,664,680
Accumulated other comprehensive loss (57,924) (57,924)
Accumulated deficit (20,801,497) (19,681,744)
Treasury stock, 1,291,704 common shares (4,104,276) (4,104,276)
------------ ------------
Total stockholders' equity 6,786,851 7,906,604
------------ ------------
Total liabilities and stockholders' equity $ 8,035,631 $ 9,198,595
============ ============
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 2001.
See accompanying notes to consolidated financial statements.
2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 3,259,920 $ 4,892,532 $ 9,524,076 $ 13,580,905
Cost of goods sold 2,905,056 4,198,032 6,886,658 10,044,121
------------ ------------ ------------ ------------
Gross profit 354,864 694,500 2,637,418 3,536,784
Selling, general and administrative
expenses 1,811,895 2,192,072 3,881,649 4,852,921
------------ ------------ ------------ ------------
Operating loss (1,457,031) (1,497,572) (1,244,231) (1,316,137)
Other income, net 66,635 89,318 87,207 118,252
Interest income, net 21,970 10,502 40,255 36,130
------------ ------------ ------------ ------------
Loss before income tax
expense (benefit) (1,368,426) (1,397,752) (1,116,769) (1,161,755)
Income tax expense (benefit) -- -- 2,984 (80)
------------ ------------ ------------ ------------
Net loss (1,368,426) (1,397,752) (1,119,753) (1,161,675)
Other comprehensive income
net of tax-- foreign currency
translation adjustment -- 1,824 -- --
------------ ------------ ------------ ------------
Comprehensive loss $ (1,368,426) $ (1,395,928) $ (1,119,753) $ (1,161,675)
============ ============ ============ ============
Net loss per common share:
Basic $ (0.19) $ (0.19) $ (0.15) $ (0.16)
Diluted $ (0.19) $ (0.19) $ (0.15) $ (0.16)
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (1,119,753) $ (1,161,675)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 71,658 91,442
Bad debt expense 124,998 70,000
Changes in operating assets and liabilities:
Trade accounts receivable 1,492,855 520,084
Inventories 211,975 (667,135)
Prepaid expenses and other assets (558,858) (438,733)
Trade accounts payable 75,559 (346,362)
Accrued expenses and other current liabilities (118,770) (139,519)
------------ ------------
Net cash provided by (used in) operating activities 179,664 (2,071,898)
------------ ------------
Cash flows from investing activities:
Property and equipment additions (39,665) (291,181)
------------ ------------
Net cash used in investing activities (39,665) (291,181)
------------ ------------
Net increase (decrease) in cash and cash equivalents 139,999 (2,363,079)
Cash and cash equivalents at beginning of period 3,330,602 3,240,052
------------ ------------
Cash and cash equivalents at end of period $ 3,470,601 $ 876,973
============ ============
See accompanying notes to consolidated financial statements.
4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months ended June 30, 2002 and 2001
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its wholly owned
subsidiaries (the "Company"). Significant intercompany accounts and
transactions are eliminated in consolidation.
The unaudited consolidated financial statements do not include all
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America. For further information, such as
the significant accounting policies followed by the Company, refer to the
notes to the Company's audited consolidated financial statements, included
in its annual report on Form 10-K for the year ended December 31, 2001.
In the opinion of management, the unaudited consolidated financial
statements include all necessary adjustments (consisting of normal,
recurring accruals), for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented.
The results of operations for the three months and six months ended June
30, 2002 and 2001 are not necessarily indicative of the operating results
to be expected for a full year.
(2) INVENTORIES
Inventories at June 30, 2002 and December 31, 2001 consist of the
following:
2002 2001
------------ ------------
Piece goods $ 63,770 $ 50,050
Finished goods 1,467,090 1,692,785
------------ ------------
$ 1,530,860 $ 1,742,835
============ ============
(3) BORROWINGS UNDER CREDIT FACILITY
The Company has a $17.5 million line of credit facility with a finance
company, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under
the facility are secured by certain of the Company's assets, primarily
inventory and trade accounts receivable, and bear interest at the prime
rate plus 0.75%. The Company is required to pay an annual commitment fee
of approximately $50,000. The credit facility contains various covenants
that require minimum levels of working capital and net tangible worth.
