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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, 2002
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 June 28, 2002, 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 $6.6 million based on the average closing price of the Common
Stock as reported by Nasdaq National Market on June 28, 2002. Determination of
affiliate status for this purpose is not a determination of affiliate status for
any other purpose.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the most recent practicable date.
Class Outstanding at March 10, 2003
----- -----------------------------
Common stock, par value $0.01 per share 7,295,065 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Marisa Christina, Incorporated (the "Company" or "Marisa") designs,
manufactures, sources, and markets a broad line of high quality clothing for
women primarily under the Marisa Christina(TM) label.
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
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 offers four "lines" per year. These are marketed under three primary
labels: Marisa Christina, Christina Rotelli and Claire Murray. Each of the three
offerings cover various seasons, i.e., fall, holiday, resort and spring.
Fabrications vary from cotton and linen blends to synthetic and wool blends
depending upon the season. Each line consists of approximately 200 styles
organized into approximately fifteen to eighteen groupings. In addition, the
Company offers large and petite sizes, as well as private label and exclusive
merchandise under various labels. Exclusive and private label merchandise is an
important factor in Marisa Christina's overall offerings.
In each selling season, the Company also offers a selection of complementary
blouses, skirts, pants, and jackets, which, when combined with sweaters, creates
complete outfits. The Company estimates that approximately 90% of Marisa
Christina customers order complementary pieces, and it is Marisa Christina's
policy to ship these orders as a group so that it can create a single, unified
display of merchandise. In addition, certain designs and colors are designated
as exclusive merchandise for customers seeking to differentiate themselves from
other retailers by creating broad identity and signature looks.
Design, Production, and Raw Materials
The Company has a staff of five designers and merchandisers located in New York
City and six 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 Company believes that its ability to create fresh and original
designs while maintaining the "look" of each of its labels is critical for
success.
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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 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 could 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 six full-time salespersons located
in its New York showroom who are compensated on a salaried basis. The direct
sales force is responsible for Marisa Christina's large department store and
specialty store chain accounts. Marisa Christina also utilizes independent sales
representatives who market Marisa Christina products to independent specialty
stores and boutiques and are compensated on a commission basis. In many cases,
these representatives also market products of other non-competing apparel
companies that have been approved by the Company. In addition, Marisa Christina
has arrangements with independent distributors in Canada that sell to various
accounts outside the United States on a royalty basis and a licensing
arrangement in Japan.
Distribution
The Company uses a centralized distribution system, under which all merchandise
is received, processed, and distributed through the Company's distribution
facility located in North Bergen, New Jersey. Merchandise received at the
distribution center is promptly inspected to insure expected quality in
workmanship and conformity to Company sizing specifications. The merchandise is
then packed for delivery and shipped to its customer, principally by common
carrier.
2
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 seasons and Holiday, the Company's next largest
season, are shipped in the last two fiscal quarters. Merchandise for Resort,
Spring/Summer and Early Fall, the Company's lower volume selling seasons, are
shipped primarily in the first two quarters. In addition, prices of products in
the Resort, Spring/Summer and Early Fall collections average 5% to 10% lower
than in the other selling seasons. In 2002, net sales of the Company's products
were $6.3 million in the first quarter, $3.3 million in the second quarter,
$10.5 million in the third quarter and $6.8 million in the fourth quarter.
Customers
The Company's products are currently sold in approximately 3,100 individual
stores by over 1,750 retailers. Approximately 49% of the Company's 2002 net
sales consisted of sales to specialty stores and specialty store chains,
including Talbots and Irresistibles, and 40% consisted of sales to department
stores, including Saks Incorporated, Dillards, Federated Department Stores, and
Nordstrom. The balance was sold to catalog merchandisers, off-price retailers
and others. In 2002, Saks Incorporated, Dillards, Coldwater Creek and Talbots
accounted for approximately 18%, 11%, 6% and 6%, 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, 2003, the Company had unfilled customer orders of approximately
$9.8 million compared with $9.9 million at January 31, 2002. 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.
3
Employees
As of December 31, 2002, the Company employed approximately 66 people, including
3 executives, 11 persons in sales, retail, marketing, and advertising, 15
persons in design and merchandising, 21 persons in administration, 8 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 SEC website www.sec.gov.
Investor and other parties with questions, including requests for the Company's
Annual Report or Form 10-K for the year ended December 31, 2002 (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 or [email protected].
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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, 2002, the general
location, use and approximate size of the Company's principal properties, all of
which are leased, are set forth below:
APPROXIMATE
LOCATION FUNCTION SQUARE FOOTAGE
-------- -------- --------------
North Bergen, New Jersey Executive offices 8,000
New York, New York Showroom and design offices 16,600
Hong Kong Production and quality control offices 2,300
Marisa Christina has outsourced its receiving, warehousing and shipping
functions to a third party adjacent to its North Bergen facility. Under the
outsourcing agreement the Company pays a fixed handling charge per unit with no
minimum.
The Company believes that its existing facilities are well maintained, in good
operating condition and that its existing facilities will be adequate for the
foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a party to a lawsuit entitled Martha Wahlert v. Marisa Christina,
Inc. and Nordstrom Inc., alleging copyright infringement and other related
claims, which has been commenced in the United States District Court for the
Eastern District of Texas. The lawsuit claims unspecified damages resulting from
Marisa Christina's sale to Nordstrom of 695 sweaters bearing a design which
allegedly infringes the Plaintiff's copyrighted design. Marisa Christina,
pursuant to an agreement, is indemnifying Nordstrom. Marisa Christina is
vigorously defending the lawsuit and believes that any possible adverse
determination would not be material.
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, 2002.
6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is traded over-the-counter and is quoted on the
Nasdaq National Market under the symbol (MRSA). The table below presents the
high and low bid prices for the Common Stock for each quarter during the two
years ended December 31, 2002. The quotations in the table represent
inter-dealer prices without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
2002
---------------
Quarter High Low
----- -----
First $2.50 0.65
Second 2.65 1.08
Third 1.62 0.85
Fourth 1.55 0.90
2001
---------------
Quarter High Low
----- -----
First $1.69 1.00
Second 1.75 1.00
Third 1.31 0.75
Fourth 0.88 0.50
HOLDERS OF COMMON STOCK
The number of shareholders of record of the Company's Common Stock as of March
4, 2003, was 51. The Company believes there are approximately 500 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.
