<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarter ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 0-24176
Marisa Christina, Incorporated
(Exact name of registrant as specified in its charter)
Delaware 11-3216809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8101 Tonnelle Avenue, North Bergen, New Jersey 07047-4601
(Address of principal executive offices) (Zip Code)
(201)-758-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Company's Common Stock on November
1, 1998 was 7,765,769.
<PAGE> 2
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997
and September 30, 1998 (Unaudited) 2
Consolidated Statements of Operations and Comprehensive
Income for the Three and Nine Months Ended September 30, 1997
and 1998 (Unaudited) 3
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 14
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURE 15
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 (1) 1998
------ ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,007,153 $ 1,152,570
Accounts receivable, less allowance for doubtful
accounts of $200,104 in 1997 and $566,319 in 1998 9,174,602 13,774,924
Inventories 12,006,285 10,276,036
Prepaid expenses and other current assets 3,597,237 3,312,874
Income taxes recoverable 3,653,933 2,106,000
------------ ------------
Total current assets 29,439,210 30,622,404
Property and equipment, net 3,186,404 3,035,650
Goodwill, less accumulated amortization of $4,615,719
in 1997 and $4,489,045 in 1998 31,294,348 13,395,715
Other assets 1,276,819 1,242,254
Deferred tax assets -- 5,261,124
------------ ------------
Total assets $ 65,196,781 $ 53,557,147
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Loans payable to banks $ 6,500,000 $ 10,700,000
Accounts payable 7,578,832 5,745,340
Accrued expenses and other current liabilities 3,419,528 6,215,575
------------ ------------
Total current liabilities 17,498,360 22,660,915
Other liabilities 503,274 --
------------ ------------
Total liabilities 18,001,634 22,660,915
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 15,000,000 shares
authorized, 8,586,769 shares issued and outstanding
in 1997 and 1998 85,868 85,868
Additional paid-in capital 31,653,186 31,653,186
Accumulated other comprehensive loss (57,924) (57,000)
Retained earnings 18,421,447 2,846,613
Treasury stock, 402,000 and 821,000 common shares
in 1997 and 1998 at cost (2,907,430) (3,632,435)
------------ ------------
Total stockholders' equity 47,195,147 30,896,232
------------ ------------
Total liabilities and stockholders' equity $ 65,196,781 $ 53,557,147
============ ============
</TABLE>
(1) Amounts were derived from the audited consolidated balance sheet as of
December 31, 1997.
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 28,375,373 $ 23,064,148 $ 73,545,760 $ 56,363,750
Cost of goods sold 19,975,115 16,699,481 51,096,887 41,113,878
------------ ------------ ------------ ------------
Gross profit 8,400,258 6,364,667 22,448,873 15,249,872
Selling, general and administrative
expenses 7,725,774 6,792,318 21,512,299 19,582,961
Restructuring charge -- 3,750,000 -- 3,750,000
Asset impairment charge -- 16,525,306 -- 16,525,306
------------ ------------ ------------ ------------
Operating earnings (loss) 674,484 (20,702,957) 936,574 (24,608,395)
Other income, net 484,520 786,831 1,982,197 1,662,908
Interest expense, net (111,537) (169,651) (276,579) (489,951)
------------ ------------ ------------ ------------
Earnings (loss) before
income tax expense
(benefit) 1,047,467 (20,085,777) 2,642,192 (23,435,438)
Income tax expense (benefit) 413,728 (6,899,204) 1,043,628 (7,860,604)
------------ ------------ ------------ ------------
Net earnings (loss) 633,739 (13,186,573) 1,598,564 (15,574,834)
Other comprehensive income,
net of tax - foreign currency
translation adjustment -- 410 -- 924
------------ ------------ ------------ ------------
Comprehensive income
(loss) $ 633,739 $(13,186,163) $ 1,598,564 (15,573,910)
============ ============ ============ ============
Net earnings (loss) per share:
Basic $ 0.08 $ (1.62) $ 0.19 (1.91)
Diluted $ 0.08 $ (1.62) $ 0.19 (1.91)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------------ PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL LOSS EARNINGS STOCK TOTAL
--------- ------------ ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 8,586,769 $ 85,868 $ 31,653,186 $ (57,924) $ 18,421,447 $ (2,907,430) $ 47,195,147
Net loss -- -- -- -- (15,574,834) -- (15,574,834)
Other comprehensive
income -- -- -- 924 -- -- 924
Treasury stock -- -- -- -- -- (725,005) (725,005)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 1998 8,586,769 $ 85,868 $ 31,653,186 $ (57,000) $ 2,846,613 $ (3,632,435) $ 30,896,232
============ ============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,598,564 $(15,574,834)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Depreciation and amortization 1,970,083 1,918,859
Restructuring charge -- 3,750,000
Asset impairment charge -- 16,525,306
Deferred tax provision -- (5,764,398)
Changes in assets and liabilities:
Accounts receivable (6,179,787) (4,600,322)
Inventories (1,959,163) 1,730,249
