ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Marisa Christina, Incorporated (the "Company" or "Marisa") designs, manufactures, sources and markets a broad line of high quality clothing for women primarily under the Marisa Christina (TM) label. The Company operates in one business segment.
Founded in 1971, the Company had several ownership changes prior to its public offering in 1994. The Company acquired Flapdoodles, Inc. in 1993 and Adrienne Vittadini Enterprises, Inc. in 1996. In September 1999 and December 2000, the Company disposed of substantially all the assets, property and rights of Adrienne Vittadini Enterprises, Inc. and Flapdoodles, Inc., respectively.
The Company's business strategy is to: (i) offer distinctive products that reflect consumer preferences, (ii) introduce new products, (iii) expand distribution through new and existing channels, (iv) minimize inventory risk and (v) emphasize customer service.
Principal Product Lines
The Company is best known for its high quality sweaters characterized by modern styling, unique details, exciting yarns and textures, and special occasion designs. Marisa Christina's product line has evolved into a true sportswear offering that also includes a selection of other styles encompassing knitted and casual garments and complementary pieces such as skirts, slacks and jackets, which are also produced in petite and large sizes. Suggested retail prices for Marisa Christina products generally range from $80.00 to $140.00 for a sweater, $40.00 to $60.00 for a specialty T-shirt and $50.00 to $100.00 for a woven skirt or pants.
Marisa offers four "lines" per year. These are marketed under two primary labels: Marisa Christina and Christina Rotelli. Each of the four offerings cover various seasons, i.e., fall, holiday, resort and spring. Fabrications vary from cotton and linen blends to synthetic and wool blends depending upon the season. Each season consists of approximately 140 styles organized into approximately eight to twelve groupings. In addition, the Company offers private label and exclusive merchandise under various labels. Exclusive and private label merchandise is an important factor in Marisa Christina's overall offerings.
In each selling season, the Company also offers a selection of complementary blouses, skirts, pants, and jackets, which, when combined with sweaters, create complete outfits. The Company estimates that approximately 90% of Marisa Christina customers order complementary pieces, and it is Marisa Christina's policy to sell these orders as a group so that it can create a single, unified display of merchandise. In addition, certain designs and colors are designated as exclusive merchandise for customers seeking to differentiate themselves from other retailers by creating brand identity and signature looks.
Design, Production, and Raw Materials
The Company has a staff of 6 designers and merchandisers located in New York City and 5 merchandisers located in Hong Kong. The staff is divided into independent teams, each of which is responsible for certain labels and for creating several groupings each season, which include knitwear and complementary pieces. As the Company expands its product line to incorporate new design and merchandising concepts, it hires designers and freelancers with expertise in the new product area. Designers are selected based upon their experience, their ability to create interesting and original designs, and their expertise in knitting techniques and technology. The Company believes that its ability to create fresh and original designs while maintaining the "look" of each of its labels is critical for success.
The design staff constantly monitors emerging trends in fashions and popular culture and may travel during the year in order to stay abreast of new designs and trends. The Company also subscribes to design services that summarize fashion trends worldwide. The design process generally requires ten to twelve weeks from the initial concept stage to completion of sample garments for a seasonal offering. The process begins with concept boards, developed by the Company's design staff, showing style and color ideas. After review by senior executives and sales staff, certain concept boards are selected for further development. From these selections, new boards are created showing detailed designs for garments and, after further review, drawings are selected to be produced as prototype samples. The Company's merchandisers in Hong Kong, as well as agents throughout Europe and Asia, work with manufacturers in executing and correcting all prototype samples. Prototype samples are reviewed by the design staff, as well as senior executives and sales staff, before final showroom samples are created, which generally requires six to eight weeks.
To minimize inventory risk, the Company normally places orders for the production of the large majority of its merchandise only upon receipt of customer orders.
The Company negotiates with suppliers for the purchase of all raw materials required for use by its United States contractors, in accordance with its specifications and based on orders taken for the upcoming season. Raw materials required for use by the Company's foreign-based contractors are procured by the contractors in accordance with the Company's specifications. Approximately sixty percent of the garments in the Marisa Christina product line consist of sweaters that have been knit or cut and sewn in The People's Republic of China and Hong Kong. Turkey, Greece and Korea are also significant sources of supply to the Company.