7
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
The information that follows should be read in conjunction with the consolidated
financial statements and notes thereto that appear elsewhere in this Form 10-K
and Management's Discussion and Analysis of Financial Condition and Results of
Operations.
YEARS ENDED DECEMBER 31
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
Net sales (1, 2) $ 26,975 34,126 57,985 62,508 74,607
Gross profit 9,243 10,817 12,194 15,788 19,230
Selling, general, and
administrative expenses 8,451 10,422 16,703 20,036 24,953
Restructuring and assets
impairment charges -- -- -- -- 20,275
Outlet store closing costs -- -- 1,005 -- --
Operating income (loss) 792 395 (5,515) (4,248) (25,998)
Income (loss) before income
tax expense (benefit) 1,045 629 (13,725) (3,128) (24,535)
Income tax expense (benefit) (6,249) (17) 437 5,151 (8,227)
Net income (loss) 7,294 646 (14,162) (8,279) (16,308)
Basic and diluted net income (loss) per
weighted average common share
amounts 1.00 0.09 (1.82) (1.07) (2.03)
Basic and diluted weighted average
common shares outstanding 7,295 7,298 7,761 7,766 8,053
DECEMBER 31
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- ------- ------- ------- -------
Working capital $ 9,224 7,373 6,556 13,235 8,912
Total assets 17,167 9,199 10,355 30,532 44,429
Stockholders' equity 15,201 7,907 7,268 21,884 30,163
(1) Net sales for the year ended December 31, 1999 and 1998 include net sales
of $8.0 million and $19.7 million, respectively, from the Company's
Adrienne Vittadini Division, which the Company sold in September 1999.
(2) Net sales for the years ended December 31, 2000, 1999 and 1998 include net
sales of $18.7 million, $20.0 million and $29.5 million, respectively,
from the Company's Flapdoodles division, which the Company sold in
December 2000.
8
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.
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. As of December 31, 2002, the Company has allowances for bad debts
of approximately $349,000 and reserves for sales allowances of $1,163,000.
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 annual 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
9
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. At December 31, 2002, the Company's deferred tax
assets related primarily to a U.S. net operating loss carryforward of $29.5
million which can be utilized over the next eighteen years. Based on the
Company's recent operating results and projections of future profitability,
management believes it is more likely than not that the Company will generate
sufficient taxable income to recover $6.3 million of its deferred tax assets.
The recovery of the remaining net deferred tax assets is significantly less
certain and, accordingly, the Company has established a valuation allowance for
the balance of its deferred tax assets of $4.9 million. If future taxable income
is less than management's estimates, the amount of the net deferred tax assets
on the Company's consolidated balance sheet will require an additional valuation
allowance. Additionally, if the Company is able to realize higher taxable income
the valuation allowance could be reduced.
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 2002 and 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 is better positioned for
profitability in the future.
The following table sets forth the Company's operating results for the years
ended December 31, 2002, 2001, and 2000.
PERCENTAGE PERCENTAGE PERCENTAGE
OF NET OF NET OF NET
2002 SALES 2001 SALES 2000 SALES
------------ ---------- ------------ ---------- ------------ ----------
Net sales $ 26,975,402 100.0% $ 34,125,556 100.0% $ 57,985,462 100.0%
------------ ----- ------------ ----- ------------ -----
Gross profit 9,242,637 34.3 10,816,962 31.7 12,193,820 21.0
Selling, general, and
administrative expenses 8,450,776 31.3 10,422,146 30.5 16,702,946 28.8
Outlet store closing costs -- -- -- -- 1,005,417 1.7
------------ ----- ------------ ----- ------------ -----
Operating
income (loss) 791,861 3.0 394,816 1.2 (5,514,543) (9.5)
Loss on the sale of the
Flapdoodles division -- -- -- -- (7,881,228) (13.6)
Interest income (expense), net 63,570 0.2 (28,603) -- (608,084) (1.0)
Other income, net 189,953 0.7 262,991 0.8 279,015 0.5
Income tax expense (benefit) (6,248,900) (23.2) (17,162) -- 437,218 0.8
------------ ----- ------------ ----- ------------ -----
Net income
(loss) $ 7,294,284 27.0% $ 646,366 2.0% $(14,162,058) (24.4)%
============ ===== ============ ===== ============ =====
YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEAR ENDED DECEMBER 31, 2001
Net sales. Net sales decreased 21.0%, from $34.1 million in 2001 to $27.0
million in 2002, primarily as a result of discontinuing an unprofitable label
and a general downturn in the economy. Two customers accounted for
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29% of the Company's net sales in 2002 and three customers accounted for 19% of
the Company's net sales in 2001.
Gross profit. Gross profit decreased 14.6%, from $10.8 million in 2001 to $9.2
million in 2002. As a percentage of net sales, gross profit increased from 31.7%
in 2001 to 34.3% in 2002, primarily as a result of improved pricing on selected
products.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 20.0%, from $10.4 million in 2001 to
$8.5 million in 2002, primarily as a result of reduced fixed overhead. As a
percentage of net sales, SG&A increased from 30.5% in 2001 to 31.3% in 2002.
Interest income (expense), net. Interest income (expense), net changed from
$27.8 thousand expense in 2001 to $63.6 thousand income in 2002, primarily as
the result of higher invested cash balances and lower interest rates on amounts
borrowed.
Other income, net. Other income, net, which consists primarily of royalty and
licensing income, decreased 27.8% from $263.0 thousand in 2001 to $190.0
thousand in 2002 due to lower licensee sales.