Prepaid expenses and other current assets (1,178,753) 284,363
Other assets (95,505) 34,565
Accounts payable 2,141,724 (1,832,568)
Accrued expenses and other current liabilities 79,581 (953,953)
Income taxes recoverable (619,136) 1,547,933
------------ ------------
Net cash used in operating activities (4,242,392) (2,934,800)
------------ ------------
Cash flows from investing activities:
Acquisitions of property and equipment (928,249) (394,778)
Other (180,212) --
------------ ------------
Net cash used in investing activities (1,108,461) (394,778)
------------ ------------
Cash flows from financing activities:
Borrowings under line of credit facilities, net 5,300,000 4,200,000
Acquisition of treasury stock -- (725,005)
------------ ------------
Net cash provided by financing activities 5,300,000 3,474,995
------------ ------------
Net increase (decrease) in cash and cash equivalents (50,853) 145,417
Cash and cash equivalents at beginning of period 1,044,094 1,007,153
------------ ------------
Cash and cash equivalents at end of period $ 993,241 $ 1,152,570
============ ============
Supplemental information:
Cash paid during the period for:
Income taxes $ 1,586,564 $ 65,327
============ ============
Interest $ 298,231 $ 495,568
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Marisa Christina, Incorporated (the "Company") and its wholly owned
subsidiaries. Significant intercompany accounts and transactions are eliminated
in consolidation.
The unaudited consolidated financial statements do not include all information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles. For further
information, such as the significant accounting policies followed by the
Company, refer to the notes to the Company's audited consolidated financial
statements.
In the opinion of management, the unaudited consolidated financial statements
include all necessary adjustments (consisting of normal, recurring accruals),
for a fair presentation of the financial position, results of operations and
cash flows for the interim periods presented. The results of operations for the
three months and nine months ended September 30, 1997 and 1998 are not
necessarily indicative of the operating results to be expected for a full year.
(2) RESTRUCTURING CHARGE
Effective September 30, 1998, the Company entered into an agreement (the
"Termination Agreement") to terminate the employment contracts of Adrienne and
Gianluigi Vittadini (the "Vittadinis"), the chairman and vice chairman,
respectively, of Adrienne Vittadini Enterprise, Inc. ("AVE"). Under such
employment agreements, entered into in January 1996 in connection with the
acquisition of AVE, the Company had agreed to provide certain base and bonus
compensation as well as certain benefits to the Vittadinis. The Termination
Agreement settles all amounts due under the employment agreements and amends
certain provisions of the January 1996 acquisition agreement. Other amounts
payable to the Vittadinis under the January 1996 acquisition agreement are
generally unaffected by the Termination Agreement, however, future payments are
likely to be limited to an .825% royalty on future licensee sales commencing in
January 2001. As a result of the Termination Agreement, the Company recognized a
restructuring charge of $3,750,000 in the consolidated statements of operations
for the three and nine months ended September 30, 1998, of which $3,150,000 was
paid to the Vittadinis in October 1998.
In connection with the restructuring described above, the Company plans to
discontinue a handbag joint venture between AVE and a third party and has
recorded a charge of $500,000 related to its investment and advances to the
joint venture partner which it deemed are no longer recoverable. The Company
expects to replace the joint venture with a new licensee.
(3) ASSET IMPAIRMENT CHARGE
As a result of the termination of the Vittadinis, operating losses of the AVE
division during 1997 and 1998 and the prospects for additional losses by the AVE
division for the foreseeable future, management of the Company has assessed the
recoverability of AVE's long-lived assets including goodwill. Based on
management's best estimate of future operating results for the AVE division,
management has concluded that it is not likely the Company can recover all of
AVE's long-lived
6
<PAGE> 8
(3) CONTINUED
assets on an undiscounted cash flow basis. Accordingly, the Company has
recognized an asset impairment charge with respect to goodwill of $16,525,306 in
the three and nine months ended September 30, 1998. The charge was based upon
an independent appraisal of the fair value of the AVE division as of September
30, 1998.
(4) REPORTING COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130 (SFAS No. 130), Reporting Comprehensive Income, as of January
1, 1998. SFAS No. 130 requires the reporting and display of comprehensive income
and its components and accumulated comprehensive income in a full set of
financial statements. Comprehensive income represents the Company's change in
equity during the periods presented from transactions and other events and
circumstances from nonowner sources. The impact of adoption was not material.