The Company's products may be significantly affected by economic, political, governmental and labor conditions in The People's Republic of China until alternate sources of production can be found.
Management of the Company believes raw materials to be readily available and can be provided from a number of alternative suppliers.
Sales and Marketing
Marisa Christina has a direct sales force of 6 full-time salespersons located in its New York showroom who are compensated on a salaried basis. The direct sales force is responsible for Marisa Christina's large department store and specialty store chain accounts. Marisa Christina also utilizes independent sales representatives who market Marisa Christina products to independent specialty stores and boutiques and are compensated on a commission basis. In many cases, these representatives also market products of other non-competing apparel companies that have been approved by the Company. In addition, Marisa Christina has a licensing arrangement in Japan.
Distribution
The Company uses a centralized distribution system, under which all merchandise is received, processed and distributed through the Company's distribution facility located in North Bergen, New Jersey. Merchandise received at the distribution center is promptly inspected to insure expected quality in workmanship and conformity to Company sizing specifications. The merchandise is then packed for delivery and shipped to its customers, principally by common carrier.
Trademarks
The Company owns all rights, title and interest in Marisa Christina and its other trademarks. Marisa Christina's trademarks are registered in the U.S. Patent and Trademark Office and also in many foreign countries.
The Company diligently and vigorously protects its original designs against infringement.
Seasonality
The Company's business is seasonal, with a substantial portion of its revenues and earnings occurring during the second half of the year as a result of the Fall and Holiday selling seasons. This is due to both a larger volume of unit sales in these seasons and traditionally higher prices for Fall and Holiday season garments, which generally require more costly materials than the Spring/Summer and Resort seasons. Merchandise from the Fall collection, the Company's largest selling season and Holiday, the Company's next largest season, are shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume selling seasons, are shipped primarily in the first two quarters. In addition, prices of products in the Resort, Spring/Summer and Early Fall collections average 5% to 10% lower than in the other selling seasons. In 2004, net sales of the Company's products were $5.6 million in the first quarter, $2.5 million in the second quarter, $8.4 million in the third quarter and $5.5 million in the fourth quarter.
Customers
The Company's products are currently sold in approximately 2,800 individual stores by over 1,390 retailers. Approximately 51% of the Company's 2004 net sales consisted of sales to specialty stores and specialty store chains, including Talbots and Coldwater Creek, and 29% consisted of sales to department stores, including Saks Incorporated, Dillards and Lord & Taylor. The balance was sold to catalog merchandisers, off-price retailers and others. In 2004, Saks Incorporated, Dillards and QVC accounted for approximately 10%, 8% and 7%, respectively, of the Company's net sales and were the only customers that individually accounted for more than 5% of the Company's net sales.
Backlog Orders
At January 31, 2005, the Company had unfilled customer orders of approximately $7.8 million compared with $10.2 million at January 31, 2004. 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, 2004, the Company employed approximately 60 people, including 3 executives, 8 persons in sales, retail, marketing and advertising, 11 persons in design and merchandising, 20 persons in administration, 10 persons in quality control and finishing and 8 persons in production. All employees are nonunion and management believes its relations with all employees are good.
AVAILABLE INFORMATION
Interested persons may obtain copies of filings the Company has made with the Securities and Exchange Commission (SEC) through the Company's website www.marisachristina.com or the SEC website www.sec.gov. Investors and other parties with questions, including requests for the Company's filings with the SEC (available without charge) should direct requests in writing to S.E. Melvin Hecht, Chief Financial Officer, Marisa Christina, Inc., 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601 or mhecht@marisachristina.com.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601. As of December 31, 2004, the general location, use and approximate size of the Company's principal properties, all of which are leased, are set forth below:
Marisa Christina has outsourced its receiving, warehousing and shipping functions to a third party adjacent to its North Bergen facility. Under the outsourcing agreement, the Company pays a fixed handling charge per unit with no minimum.