Income tax expense (benefit). Income tax benefit was $6.2 million in 2002
primarily as a result of the Company decreasing the valuation allowance related
to its deferred tax assets. Over the past several years, the Company has
implemented a number of initiatives which have returned the Company to
profitability. Based on the Company's recent operating results and projections
of future profitability, management believes it is more likely than not that the
Company will be able to recover $6.3 million of its net deferred tax assets and
has reduced its valuation allowance to $4.9 million at December 31, 2002. The
Company utilized net operating loss carryforwards to offset its taxable income
in 2002. Income tax benefit of $17.2 thousand in 2001 relates to state income
tax refunds realized. As of December 31, 2002, the Company had remaining net
operating loss carryforwards of approximately $29.5 million, which may be used
to offset future taxable income through 2020.
Net income. Net income was $646.4 thousand in 2001 compared to net income of
$7.3 million in 2002 as a result of the aforementioned items. Excluding the
impact of Company's reduction in its deferred tax asset valuation allowance, the
Company's net income for 2002 would have been $1.1 million.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Net sales. Net sales decreased 41.1%, from $58.0 million in 2000 to $34.1
million in 2001. Net sales of Flapdoodles were $18.7 million in 2000. Excluding
Flapdoodles, net sales of the Company decreased 13.1% from $39.3 million in 2000
to $34.1 million in 2001, primarily as a result of lower volume with discounters
and less profitable accounts, as well as slower economic conditions.
Gross profit. Gross profit decreased 11.3%, from $12.2 million in 2000 to $10.8
million in 2001. As a percentage of net sales, gross profit increased from 21.0%
in 2000 to 31.7% in 2001. Excluding Flapdoodles, gross profit was $8.3 million
in 2000 (21.1% of net sales). The increase in the gross profit percentage in
2001 compared to 2000, excluding Flapdoodles, is a result of reduced sales to
discounters and others with lower gross profit margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses (SG&A) decreased 37.6%, from $16.7 million in 2000 to
$10.4 million in 2001. As a percentage of net sales, SG&A increased from 28.8%
in 2000 to 30.5% in 2001. Excluding Flapdoodles, SG&A as a percentage of net
sales increased from 27.4% in 2000 to 30.5% in 2001.
Outlet store closing costs. Outlet store closing costs of $1.0 million in 2000
relate to the closing of twelve of Flapdoodles' thirteen retail outlets prior to
the sale of the division.
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Loss on the sale of the Flapdoodles division. Loss on the sale of the
Flapdoodles division of $7.9 million in 2000 represents the pretax loss
recognized on the disposition.
Interest expense, net. Interest expense, net decreased 95.3% from $608.1
thousand in 2000 to $28.6 thousand in 2001, primarily as the result of lower
average outstanding borrowings and lower interest rates.
Other income, net. Other income, net, which consists of royalty, licensing and
copyright infringement income, decreased 5.7% from $279.0 thousand in 2000 to
$263.0 thousand in 2001.
Income tax expense (benefit). Income tax expense was $437.2 thousand in 2000
primarily as a result of the Company increasing the valuation allowance related
to its deferred tax assets. The Company utilized net operating loss
carryforwards to offset its taxable income in 2001. Income tax benefit of $17.2
thousand in 2001 relates to state income tax refunds realized.
Net income (loss). Net loss was $14.2 million in 2000 compared to net income of
$646.4 thousand in 2001 as a result of the aforementioned items.
SEASONALITY
The Company's business is seasonal, with a substantial portion of its revenues
and earnings occurring during the second half of the year as a result of the
Fall and Holiday selling seasons. This is due to both a larger volume of unit
sales in these seasons and traditionally higher prices for Fall and Holiday
season garments, which generally require more costly materials than the
Spring/Summer and Resort seasons. Merchandise from the Fall collection, the
Company's largest selling season, and Holiday, the Company's next largest
season, are shipped in the last two fiscal quarters. Merchandise for Resort,
Spring/Summer and Early Fall, the Company's lower volume seasons, is shipped
primarily in the first two quarters. In addition, prices of products in Resort,
Spring/Summer and Early Fall collections average 5% to 50% lower than in other
selling seasons.
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 inventory, and bear interest at the prime rate plus 0.75%. The arrangement
expires on June 14, 2004. There were no borrowings outstanding and approximately
$247,000 of commercial letters of credit outstanding under the credit facility
at December 31, 2002. Available borrowings at December 31, 2002 were $4.8
million. The Company expects to have sufficient financing and funds generated by
operations, if any, to meet its working capital needs throughout 2003.
During 2002, the Company had capital expenditures of approximately $65 thousand,
primarily to upgrade computer systems and leasehold improvements. Capital
expenditures for 2003 are expected to be $125 thousand. These capital
expenditures will be funded by internally generated funds and, if necessary,
borrowings under the Company's line of credit facility. The Company's
contractual cash obligations related to operating leases as of December 31, 2002
include: $588,000 in 2003, $590,000 in 2004, $449,000 in 2005, $50,000 in 2006
and $37,000 in 2007. The Company has purchase commitments with respect to
inventory of $3.0 million at December 31, 2002. Other purchase commitments are
not significant.
12
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.
NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a liability for
the fair value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to guarantees issued
or modified after December 31, 2002 and are not expected to have a material
effect on the Company's financial statements. The disclosure requirements are
effective for financial statements of interim and annual periods ending after
December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
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, 2002, there were no borrowings under its credit facility and there
was no interest expense in 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 December 31,
2002.