As of June 30, 2002, there were no borrowings and $303,000 of commercial
letters of credit outstanding under the credit facility. Available
borrowings at June 30, 2002 were $2.5 million. The arrangement expires on
June 14, 2004 and is cancelable by either party with 90 days' written
notice. The Company expects to have sufficient financing to meet its
working capital needs throughout 2002. As of December 31, 2001, there were
no borrowings outstanding under the credit facility.
(Continued)
5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Six months ended June 30, 2002 and 2001
(4) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are based on the weighted
average number of common shares outstanding, which was 7,295,065 for the
three and six months ended June 30, 2002 and 7,299,785 for the three and
six months ended June 30, 2001. The effect of stock options outstanding
during the three and six months ended June 30, 2002 and 2001 was not
included in the computation of diluted loss per common share because the
effect would have been antidilutive.
(5) 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.
6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Marisa Christina's
consolidated financial statements and the notes thereto that follow in this Form
10-Q for the three and six months ended June 30, 2002.
Forward-Looking Statements
This report on Form 10-Q contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. The statements
regarding Marisa Christina in this document that are not historical in nature,
particularly those that utilize terminology such as "may," "will," "should,"
"likely," "expects," "anticipates," "estimates," "believes" or "plans," or
comparable terminology are forward-looking statements based on current
expectations about future events, which Marisa Christina has derived from
information currently available. These forward-looking statements involve known
and unknown risks and uncertainties that may cause our results to be materially
different from results implied in such forward-looking statements. Those risks
include, among others, risks associated with the apparel industry, the
dependence on senior management maintaining sufficient working capital
financing, price pressures and other competitive factors, and a softening of
retailer or consumer acceptance of the Company's products leading to a decrease
in anticipated revenues and gross profit margins.
Critical Accounting Policies
Critical accounting policies are those that are both important to the
presentation of our financial condition and results of operations and require
management's most difficult, complex or subjective judgments. The Company's most
critical accounting policies relate to estimates related to allowances for
uncollectible receivables, customer sales allowances and valuation of
inventories.
Receivables
Allowances are provided for estimated uncollectible receivables based on review
of specific accounts and historical experience. Allowances and credits, which
are given to customers in connection with sales incentives and promotional
activities, are recognized as reductions of sales when the related sales revenue
is earned and recognized. Events or changes in market conditions that adversely
impact our customers or the Company's ability to generate sales, could impact
management's estimates of uncollectible receivables or require the Company to
offer greater sales incentives, which could negatively impact sales or profits
in the future.
Inventories
Inventories are stated at the lower of cost, by the first-in, first-out method
or market. In assessing the market value of its inventories, particularly those
with slower turnover, the Company considers the estimated sales value less costs
to dispose and a reasonable profit margin and assesses the likelihood of
realizing the recorded amounts of inventory. Changes in market conditions could
impact the Company's ability to achieve sales at the estimated selling prices
and could negatively impact the carrying value of the Company's inventory.
7
OVERVIEW
In order to reverse the trend of continuing losses, the Company undertook a
number of initiatives over the past four years to reduce overhead, replace
certain sales and marketing personnel and exit unprofitable product lines. Most
significantly, in an effort to refocus its resources on its core business, the
Marisa Christina product lines (MC), the Company disposed of its Flapdoodles
division (Flapdoodles) in 2000 and its Adrienne Vittadini division (AVE) in
1999.
The Company returned to profitability in 2001 primarily as a result of these
initiatives and focusing on its core business. While there can be no assurance,
management believes that the Company's prospects for profitability will continue
in calendar 2002.