The Company believes that its existing facilities are well maintained, in good operating condition and that its existing facilities will be adequate for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. There are no pending material legal proceedings or environmental investigations to which the Company is a party or to which the property of the Company is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2004.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded over-the-counter under the symbol MRSA. Prior to December 27, 2004, the Company's Common Stock was traded on the NASDAQ National Market. The table below presents the high and low bid prices for the Common Stock for each quarter during the two years ended December 31, 2004. The quotations in the table represent inter-dealer prices without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
While the Company has delisted from NASDAQ, it has not deregistered from reporting with the Securities and Exchange Commission (SEC) at this time. The Company is still in the process of evaluating opportunities and alternatives for the benefit of the Company and its stockholders. These could include sales, mergers, acquisitions, divestitures, recapitalizations, share repurchases or similar transactions; there can be no assurances the Company will be successful, and there can be no assurance that the Company will decide to proceed with any such transaction. Also, there can be no assurance that the Company will not deregister from the SEC in the future.
HOLDERS OF COMMON STOCK
The number of shareholders of record of the Company's Common Stock as of March 9, 2005, was 47. The Company believes there are approximately 530 beneficial holders of the Company's Common Stock.
On December 14, 1994, the Company announced an open market purchase program for its Common Stock. The Company has purchased 835,000 shares of Common Stock pursuant to this program.
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends on the Common Stock for the foreseeable future. From time to time, the board of directors intends to review the Company's dividend policy. Any payment of dividends will be at the direction of the Board of Directors and will be dependent on the earnings and financial requirements of the Company and other factors, including the restrictions imposed by the General Corporation Law of the State of Delaware and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The information that follows should be read in conjunction with the consolidated financial statements and notes thereto that appear elsewhere in this Form 10-K and Management's Discussion and Analysis of Financial Condition and Results of Operations.
(1) Net sales for the year ended December 31, 2000 include net sales of $18.7 million from the Company's Flapdoodles division, which the Company sold in December 2000.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Marisa Christina's consolidated financial statements and the notes thereto that follow in this Form 10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The statements regarding Marisa Christina in this document that are not historical in nature, particularly those that utilize terminology such as "may," "will," "should," "likely," "expects," "anticipates," "estimates," "believes" or "plans," or comparable terminology, are forward-looking statements based on current expectations about future events, which Marisa Christina has derived from information currently available. These forward-looking statements involve known and unknown risks and uncertainties that may cause our results to be materially different from results implied in such forward-looking statements. Those risks include, among others, risks associated with the apparel industry, the dependence on senior management, maintaining sufficient working capital financing, price pressures and other competitive factors and a softening of retailer or consumer acceptance of the Company's products leading to a decrease in anticipated revenues and gross profit margins.
OVERVIEW
Over the past four years, the Company has undertaken a number of initiatives to focus resources, improve profitability and return the Company to its core business and history of success. These initiatives had returned the Company to profitable operations in 2001 and 2002, but softer demand for the Company's product in 2003 and 2004 led to operating losses. The softer retail economy has hurt margins during this period as customers required greater discounts and markdowns to move the product at the retail level. The Company has reduced selling, general and administrative expenses by $3.2 million over the last four years, primarily related to the closing of two unprofitable divisions, but also related to reducing operating costs commensurate with the size of the business.
Over most of the past four years, the Company's focus has been to eliminate unprofitable lines and reduce operating costs. During 2003, the senior management sharpened its focus on rebuilding the volume of the core business. In this regard, the sales function was restructured by hiring a new group of highly experienced people and realigning the sales function by dividing it into the Company's three main distribution channels (i.e., department stores, specialty stores and private label customers). The Company's new sales leadership is establishing tools to analyze profitability by customer for each of its selling locations in order to provide merchandise mixes for each retail location based on their consumer profile. Management believes that these initiatives together with a stronger retail economy will enable the Company to return to profitable operations in 2005.
While the Company's plans for the future are not dependent on one single strategy, the possible failure of a large number of new initiatives could have an adverse impact on profitability. In addition, the Company's results are heavily dependent upon demand for its Fall and Holiday product lines. In 2004, sales of Fall and Holiday product represented 57% of the Company's net sales. Should the Company's customers not react positively to styles offered by the Company for the 2005 Fall and Holiday seasons or should the retail economy not improve, the Company may not be able to return to profitable operations in 2005.