13
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report 15
Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 2002 and 2001 16
Consolidated Statements of Operations and Comprehensive Income (Loss) --
Years ended December 31, 2002, 2001, and 2000 17
Consolidated Statements of Stockholders' Equity --
Years ended December 31, 2002, 2001, and 2000 18
Consolidated Statements of Cash Flows --
Years ended December 31, 2002, 2001 and 2000 19
Notes to Consolidated Financial Statements 20
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Marisa Christina, Incorporated:
We have audited the accompanying consolidated financial statements of Marisa
Christina, Incorporated and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the consolidated financial statement schedule listed under Item
15(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Marisa Christina,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
\s\ KPMG LLP
Baltimore, Maryland
February 21, 2003
15
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
ASSETS 2002 2001
------------ -----------
Current assets:
Cash and cash equivalents $ 4,721,614 3,330,602
Trade accounts receivable, less allowance for doubtful accounts
of $348,860 in 2002 and $365,000 in 2001 3,562,927 3,160,273
Inventories 1,843,190 1,742,835
Deferred taxes 739,000 --
Prepaid expenses and other current assets 322,912 431,419
------------ -----------
Total current assets 11,189,643 8,665,129
Property and equipment, net 320,061 404,274
Noncurrent deferred taxes 5,551,000 --
Other assets 106,004 129,192
------------ -----------
Total assets $ 17,166,708 9,198,595
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,506,579 833,437
Accrued expenses and other current liabilities 459,499 458,554
------------ -----------
Total current liabilities 1,966,078 1,291,991
------------ -----------
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares;
none issued -- --
Common stock, $0.01 par value. Authorized 15,000,000 shares;
issued 8,586,769 shares in 2002 and 2001 85,868 85,868
Additional paid-in capital 31,664,680 31,664,680
Accumulated other comprehensive loss (58,182) (57,924)
Accumulated deficit (12,387,460) (19,681,744)
Treasury stock, 1,291,704 common shares in 2002 and
2001, at cost (4,104,276) (4,104,276)
------------ -----------
Total stockholders' equity 15,200,630 7,906,604
Commitments and contingencies (notes 5, 8, and 15)
------------ -----------
Total liabilities and stockholders' equity $ 17,166,708 9,198,595
============ ===========
See accompanying notes to consolidated financial statements.
16
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Income (Loss)
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------ ----------- -----------
Net sales $ 26,975,402 34,125,556 57,985,462
Cost of goods sold 17,732,765 23,308,594 45,791,642
------------ ----------- -----------
Gross profit 9,242,637 10,816,962 12,193,820
Selling, general, and administrative expenses 8,450,776 10,422,146 16,702,946
Outlet store closing costs -- -- 1,005,417
------------ ----------- -----------
Operating income (loss) 791,861 394,816 (5,514,543)
Loss on the sale of the Flapdoodles division -- -- (7,881,228)
Interest income (expense), net 63,570 (28,603) (608,084)
Other income, net 189,953 262,991 279,015
------------ ----------- -----------
Income (loss) before income tax
expense (benefit) 1,045,384 629,204 (13,724,840)
Income tax expense (benefit) (6,248,900) (17,162) 437,218
------------ ----------- -----------
Net income (loss) 7,294,284 646,366 (14,162,058)
Other comprehensive income (loss), net of tax -
foreign currency translation adjustment (258) (1,324) --
------------ ----------- -----------
Comprehensive income (loss) $ 7,294,026 645,042 (14,162,058)
============ =========== ===========
Basic and diluted net income (loss) per
weighted average common share $ 1.00 0.09 (1.82)
============ =========== ===========
See accompanying notes to consolidated financial statements
17
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001, and 2000
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER EARNINGS
-------------------- PAID-IN COMPREHENSIVE (ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL LOSS DEFICIT) STOCK TOTAL
--------- ------- ----------- ------------- ------------ ----------- ------------
Balance at December 31, 1999 8,586,769 $85,868 $31,653,186 $(56,600) $ (6,166,052) $(3,632,435) $ 21,883,967
Net loss -- -- -- -- (14,162,058) -- (14,162,058)
Treasury stock received from
the sale of the Flapdoodles
division -- -- -- -- -- (456,984) (456,984)
Purchase of treasury stock,
at cost -- -- -- -- -- (8,573) (8,573)
Other -- -- 11,494 -- -- -- 11,494
--------- ------- ----------- -------- ------------ ----------- ------------
Balance at December 31, 2000 8,586,769 85,868 31,664,680 (56,600) (20,328,110) (4,097,992) 7,267,846
Net income -- -- -- -- 646,366 -- 646,366
Other comprehensive loss -- -- -- (1,324) -- -- (1,324)
Purchase of treasury stock,
at cost -- -- -- -- -- (6,284) (6,284)
--------- ------- ----------- -------- ------------ ----------- ------------
Balance at December 31, 2001 8,586,769 85,868 31,664,680 (57,924) (19,681,744) (4,104,276) 7,906,604
Net income -- -- -- -- 7,294,284 -- 7,294,284
Other comprehensive loss -- -- -- (258) -- -- (258)
--------- ------- ----------- -------- ------------ ----------- ------------
Balance at December 31, 2002 8,586,769 $85,868 $31,664,680 $(58,182) $(12,387,460) $(4,104,276) $ 15,200,630
========= ======= =========== ======== ============ =========== ============
See accompanying notes to consolidated financial statements.
18
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
----------- ---------- -----------
Cash flows from operating activities:
Net income (loss) $ 7,294,284 646,366 (14,162,058)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 149,213 222,287 889,826
Deferred income tax expense (benefit) (6,290,000) -- 400,000
Bad debt expense 159,321 295,034 183,173
Loss on sale of the Flapdoodles division -- -- 7,881,228
Loss on property and equipment
retirements -- -- 654,000
Changes in assets and liabilities, net of
effects from the sale of the divisions:
Trade accounts receivable (561,975) 178,062 1,949,079
Inventories (100,355) 729,090 4,136,031
Prepaid expenses and other assets 131,437 59,124 1,003,520
Trade accounts payable 673,142 (1,749,482) (135,249)
Accrued expenses and other
current liabilities 945 (46,674) 156,565
----------- ---------- -----------
Net cash provided by operating
activities 1,456,012 333,807 2,956,115
----------- ---------- -----------
Cash flows from investing activities:
Acquisitions of property and equipment (65,000) (336,973) (166,559)
Proceeds from sale of trademark -- 100,000 --
Acquisition of trademark -- -- (350,000)
Proceeds from the sale of the Flapdoodles
division -- -- 4,300,000
Receipt of amount due from the sale of the
Adrienne Vittadini division -- -- 651,569
----------- ---------- -----------
Net cash provided by (used in)
investing activities (65,000) (236,973) 4,435,010
----------- ---------- -----------
Cash flows from financing activities:
Repayments under credit facility, net -- -- (4,500,000)
Acquisition of treasury stock -- (6,284) (8,573)
Other -- -- 11,494
----------- ---------- -----------
Net cash used in financing activities -- (6,284) (4,497,079)
----------- ---------- -----------
Net increase in cash and cash
equivalents 1,391,012 90,550 2,894,046
Cash and cash equivalents at beginning of year 3,330,602 3,240,052 346,006
----------- ---------- -----------
Cash and cash equivalents at end of year $ 4,721,614 3,330,602 3,240,052
=========== ========== ===========
Cash paid during the year for:
Income taxes $ 41,100 6,200 34,684
=========== ========== ===========
Interest $ -- 93,755 620,851
=========== ========== ===========
See accompanying notes to consolidated financial statements.