The following table sets forth information with respect to the percentage
relationship to net sales of certain items of the consolidated statements of
operations of the Company for the three and six months ended June 30, 2002 and
2001.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
-------- -------- -------- --------
Gross profit 10.9 14.2 27.7 26.0
Selling, general and administrative
expenses 55.6 44.8 40.8 35.7
-------- -------- -------- --------
Operating loss (44.7) (30.6) (13.1) (9.7)
Other income, net 2.0 1.8 0.9 0.9
Interest income, net 0.7 0.2 0.4 0.2
Income tax expense -- -- -- --
-------- -------- -------- --------
Net loss (42.0)% (28.6)% (11.8)% (8.6)%
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2002 (2002) COMPARED WITH THREE MONTHS ENDED JUNE
30, 2001 (2001)
Net sales. Net sales decreased 33.4% from $4.9 million in 2001 to $3.3 million
in 2002, primarily as a result of discontinuing an unprofitable label and a
general downturn in the economy post September 11.
Gross profit. Gross profit decreased 48.9% from $0.7 million in 2001 to $0.4
million in 2002, primarily as a result of lower sales. As a percentage of net
sales, gross profit decreased from 14.2% in 2001 to 10.9% in 2002, primarily as
a result of certain fixed design and production costs on a lower sales base.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 17.3% from $2.2 million in 2001 to $1.8
million in 2002, primarily as a result of cost reductions associated with a
discontinued label and lower variable selling costs. As a percentage of net
sales of the Company, SG&A increased from 44.8% in 2001 to 55.6% in 2002 as a
result of a lower sales base in 2002.
Other income, net. Other income, net, which consists of royalty and licensing
income, was $89.3 thousand and $66.6 thousand in 2001 and 2002, respectively.
Interest income, net. Interest income, net changed from $10.5 thousand in 2001
to $22.0 thousand in 2002, as a result of higher invested balances, offset
partially by lower interest rates.
Income tax expense. As of December 31, 2001, the Company had net operating loss
carryforwards of approximately $31.0 million, which may be used to offset future
taxable income through 2018.
Net loss. Net loss was $1.4 million in 2001 and 2002.
8
SIX MONTHS ENDED JUNE 30, 2002 (2002) COMPARED WITH SIX MONTHS ENDED JUNE 30,
2001 (2001)
Net sales. Net sales decreased 29.9% from $13.6 million in 2001 to $9.5 million
in 2002, primarily as a result of discontinuing an unprofitable label and a
general downturn in the economy post September 11.
Gross profit. Gross profit decreased 25.4% from $3.5 million in 2001 to $2.6
million in 2002, primarily as a result of the lower sales. As a percentage of
net sales, gross profit increased from 26.0% in 2001 to 27.7% in 2002, primarily
as a result of improved pricing on selective sales during the first quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 20.0% from $4.9 million in 2001 to $3.9
million in 2002, primarily as a result of cost reductions associated with a
discontinued label and lower variable selling costs. As a percentage of net
sales of the Company, SG&A increased from 35.7% in 2001 to 40.8% in 2002, due to
a lower sales base in 2002.
Other income, net. Other income, net, which consists of royalty and licensing
income, was $118.3 thousand in 2001 and $87.2 thousand in 2002.
Interest income, net. Interest income, net increased from $36.1 thousand in 2001
to $40.3 thousand in 2002, principally as the result of higher invested
balances.
Income tax expense. As of December 31, 2001, the Company had net operating loss
carryforwards of approximately $31.0 million, which may be used to offset future
table income through 2018.
Net loss. Net loss was $1.2 million in 2001 and $1.1 million in 2002.
SEASONALITY
The Company's business is seasonal, with a substantial portion of its revenues
and earnings occurring during the second half of the year as a result of the
Back-to-School, Fall and Holiday selling seasons. This is due to both a larger
volume of unit sales in these seasons and traditionally higher prices for Fall
and Holiday season garments, which generally require more costly materials than
the Spring/Summer and Resort seasons. Merchandise from the Back-to-School and
Fall collections, the Company's largest selling seasons, and Holiday, the
Company's next largest season, are shipped in the last two fiscal quarters.
Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume
seasons, is shipped primarily in the first two quarters. In addition, prices of
products in Resort, Spring/Summer and Early Fall collections average 5% to 50%
lower than in other selling seasons.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17.5 million line of credit facility with a finance company,
which may be utilized for commercial letters of credit, banker's acceptances,
commercial loans and letters of indemnity. Borrowings under the facility are
secured by certain of the Company's assets, primarily inventory and trade
accounts receivable, and bear interest at the prime rate plus 0.75%. The
arrangement expires on June 14, 2004. The Company is required to pay an annual
commitment fee of approximately $50,000. The credit facility contains various
covenants that require minimum levels of working capital and net tangible worth.
As of June 30, 2002, there were no borrowings and $303,000 of commercial letters
of credit outstanding under the credit facility. Available borrowings at June
30, 2002 were $2.5 million.
During the six months ended June 30, 2002, the Company had capital expenditures
of approximately $40,000, primarily for upgrading computer systems. Capital
expenditures for the remainder of 2002 are expected to be approximately $60,000.
These capital expenditures will be funded by internally generated funds and, if
necessary, borrowings under the Company's credit facility. The Company's
contractual cash obligations related to operating leases as of June 30, 2002
include approximately $300,000 for the remainder of 2002; $528,000 in 2003;
$529,000 in 2004; $452,000 in 2005, and $5,000 in 2006.
EXCHANGE RATES
Although it is Company policy to contract for the purchase of imported
merchandise in United States dollars, reductions in the value of the dollar
could result in the Company paying higher prices for its products. During the
last three fiscal years, however, currency fluctuations have not had an impact
on the Company's cost of merchandise. The Company does not engage in hedging
activities with respect to such exchange rate risk.
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However,
interest expense has not been and is not expected to be a material expense of
the Company throughout 2002. The Company has implemented management monitoring
processes designed to minimize the impact of sudden and sustained changes in
interest rates. The Company's floating rate debt is based on the prime rate;
however, there were no borrowings outstanding at June 30, 2002.
Currently, the Company does not use foreign currency forward contracts or
commodity contracts and does not have any material foreign currency exposure.
All purchases from foreign contractors are made in United States dollars and the
Company's investment in its foreign subsidiary was $140,000 at June 30, 2002.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings required to be disclosed in response to Item 103
of Regulation S-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following are the results of the balloting at the Registrant's Annual
Meeting of Stockholders held on May 16, 2002:
FOR WITHHELD
------------- -------------
1. Election of Directors:
Michael H. Lerner 4,797,079 24,200
S.E. Melvin Hecht 4,797,079 24,200
Brett J. Meyer 4,767,079 54,200
Robert Davidoff 4,797,079 24,200
Barry S. Rosenstein 4,797,079 24,200
G. Michael Dees 4,733,359 87,920
Lawrence D. Glaubinger 4,797,079 24,200
David W. Zalaznick 4,797,079 24,200
2. Ratification of the appointment of KPMG LLP as the independent public
accountants of the company for the year ending December 31, 2002.
FOR AGAINST ABSTAIN
--- ------- -------
4,818,479 2,800 --
3. In their discretion, the proxies are authorized to vote such other matters as
may properly come before this annual meeting of shareholders.
FOR AGAINST ABSTAIN
--- ------- -------
4,803,979 17,300 --
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K -- no reports on Form 8-K were filed during the quarter
ended June 30, 2002.
11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 12, 2002 /s/ S. E. Melvin Hecht
----------------- -------------------------------------
S. E. Melvin Hecht
Vice Chairman,
Chief Financial Officer and Treasurer
12
MARISA CHRISTINA, INCORPORATED
SECTION 906 CERTIFICATION
The following statement is provided by the undersigned to accompany the
foregoing Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and shall not be deemed filed pursuant to any provision of the Exchange
Act of 1934 or any other securities law:
Each of the undersigned certifies that the foregoing Report on Form
10-Q fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the
information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations
of Marisa Christina, Incorporated.
/s/ Michael H. Lerner /s/ S. E. Melvin Hecht
- ---------------------------------- --------------------------------------
Michael H. Lerner S. E. Melvin Hecht
Chairman, Chief Executive Officer Vice Chairman, Chief Financial Officer
and President and Treasurer
Marisa Christina, Incorporated Marisa Christina, Incorporated
13