Management believes the Company's balance sheet is strong. Cash at December 31, 2004 was over $5.4 million and total liabilities were $1.3 million. At December 31, 2004, the Company had no outstanding long-term debt and available borrowings of $3.2 million under a line of credit arrangement. During 2004, the Company had no borrowings outstanding under the line of credit. In addition, the Company has a Federal tax loss carryforward of approximately $30 million, which can be utilized in various amounts through 2024. This should meaningfully limit the amount of cash taxes the Company will owe on its taxable earnings, which may enhance future cash flows.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both important to the presentation of the Company's financial condition and results of operations and require management's most difficult, complex or subjective judgments. The Company's most critical accounting policies relate to estimates related to allowances for uncollectible receivables, customer sales allowances, valuation of inventories and valuation allowances for deferred tax assets.
Receivables
Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. Events or changes in market conditions that adversely impact our customers or the Company's ability to generate sales, could impact management's estimates of uncollectible receivables or require the Company to offer greater sales incentives, which could negatively impact sales or profits in the future. As of December 31, 2004, the Company had allowances for bad debts of approximately $192 thousand and allowances for sales incentives, promotional activities and trade discounts of approximately $1.0 million.
Inventories
Inventories are stated at the lower of cost, by the first-in, first-out method, or market. In assessing the market value of its inventories, particularly those with slower turnover, the Company considers the estimated sales value less costs to dispose and a reasonable profit margin and assesses the likelihood of realizing the recorded amounts of inventory. Changes in market conditions could impact the Company's ability to achieve sales at the estimated selling prices and could negatively impact the carrying value of the Company's inventory.
Valuation of Deferred Tax Assets
Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Management makes an assessment of the realizability of the Company's deferred tax assets. In making this assessment, management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income of the Company in making this assessment. A valuation allowance is recorded to reduce the total deferred income tax assets to its net realizable value. The Company's deferred tax assets related primarily to a U.S. net operating loss carryforward of approximately $30 million which can be utilized over the next twenty years.
During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its' assessment, management determined that operating results for the three-year period ended December 31, 2004 would not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.4 million to $11.3 million during the quarter ended September 30, 2004. The Company, as of December 31, 2004, had a full valuation allowance for its deferred tax assets. If the Company is able to realize taxable income in the future, the valuation allowance could be reduced.
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results for the years ended December 31, 2004, 2003, and 2002.
YEAR ENDED DECEMBER 31, 2004 (2004) COMPARED WITH YEAR ENDED DECEMBER 31, 2003 (2003)
Net sales. Net sales decreased 5.8%, from $23.4 million in 2003 to $22.0 million in 2004, primarily as a result of lower sales to a large private label account. Three customers accounted for 25% of the Company's net sales in 2004 and three customers accounted for 34% of the Company's net sales in 2003
Gross profit. Gross profit decreased 7.1%, from $7.1 million in 2003 to $6.6 million in 2004. As a percentage of net sales, gross profit decreased from 30.5% in 2003 to 30.1% in 2004, due to a slight change in product mix.
Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 9.4%, from $8.0 million in 2003 to $7.2 million in 2004, primarily as a result of reduced salaries and cost reduction initiatives. As a percentage of net sales, SG&A decreased from 34.0% in 2003 to 32.7% in 2004.
Interest income, net. Interest income, net increased from $21.5 thousand in 2003 to $31.4 thousand in 2004, primarily as the result of higher average invested cash balances and higher interest rates.
Other income, net. Other income, net, which consists primarily of royalty and licensing income, increased 4.4% from $163.9 thousand in 2003 to $171.0 thousand in 2004 due to higher licensee sales.
Income tax expense. Income tax expense changed from a benefit of $209.7 thousand in 2003 to an expense of $6.6 million in 2004. During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its' assessment, management determined that operating results for the three-year period ended December 31, 2004 would not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.4 million to $11.3 million during the quarter ended September 30, 2004. The Company, as of December 31, 2004, had a full valuation allowance for its deferred tax assets.
Net income (loss). Net loss was $431.4 thousand in 2003 compared to net loss of $7.0 million in 2004 due to factors discussed above.