19
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
Marisa Christina, Incorporated and subsidiaries (the Company)
designs, manufactures, sources and markets a broad line of high
quality "better" clothing for women under the Marisa Christina(TM)
and other labels. Prior to December 2000, the Company also designed,
manufactured, sourced and marketed a broad line of high quality
clothing for children under the Flapdoodles(TM) label.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Marisa Christina, Incorporated and its subsidiaries,
each of which is wholly owned. Significant intercompany accounts and
transactions are eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
(d) REVENUE AND RECEIVABLES
Revenue is recognized when title and risk of ownership transfers to
the customer, which is when the product is shipped to the customer.
Allowances are provided for estimated uncollectible receivables
based on review of specific accounts and historical experience.
Allowances and credits, which are given to customers in connection
with sales incentives and promotional activities, are recognized as
reductions of sales when the related sales revenue is earned and
recognized. As of December 31, 2002 and 2001, the Company's reserves
for sales allowances were $1,163,000 and $1,556,000, respectively.
Such amounts are recorded as reductions to accounts receivable.
(e) INVENTORIES
Inventories are stated at the lower of cost, by the first-in,
first-out method, or market.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization is calculated on the straight-line method over the
estimated useful lives of the respective assets (which range from
five years to seven years) or, where applicable, the term of the
lease, if shorter. Additions to property and equipment, as well as
major renewals and betterments, are capitalized. The costs of
maintenance and repairs are charged to operations as incurred. Total
depreciation for the years ended December 31, 2002, 2001 and 2000
was approximately $149,000, $222,000 and $890,000, respectively,
which was recorded in selling, general, and administrative expense
each year.
20 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(g) LONG-LIVED ASSETS
Statement of Financial Accounting Standards (SFAS) No. 144 provides
a single accounting model for long-lived assets to be disposed of,
changes the criteria for classifying an asset as held for sale, and
broadens the scope of operations to be disposed of that qualify for
reporting as discontinued operations. The Company adopted SFAS No.
144 on January 1, 2002. The adoption of SFAS No. 144 did not affect
the Company's consolidated financial statements.
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 $164,000 in 2002, $209,500 in 2001, and $373,000 in 2000.
(j) SHIPPING AND HANDLING EXPENSE
Shipping and handling costs are included as a component of selling,
general and administrative expenses.
(k) NET INCOME (LOSS) PER WEIGHTED AVERAGE COMMON SHARE
Basic and diluted net income (loss) per weighted average common
share is based on the weighted average number of common shares
outstanding, which were 7,295,065 for 2002, 7,298,043 for 2001, and
7,760,725 for 2000. 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.
21 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(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.
(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 exceeded 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 2002, 2001 and 2000:
2002 2001 2000
---------- -------- -----------
Net income (loss), as reported $7,294,284 646,366 (14,162,058)
Deduct total stock-based employee
compensation expense determined
under fair-value-based method for
all rewards, net of tax 130,000 (81,000) (95,000)
---------- -------- -----------
Pro forma net income
(loss) $7,164,284 565,366 (14,257,058)
========== ======== ===========
Diluted net income (loss) per weighted
average common share
As reported $ 1.00 0.09 (1.82)
Pro forma $ 0.98 0.08 (1.84)
========== ======== ===========
(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.
22 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(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 carrying amount of property, plant and equipment; valuation
allowances for receivables, inventories and deferred income tax
assets. Actual results could differ from those estimates.
(p) RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of
FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees issued.
The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial
statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15,
2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment
of FASB Statement No. 123. This Statement amends FASB Statement No.
123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual
and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December
15, 2002 and are included in the notes to these consolidated
financial statements.
(2) INVENTORIES
Inventories at December 31, 2002 and 2001 consist of the following:
2002 2001
---------- ---------
Piece goods $ 68,900 50,050
Finished goods 1,774,290 1,692,785
---------- ---------
$1,843,190 1,742,835
========== =========
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, 2002 and 2001. Actual results could differ from
those estimates.
23 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(3) PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets at December 31, 2002 and 2001
consist of the following:
2002 2001
-------- -------
Prepaid expenses $166,486 135,520
Nontrade receivables 156,426 295,899
-------- -------
$322,912 431,419
======== =======
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 and 2001 consist of the
following:
2002 2001
-------- -------
Computer equipment and software $287,690 250,734
Furniture and fixtures 164,005 194,616
Leasehold improvements 245,512 274,887
-------- -------
Total 697,207 720,237
Less accumulated depreciation and amortization 377,146 315,963
-------- -------
$320,061 404,274
======== =======
(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 inventory, 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 December 31, 2002, there were no borrowings outstanding and
approximately $247,000 of commercial letters of credit outstanding under
the credit facility. Available borrowings at December 31, 2002 were
approximately $4.8 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 2003. There were no borrowings outstanding at December 31,
2001.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities at December 31, 2002 and
2001 consist of the following:
2002 2001
-------- -------
Accrued compensation $106,267 97,883
Other accrued expenses 353,232 360,671
-------- -------
$459,499 458,554
======== =======
24 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(7) RETIREMENT PLAN
The Company sponsors a 401(k) profit sharing plan for the benefit of all
eligible employees. Profit sharing expense was $67,599 and 2002, $101,100
in 2001 and $157,100 in 2000.
(8) LEASES
The Company is committed under various noncancelable operating leases for
office, showroom, design, and warehouse space. The leases expire on
various dates through 2007. Future annual minimum lease payments under
noncancelable operating leases as of December 31, 2002 are as follows:
2003 $ 588,000
2004 590,000
2005 449,000
2006 50,000
2007 37,000
----------
$1,714,000
==========
Total rent expense charged to operations was $624,000 in 2002, $631,000 in
2001, and $1,600,000 in 2000.
(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, 2002, there were 172,460
additional shares available for grant under the Plan.
Changes in options outstanding, options exercisable and shares reserved
for issuance pursuant to stock options are as follows:
WEIGHTED AVERAGE NUMBER OF
PER SHARE PRICE SHARES
---------------- ---------
December 31, 1999 $2.86 799,300
Forfeited 4.57 (290,450)
--------
December 31, 2000 1.88 508,850
Forfeited 1.88 (40,400)
--------
December 31, 2001 1.88 468,450
Granted 1.43 259,000
Forfeited 1.43 (5,000)
--------
December 31, 2002 $1.72 722,450
========
Options exercisable:
December 31, 2000 $1.88 205,130
December 31, 2001 $1.88 258,510
December 31, 2002 $1.88 330,450
25 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
At December 31, 2002, the number of outstanding options with an exercise
price of $1.88, have weighted-average remaining contractual lives as
follows: 123,450 options -- 3.5 years; 50,000 options -- 6.0 years; and
295,000 options -- 6.5 years. In addition, 254,000 options having an
exercise price of $1.43 with a remaining contractual life of nine years.
In October 1999, the Company repriced 173,450 options at $1.88.
The per share weighted average fair value of the 259,000 stock options
granted during 2002 was $1.11 using the Black Scholes option-pricing model
with the following weighted average assumptions: expected dividend yield
0%, risk-free interest rate 2.0%, expected volatility of 89% and an
expected life of seven years.
(10) INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 2002, 2001 and 2000 are as follows:
2002 2001 2000
----------- -------- -------
Current:
Federal $ -- -- --
State and local 41,100 (17,162) 37,218
----------- -------- -------
41,100 (17,162) 37,218
----------- -------- -------
Deferred:
Federal (5,786,416) -- 370,000
State and local (503,584) -- 30,000
----------- -------- -------
(6,290,000) -- 400,000
----------- -------- -------
$(6,248,900) (17,162) 437,218
=========== ======== =======
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, 2002 and 2001 are as follows:
2002 2001
------------ -----------
Deferred tax assets:
Uniform inventory capitalization $ 48,688 55,628
Accrued expenses and other assets and liabilities 459,027 577,474
Federal and state net operating losses 10,642,090 10,834,170
------------ -----------
Total gross deferred tax assets 11,149,805 11,467,272
Valuation allowance (4,855,130) (11,467,272)
------------ -----------
Net deferred tax asset 6,294,675 --
Deferred tax liabilities:
Depreciation on property and equipment (4,675) --
------------ -----------
Net deferred tax asset $ 6,290,000 --
============ ===========
At December 31, 2002, the Company had Federal net operating loss
carryforwards of approximately $29,500,000, which expire in various
amounts through 2020.
26 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The Company's deferred tax assets relate principally to net operating
losses. In assessing the realizability of deferred tax assets, management
considered whether it was more likely than not that some portion or all of
the deferred tax assets will be realized. The ultimate realization of the
deferred tax assets is dependent upon the generation of future taxable
income during periods in which temporary differences become deductible.
Over the past several years, the Company has implemented a number of
initiatives which have returned the Company to profitability. Based on the
Company's recent operating results and projections of future
profitability, management believes it is more likely than not that the
Company will be able to recover $6,290,000 of its net deferred tax assets
and has reduced its valuation allowance to $4,855,130 at December 31,
2002.
A reconciliation of the provision for income taxes and the amounts
computed by applying the Federal income tax rate of 34% to income (loss)
before income tax expense (benefit) is as follows for the years ended
December 31, 2002, 2001 and 2000:
2002 2001 2000
----------- -------- ----------
Income tax on income (loss) before income
tax expense computed at statutory rate $ 355,431 213,929 (4,666,446)
State and local income tax 41,100 (17,162) 44,364
Change in valuation allowance (6,612,142) (302,992) 5,048,470
Other (33,289) 89,063 10,830
----------- -------- ----------
$(6,248,900) (17,162) 437,218
=========== ======== ==========
(11) DISPOSITION OF THE FLAPDOODLES DIVISION
On December 29, 2000, the Company sold substantially all the assets,
properties and rights of its Flapdoodles division (Flapdoodles) to Flap
2001, Inc., a Delaware corporation owned by one of the Company's directors
and a member of senior management on that date (the Purchaser), for (i)
$4,300,000 in cash, (ii) 456,984 shares of the Company's common stock and
280,000 stock options to acquire the Company's common stock held by the
Purchaser and (iii) the assignment of certain liabilities of Flapdoodles.
Proceeds to the Company of $4,200,000, net of transaction and related
costs, were used by the Company to pay down borrowings under its credit
facility. The Company recognized a loss of approximately $7,900,000 on the
sale. During the second quarter of 2000, the Company closed its
Flapdoodles' outlet stores and recognized a nonrecurring operating charge
of approximately $1,005,000.
(12) 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 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. Two customers accounted for 29% of the Company's net sales in
2002, three customers accounted for 19% of the Company's net sales in
2001, and two customer accounted for 22% of the Company's net sales in
2000.
27 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Receivables from two customers represented approximately 36% and 19% of
accounts receivable at December 31, 2002 and 2001, respectively. One
customer balance exceeded $900,000 at December 31, 2002. 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.