YEAR ENDED DECEMBER 31, 2003 (2003) COMPARED WITH YEAR ENDED DECEMBER 31, 2002 (2002)
Net sales. Net sales decreased 13.3%, from $27.0 million in 2002 to $23.4 million in 2003, primarily as a result of flat or slightly lower sales to existing customers and due to the closing of a division. Three customers accounted for 34% of the Company's net sales in 2003 and two customers accounted for 29% of the Company's net sales in 2002.
Gross profit. Gross profit decreased 22.8%, from $9.2 million in 2002 to $7.1 million in 2003. As a percentage of net sales, gross profit decreased from 34.3% in 2002 to 30.5% in 2003, primarily as a result of higher markdowns and discounts.
Selling, general and administrative expenses. Selling, general and administrative expenses (SG&A) decreased 5.9%, from $8.5 million in 2002 to $8.0 million in 2003, primarily as a result of cost reduction initiatives and closing of a division. As a percentage of net sales, SG&A increased from 31.3% in 2002 to 34.0% in 2003.
Interest income, net. Interest income, net decreased from $63.6 thousand in 2002 to $21.5 thousand in 2003, primarily as the result of lower average invested cash balances and lower interest rates.
Other income, net. Other income, net, which consists primarily of royalty and licensing income, decreased 13.7% from $190.0 thousand in 2002 to $163.9 thousand in 2003 due to lower licensee sales.
Income tax benefit. Income tax benefit was $209.7 thousand in 2003 primarily as a result of the Company's 2003 net operating loss, partially offset by current state income taxes. Income tax benefit was $6.2 million in 2002 primarily as a result of the Company decreasing the valuation allowance related to its deferred tax assets.
Net income (loss). Net income was $7.3 million in 2002 compared to net loss of $431.4 thousand in 2003 due to factors discussed above.
SEASONALITY
The Company's business is seasonal, with a substantial portion of its revenues and earnings occurring during the second half of the year as a result of the Fall and Holiday selling seasons. This is due to both a larger volume of unit sales in these seasons and traditionally higher prices for Fall and Holiday season garments, which generally require more costly materials than the Spring/Summer and Resort seasons. Merchandise from the Fall collection, the Company's largest selling season, and Holiday, the Company's next largest season, are shipped in the last two fiscal quarters. Merchandise for Resort, Spring/Summer and Early Fall, the Company's lower volume seasons, is shipped primarily in the first two quarters. In addition, prices of products in Resort, Spring/Summer and Early Fall collections average 5% to 10% lower than in other selling seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $17.5 million line of credit facility with a finance company, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the facility are secured by certain of the Company's assets, primarily trade accounts receivable and inventories, and bear interest at the prime rate plus 0.75%. The arrangement expires on June 14, 2006. There were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility at December 31, 2004. Available borrowings at December 31, 2004 were $3.2 million. The Company expects to have sufficient financing and funds generated by operations to meet its working capital needs throughout 2005.
During 2004, the Company had capital expenditures of approximately $150 thousand, primarily to upgrading computer systems. Capital expenditures for 2005 are expected to be $100 thousand. These capital expenditures will be funded by internally generated funds and, if necessary, borrowings under the Company's line of credit facility.
The following table summarizes the Company's contractual cash obligations as of December 31, 2004:
(A) See note 8 to the consolidated financial statements.
(B) The Company generally does not make unconditional, noncancelable purchase commitments for goods and services other than inventory. The Company enters into other purchase orders in the normal course of business, but they do not exceed one-year terms. Other purchase commitments are not significant.
OFF-BALANCE SHEET ARRANGEMENTS
The Company did not enter into any off-balance sheet arrangements during 2004 or 2003, nor did the Company have any off-balance sheet arrangements at December 31, 2004.
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.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's major market risk exposure is to changing interest rates. However, interest expense was not and is not expected to be a material expense of the Company. The Company has implemented management monitoring processes designed to minimize the impact of sudden and sustained changes in interest rates. As of December 31, 2004, there were no borrowings under its credit facility and there was no interest expense in 2004.
Currently, the Company does not use foreign currency forward contracts or commodity contracts and does not have any material foreign currency exposure. All purchases from foreign contractors are made in United States dollars and the Company's investment in its foreign subsidiary was $140,000 at December 31, 2004.