(13) SEGMENT REPORTING
The operating divisions of the Company included: Marisa Christina Apparel
(MC) and Flapdoodles, prior to Flapdoodles' disposition in December 2000,
for which a summary of each follows:
- MC designs, manufactures and distributes "better" women's
knitwear.
- Flapdoodles designed, manufactured and distributed
comfortable, high-quality, functional children's clothing.
Flapdoodles also maintained licensees for footwear and
sleepwear.
28 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The accounting policies of the operating divisions were the same as those
described in the summary of significant accounting policies (see note 1).
The following information is provided in thousands:
MC FLAPDOODLES ELIMINATIONS CONSOLIDATED
-------- ----------- ------------ ------------
2002:
Net sales $ 26,975 -- -- 26,975
Depreciation and amortization 149 -- -- 149
Operating income 792 -- -- 792
Interest income, net 64 -- -- 64
Income before income tax benefit 1,045 -- -- 1,045
Total assets 17,167 -- -- 17,167
Long-lived assets 320 -- -- 320
Capital expenditures 65 -- -- 65
2001:
Net sales $ 34,126 -- -- 34,126
Depreciation and amortization 222 -- -- 222
Operating income 395 -- -- 395
Interest expense, net (29) -- -- (29)
Income before income tax benefit 629 -- -- 629
Total assets 9,199 -- -- 9,199
Long-lived assets 404 -- -- 404
Capital expenditures 337 -- -- 337
2000:
Net sales $ 39,267 18,718 -- 57,985
Depreciation and amortization 136 754 -- 890
Outlet store closing costs -- 1,005 -- 1,005
Operating loss (2,480) (3,035) -- (5,515)
Loss on the sale of the
Flapdoodles division -- (7,881) -- (7,881)
Interest income (expense), net (608) (1,508) 1,508 (608)
Income (loss) before income tax
expense (2,809) (12,424) 1,508 (13,725)
Total assets 9,882 61 412 10,355
Long-lived assets 490 -- -- 490
Capital expenditures 129 38 -- 167
Eliminations consist of intercompany interest charges and intercompany
accounts.
29 (Continued)
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
(14) UNAUDITED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT FOR PER SHARE
INFORMATION)
THREE MONTHS ENDED YEAR
----------------------------------------------------------- ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
-------- ------- ------------ ----------- -----------
2002:
Net sales $6,264 3,260 10,529 6,922 26,975
Operating income (loss) 213 (1,457) 1,863 173 792
Net income (loss) 252 (1,368) 1,900 6,510 7,294
Basic and diluted
net income (loss)
per common share 0.03 (0.19) 0.26 0.90 1.00
2001:
Net sales 8,688 4,893 12,607 7,938 34,126
Operating income (loss) 181 (1,497) 1,728 (17) 395
Net income (loss) 236 (1,398) 1,733 75 646
Basic and diluted
net income (loss)
per common share $ 0.03 (0.19) 0.24 0.01 0.09
The fourth quarter of 2002, includes the $6.2 million impact of the
reduction in the Company's defined income tax valuation allowance (see
note 10).
(15) LEGAL PROCEEDINGS
The Company is a party to a lawsuit entitled Martha Wahlert v. Marisa
Christina, Inc. and Nordstrom Inc., alleging copyright infringement and
other related claims, which has been commenced in the United States
District Court for the Eastern District of Texas. The lawsuit claims
unspecified damages resulting from Marisa Christina's sale to Nordstrom of
695 sweaters bearing a design which allegedly infringes the Plaintiff's
copyright design. Marisa Christina, pursuant to an agreement, is
indemnifying Nordstrom. Marisa Christina is vigorously defending the
lawsuit and believes that any possible adverse determination would not be
material.
30
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.
PART III
ITEM 10. EXECUTIVES OF THE REGISTRANT
The following table sets forth the names of the principal executive officers of
Marisa Christina, Incorporated, their positions with the Company, and their
principal business experience for the last five years.
NAME AGE POSITION
---- --- --------
Michael H. Lerner 58 Chairman of the Board of Directors, Chief Executive Officer and President
S. E. Melvin Hecht 68 Vice Chairman of the Board of Directors, Chief Financial Officer and Treasurer
G. Michael Dees 49 President of Marisa Christina Apparel and Director
Michael H. Lerner joined Marisa Christina in August 1986, and has served as
Chief Executive Officer, President and Chairman since that time. Prior to
joining Marisa Christina, Mr. Lerner was President of TFM Industries, Inc.
(TFM), a maker of moderate priced sportswear. He is also a director of Apparel
Ventures, Inc. an affiliate of The Jordan Company as well as a director of
Educational Housing Services, Inc.
S.E. Melvin Hecht, C.P.A., joined Marisa Christina in December 1993, and has
served as Chief Financial Officer and Treasurer since that time. In April 1999,
he was also named Vice Chairman of the Board of Directors. From 1978 until 1991,
Mr. Hecht was a partner at Hertz, Herson & Company, certified public accountants
and, since 1991, has served as a financial consultant to various companies.
Prior to 1978, Mr. Hecht was an Executive Office partner at Touche Ross & Co., a
predecessor company to Deloitte & Touche, LLP.
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, 2002.
31
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 8,
2003, which will be filed within 120 days from the close of its year ended
December 31, 2002.
32
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of 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. There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following are included in Item 8 of Part II:
PAGE
Independent Auditors' Report 15
Consolidated Financial Statements:
Consolidated Balance Sheets -- December 31, 2002 and 2001 16
Consolidated Statements of Operations and Comprehensive Income (Loss) -- Years ended
December 31, 2002, 2001, and 2000 17
Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2002, 2001,
and 2000 18
Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001, and 2000 19
Notes to Consolidated Financial Statements 20
(a)(2) The following financial statement schedule for the years ended
December 31, 2002, 2001, and 2000 is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts 34
Schedules other than those listed above have been omitted because they are not
required or are not applicable, or the required information has been included in
the Consolidated Financial Statements or the Notes thereto.