ITEM 8.
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors Marisa Christina, Incorporated:
We have audited the accompanying consolidated balance sheets of Marisa Christina, Incorporated and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule listed under item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Baltimore, Maryland March 17, 2005
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2003
See accompanying notes to consolidated financial statements.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2004, 2003, and 2002
See accompanying notes to consolidated financial statements.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2004, 2003, and 2002
See accompanying notes to consolidated financial statements.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003, and 2002
See accompanying notes to consolidated financial statements.
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Marisa Christina, Incorporated and subsidiaries (the Company) designs, manufactures, sources and markets a broad line of high quality "better" clothing for women primarily under the Marisa Christina(TM) label and other labels.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Marisa Christina, Incorporated and its subsidiaries, each of which is wholly owned. Significant intercompany accounts and transactions are eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of December 31, 2004 and 2003, approximately $5.3 million and $4.6 million, respectively, were on deposit with a finance company, which earns interest at a rate of 3% below prime rate. Such amounts are not insured by the FDIC.
(d) REVENUE AND RECEIVABLES
Revenue is recognized when title and risk of ownership transfers to the customer, which is when the product is shipped to the customer. Allowances are provided for estimated uncollectible receivables based on review of specific accounts and historical experience. Allowances and credits, which are given to customers in connection with sales incentives and promotional activities, are recognized as reductions of sales when the related sales revenue is earned and recognized. As of December 31, 2004 and 2003, the Company's allowances for sales incentives, promotional activities and trade discounts were approximately $1,031,000 and $1,328,000, respectively. Such amounts are recorded as reductions to accounts receivable.
(e) INVENTORIES
Inventories are stated at the lower of cost, by the first-in, first-out method, or market.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is calculated on the straight-line method over the estimated useful lives of the respective assets (which range from five years to seven years) or, where applicable, the term of the lease, if shorter. Additions to property and equipment, as well as major renewals and betterments, are capitalized. The costs of maintenance and repairs are charged to operations as incurred. Depreciation and amortization expense for the years ended December 31, 2004, 2003, and 2002 was approximately $143,000, $141,000 and $149,000, respectively, which was recorded in selling, general and administrative expense each year.
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(g) LONG-LIVED ASSETS
Long-lived assets, such as property, plant, and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
(h) INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during periods in which temporary differences become deductible.
(i) ADVERTISING
The Company expenses advertising as incurred. Advertising expense was $114,000 in 2004, $298,000 in 2003 and $164,000 in 2002.
(j) SHIPPING AND HANDLING EXPENSE
Shipping and handling costs are included as a component of selling, general and administrative expenses. Shipping and handling costs were $583,036 in 2004, $683,946 in 2003 and $773,675 in 2002.
(k) NET INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Basic and diluted net income (loss) per weighted average common share is based on the weighted average number of common shares outstanding, which were 7,295,065 for 2004, 2003 and 2002. The effect of stock options outstanding were not included in the computation of diluted net income (loss) per share because the effect would have been antidilutive.
(l) FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's foreign operation is the local currency. The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using average rates of exchange prevailing during the year. Adjustments resulting from such translation are included as a separate component of accumulated other comprehensive loss.
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(m) STOCK OPTION PLAN
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income (loss) if the fair-value-based method had been applied to all outstanding and unvested awards for 2004, 2003 and 2002:
(n) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments, consisting of cash and cash equivalents, trade accounts receivable and trade accounts payable, approximate their carrying values due to the short-term maturities of such instruments.
(o) USE OF ESTIMATES
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the valuation allowances for receivables, inventories and deferred income tax assets. Actual results could differ from these and other estimates.
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(p) RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004 the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires an entity to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the income statement. The revised statement requires that an entity account for those transactions using the fair-value-based method, and eliminates an entity's ability to account for share-based compensation transactions using the intrinsic value method of accounting. The Company is required to adopt SFAS No. 123(R) as of July 1, 2005. Adoption is not expected to have a material impact on the Company's results of operations.
(2) INVENTORIES
Inventories at December 31, 2004 and 2003 consist of the following:
Based on management's assumptions and estimates relating to future operations, the Company has reduced its inventory value for slow moving inventory at December 31, 2004 and 2003. Actual results could differ from those estimates.