(a)(3) See accompanying Index to Exhibits
(b) No reports on Form 8-K were filed during the fourth quarter of 2002
33
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(a) PERIOD
----------- ---------- ---------- ------------- ----------
ALLOWANCE FOR DOUBTFUL TRADE ACCOUNTS:
Year ended December 31, 2002 $ 365,000 159,321 175,461 348,860
Year ended December 31, 2001 166,824 295,034 96,858 365,000
Year ended December 31, 2000 253,264 183,173 269,613(b) 166,824
(a) Deductions represent write-offs of specifically identified accounts.
(b) Includes $48,885 for the disposition of the Flapdoodles division.
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
SALES ALLOWANCES FOR TRADE ACCOUNTS:
Year ended December 31, 2002 $1,556,000 5,186,868 5,579,868 1,163,000
Year ended December 31, 2001 1,844,400 5,701,973 5,990,373 1,556,000
Year ended December 31, 2000 644,655 9,142,233 7,942,488(a) 1,844,400
(a) Includes $85,000 for the disposition of the Flapdoodles division.
34
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 13, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Michael H. Lerner Chairman, Chief Executive
- ----------------------------- Officer and President March 13, 2003
Michael H. Lerner
/s/ S.E. Melvin Hecht Vice Chairman, Chief Financial
- ----------------------------- Officer and Treasurer March 13, 2003
S.E. Melvin Hecht
/s/ G. Michael Dees Director
- -----------------------------
G. Michael Dees March 13, 2003
/s/ Robert Davidoff Director
- -----------------------------
Robert Davidoff March 13, 2003
/s/ Lawrence D. Glaubinger Director
- -----------------------------
Lawrence D. Glaubinger March 13, 2003
/s/ Barry S. Rosenstein Director
- -----------------------------
Barry S. Rosenstein March 13, 2003
/s/ Brett J. Meyer Director
- -----------------------------
Brett J. Meyer March 13, 2003
/s/ David W. Zalaznick Director
- -----------------------------
David W. Zalaznick March 13, 2003
March 13, 2003
MARISA CHRISTINA, INCORPORATED
SECTION 302(a) CERTIFICATION
CERTIFICATIONS
I, S.E. Melvin Hecht, certify that:
1. I have reviewed this annual report of Form 10-K of Marisa Christina,
Incorporated (Marisa Christina or the Company);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
Marisa Christina as of, and for, the periods presented in this annual
report;
4. Michael H. Lerner and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Marisa Christina and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of Marisa Christina's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. Michael H. Lerner and I have disclosed, based on our most recent
evaluation, to our auditors and the audit committee of Marisa Christina's
board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize, and report financial
data and have identified for the Company's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. Michael H. Lerner and I have indicated in this annual report whether or
not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
March 13, 2003
/s/ S.E. Melvin Hecht
- ----------------------------------------
Vice Chairman of the Board of Directors,
Chief Financial Officer, and Treasurer
MARISA CHRISTINA, INCORPORATED
SECTION 302(a) CERTIFICATION
CERTIFICATIONS
I, Michael H. Lerner, certify that:
1. I have reviewed this annual report of Form 10-K of Marisa Christina,
Incorporated (Marisa Christina or the Company);
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations, and cash flows of
Marisa Christina as of, and for, the periods presented in this annual
report;
4. S.E. Melvin Hecht and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for Marisa Christina and we have:
a) designed such disclosure controls and procedures to ensure
that material Information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of Marisa Christina's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. S.E. Melvin Hecht and I have disclosed, based on our most recent
evaluation, to our auditors and the audit committee of Marisa Christina's
board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize, and report financial
data and have identified for the Company's auditors any
material weaknesses in Internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. S.E. Melvin Hecht and I have indicated in this annual report whether or
not there were significant changes in Internal controls or in other
factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
March 13, 2003
/s/ Michael H. Lerner
- -----------------------------------
Chairman of the Board of Directors,
Chief Executive Officer, and President
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report.
SEQUENTIALLY
EXHIBIT NUMBERED
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) .......................................................................... **
2.4++ Asset Purchase Agreement, dated as of September 2, 1999, by and among
Adrienne Vittadini Enterprises, Inc. (AVE), Marisa Christina Incorporated (Marisa Christina)
and de V&P, Inc. (Purchaser) ..................................................................... ****
2.5++ Asset Purchase Agreement, dated as of December 29, 2000, by and among
Flapdoodles, Inc., MF Showroom Holdings, Inc., Mousefeathers, Inc. (Sellers) and
Flap 2001, Inc. (Purchaser) ...................................................................... *****
3.1 Amended and Restated Certificate of Incorporation of the Company ................................. ***
3.2 By-Laws of the Company ........................................................................... ***
4.3 1994 Stock Option Plan ........................................................................... ***
10.1+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Michael H. Lerner ................................................................ ***
10.3+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and G. Michael Dees .................................................................. ***
10.6+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and S.E. Melvin Hecht ................................................................ ***
10.8+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Robert Davidoff .................................................................. ***
10.9+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and Lawrence D. Glaubinger ........................................................... ***
10.10+ Directors and Officers Indemnification Agreement, dated June 22, 1994, between
the Company and David W. Zalaznick ............................................................... ***
10.16+ Amended and Restated Employment Agreement, dated June 30, 1993, between
the Company and TJC Management Corporation ....................................................... *
10.22+ Employment Agreement between the Company and Michael H. Lerner,
dated January 1, 2001 ............................................................................ ******
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DOCUMENT PAGE
--- -------- ----
10.23+ Employment Agreement between the Company and G. Michael Dees,
dated January 1, 2001 ............................................................................ ******
21 Subsidiaries of the Registrant ................................................................... ***
23 Consent of Independent Auditors .................................................................. (1)
99.1 Certification of Chief Executive Officer and President and Chief Financial
Officer and Treasurer ............................................................................ (1)
* 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.
*** 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 8-K, filed on September 17, 1999.
***** Incorporated by reference to the Exhibits filed with the Company's
Report on Form 8-K, filed on January 16, 2001.
****** 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