(3) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2004 and 2003 consist of the following:
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 and 2003 consist of the following:
(5) CREDIT FACILITY
The Company has a $17.5 million line of credit facility with a finance company, which may be utilized for commercial letters of credit, banker's acceptances, commercial loans and letters of indemnity. Borrowings under the facility are secured by certain of the Company's assets, primarily trade accounts receivable and inventories, and bear interest at the prime rate plus 0.75%. The Company is required to pay an annual commitment fee of approximately $50,000. The credit facility contains various covenants that require minimum levels of working capital and tangible net worth.
As of December 31, 2004 and 2003, there were no borrowings outstanding and approximately $79,200 of commercial letters of credit outstanding under the credit facility. Available borrowings at December 31, 2004 were approximately $3.2 million. The arrangement expires on June 14, 2006 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 2005.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2004 and 2003 consist of the following:
(7) RETIREMENT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of all eligible employees. Profit sharing expense was $69,031 in 2004, $63,255 in 2003 and $67,599 in 2002.
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(8) LEASES
The Company is committed under various noncancelable operating leases for office, showroom and design space. The leases expire on various dates through 2013. Future annual minimum lease payments under noncancelable operating leases as of December 31, 2004 are as follows:
Total rent expense charged to operations was $590,000 in 2004, $703,000 in 2003 and $624,000 in 2002.
(9) STOCK OPTION PLAN
The Company sponsors an incentive stock ownership plan (Plan) that provides for the grant of up to 900,000 options to purchase shares of the Company's common stock at fair market value on the dates of grant. Options generally vest over a five-year period and are exercisable over a ten-year period from the dates of grant. At December 31, 2004, there were 206,460 additional shares available for grant and 894,910 shares reserved for issuance under the plan.
A summary of the changes in options outstanding and exercisable under the Plan, including the weighted average exercise prices per share follows:
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
Weighted average characteristics of outstanding and exercisable stock options as of December 31, 2004 were as follows:
In October 1999, the Company repriced 153,450 options to $1.88 per share.
The per share weighted average fair value of the stock options granted during 2004, 2003 and 2002, using the Black Scholes option-pricing model with the following weighted average assumptions, was $0.78, $1.03 and $1.11 per share, respectively.
(10) INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2004, 2003 and 2002 were as follows:
(Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
The tax effects of temporary differences between the financial reporting and income tax bases of assets and liabilities that are included in the net deferred tax assets at December 31, 2004 and 2003 were as follows:
At December 31, 2004, the Company had Federal net operating loss carryforwards of approximately $30 million, which expire in various amounts through 2024.
The Company's deferred tax assets relate principally to net operating losses, which included losses on the disposal of two divisions in 1999 and 2000. 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. During the quarter ended September 30, 2004, the Company reassessed the recovery of its deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. In making its assessment, management determined that operating results for the three-year period ended December 31, 2004 would not be sufficient to support a conclusion that recovery of the deferred tax assets is more likely than not. While management believes the Company will achieve profitable operations in future years that will enable the Company to recover a substantial portion of its deferred tax assets, the Company presently does not have sufficient objective evidence to support management's belief. Accordingly, the Company increased its valuation allowance for deferred tax assets by approximately $6.4 million. As of December 31, 2004, the Company had a full valuation allowance for its deferred tax assets.
A reconciliation of the income tax benefit and the amounts computed by applying the Federal income tax rate of 34% to income (loss) before income tax benefit is as follows for the years ended December 31, 2004, 2003 and 2002:
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2004, 2003, and 2002
(11) BUSINESS RISKS AND CREDIT CONCENTRATIONS
A significant amount of the Company's product lines are produced in The People's Republic of China. The Company's operations with respect to these product lines may be significantly affected by economic, political, governmental and labor conditions in The People's Republic of China until alternative sources of production can be found.
The Company's products are sold principally in the United States to apparel retailers operating in the department and specialty store segments. Three customers accounted for 25% of the Company's net sales in 2004, three customers accounted for 34% of the Company's net sales in 2003 and two customers accounted for 29% of the Company's net sales in 2002.
Receivables from two customers represented approximately 21% and 28% of accounts receivable at December 31, 2004 and 2003, respectively. Two customer balances exceeded $240,000 at December 31, 2004. The Company estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimates of its uncollectible receivables.
(12) UNAUDITED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE INFORMATION)
The third quarter of 2004, includes the $6.4 million expense from the increase in the Company's deferred income tax valuation allowance (see note 10).
(13) LEGAL PROCEEDINGS
The Company is involved, from time to time, in litigation and proceedings arising out of the ordinary course of business. There are no pending material legal proceedings or environmental investigations to which the Company is a party or to which the property of the Company is subject.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in accountants or disagreements on any matter of accounting principle or financial statement disclosure.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report on Form 10-K (the "Effective Date"), the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14, promulgated under the Securities and Exchange Act of 1934. Based upon that evaluation, the Company's President and Chief Executive Officer and the Company's Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the Effective Date in alerting them timely to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.
PART III
ITEM 10.
ITEM 10. EXECUTIVES OF THE REGISTRANT
The following table sets forth the names of the principal executive officers of Marisa Christina, Incorporated, their positions with the Company, and their principal business experience for the last five years.
Michael H. Lerner joined Marisa Christina in August 1986, and has served as Chief Executive Officer, President and Chairman since that time. Prior to joining Marisa Christina, Mr. Lerner was President of TFM Industries, Inc. (TFM), a maker of moderate priced sportswear. He is also a director of Apparel Ventures, Inc. an affiliate of The Jordan Company as well as a director of Educational Housing Services, Inc.
S.E. Melvin Hecht, C.P.A., joined Marisa Christina in December 1993, and has served as Chief Financial Officer and Treasurer since that time. In April 1999, he was also named Vice Chairman of the Board of Directors. From 1978 until 1991, Mr. Hecht was a partner at Hertz, Herson & Company, certified public accountants and, since 1991, had served as a financial consultant to various companies. Prior to 1978, Mr. Hecht was an Executive Office partner at Touche Ross & Co., a predecessor company to Deloitte & Touche, LLP.
G. Michael Dees joined Marisa Christina in September 1986 and has served as a Director of the Company and Executive Vice-President of Design and Merchandising of Marisa Christina since that time. In April 1999, he was named President of Marisa Christina Apparel. Prior to joining Marisa Christina, Mr. Dees was Divisional Merchandise Manager of ladies' sportswear for Belk Stores, Inc.
The remaining information required by Item 10 is incorporated by reference from the Company's definitive proxy statement which will be filed within 120 days from the close of its year ended December 31, 2004.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by these items is included in the Company definitive proxy statement for the Company's Annual Meeting of Stockholders to be held May 17, 2005, which will be filed within 120 days from the close of its year ended December 31, 2004.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following are included in Item 8 of Part II:
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
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(a) Deductions represent write-offs of specifically identified accounts.
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
** Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K, filed on March 22, 1996.
** Incorporated by reference to the Exhibits filed with the Company's Annual Report on Form 10-K, filed on April 2, 2001.
+ This exhibit is a management contract or compensatory plan or arrangement required to be identified in this Form 10-K pursuant to Item 14(a)3 of this report.
++ The schedules (or similar attachments) to these agreements have not been filed pursuant to Item 601(b)(2) of Regulation S-K. Such schedules or attachments will be filed supplementally upon the request of the Securities and Exchange Commission.
(1) Filed herewith
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 17, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
Signature Title Date --------- ----- ---- /s/ Michael H. Lerner Chairman, Chief Executive - ------------------------------ Officer and President Michael H. Lerner March 17, 2005
/s/ S.E. Melvin Hecht Vice Chairman, Chief Financial - ------------------------------ S.E. Melvin Hecht Officer and Treasurer March 17, 2005
/s/ G. Michael Dees Director - ------------------------------ G. Michael Dees March 17, 2005
/s/ Robert Davidoff Director - ------------------------------ Robert Davidoff March 17, 2005
/s/ Lawrence D. Glaubinger Director - ------------------------------ Lawrence D. Glaubinger March 17, 2005
/s/ David W. Zalaznick Director - ------------------------------ David W. Zalaznick March 17, 2005
March 17, 2005