(5) INVENTORIES
Inventories at December 31, 1997 and September 30, 1998 consist of the
following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Piece goods $ 2,959,703 $ 2,731,743
Work in process 2,863,727 1,255,940
Finished goods 6,182,855 6,288,353
----------- -----------
$12,006,285 $10,276,036
=========== ===========
</TABLE>
(6) CREDIT FACILITIES
The Company has line of credit facilities with two banks, aggregating
$23,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
arrangements are secured by certain of the Company's assets and bear interest at
the banks' prime rate plus 0.25% to 1.0% or Libor plus 2.5%, at the Company's
option. The arrangements expire on June 30, 1999. As of September 30, 1998,
$10,700,000 of borrowings, bearing interest at an average rate of 6.97%, and
$3,596,905 of commercial letters of credit were outstanding under the credit
facilities.
(7) EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 Earnings Per Share, as of December 31, 1997, and accordingly,
has restated all prior periods in accordance with the pronouncement. The impact
on adoption was not material. Basic and diluted net earnings (loss) per common
share is based on the weighted average number of common shares outstanding
which were 8,384,769 and 8,125,508 and 8,384,769 and 8,148,904 for the three
months and nine months ended September 30, 1997 and 1998, respectively.
7
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results for the first nine months of 1998 were below historical levels. The
Company's results were adversely impacted by weaker sales and customer demand at
all three of the Company's operating divisions; Marisa Christina (MC), Adrienne
Vittadini (AVE) and Flapdoodles. Management attributes the decline in operating
results primarily to the change in consumer habits and a shift in the buying
patterns of major department stores to favor a smaller number of suppliers with
very large name brands. Sales were also negatively impacted by a conscious
decision to reduce sales to discounters, as well as unfavorable year to date
sales by retail customers. The Company expects this trend to continue.
Effective September 30, 1998, the Company entered into an agreement (the
"Termination Agreement") to terminate the employment contracts of Adrienne and
Gianluigi Vittadini (the "Vittadinis"), the chairman and vice chairman,
respectively, of Adrienne Vittadini Enterprise, Inc. ("AVE"). Under such
employment agreements, entered into in January 1996 in connection with the
acquisition of AVE, the Company had agreed to provide certain base and bonus
compensation as well as certain benefits to the Vittadinis. The Termination
Agreement settles all amounts due under the employment agreements and amends
certain provisions of the January 1996 acquisition agreement. Other amounts
payable to the Vittadinis under the January 1996 acquisition agreement are
generally unaffected by the Termination Agreement, however, future payments are
likely to be limited to an .825% royalty on future licensee sales commencing in
January 2001. As a result of the Termination Agreement, the Company recognized a
restructuring charge of $3,750,000 in the consolidated statements of operations
for the three and nine months ended September 30, 1998, of which $3,150,000 was
paid to the Vittadinis in October 1998.
As a result of the termination of the Vittadinis, operating losses of the AVE
division during 1997 and 1998 and the prospects for additional losses by the AVE
division for the foreseeable future, management of the Company has assessed the
recoverability of AVE's long-lived assets including goodwill. Based on
management's best estimate of future operating results for the AVE division,
management has concluded that it is not likely the Company can recover all of
AVE's long-lived assets on an undiscounted cash flow basis. Accordingly, the
Company has recognized an asset impairment charge with respect to goodwill of
$16,525,306 in the three months ended September 30, 1998. Such charge was based
upon an independent appraisal of the fair value of the AVE division as of
September 30, 1998.
In connection with the restructuring described above, the Company plans to
discontinue a handbag joint venture between AVE and a third party. In connection
with the reorganization, the Company has recorded a charge of $500,000 related
to its investment and advances to the joint venture partner which it deemed are
no longer recoverable.
8
<PAGE> 10
The following table sets forth information with respect to the percentage
relationship to net sales of certain items of the Company's consolidated
statements of operations for the three-month and nine- month periods ended
September 30, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------- ---------------
1997 1998 1997 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Gross profit 29.6 27.6 30.5 27.1
Selling, general and administrative
expenses 27.2 29.5 29.2 34.8
Restructuring charge -- 16.3 -- 6.7
Asset impairment charge -- 71.6 -- 29.3
----- ----- ----- -----
Operating earnings (loss) 2.4 (89.8) 1.3 (43.7)
Other income, net 1.8 3.4 2.7 3.0
Interest expense, net (0.4) (0.7) (0.4) (0.9)
Income tax expense (benefit) 1.5 (29.9) 1.4 (14.0)
----- ----- ----- -----
Net earnings (loss) 2.3% (57.2%) 2.2% (27.6%)
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net sales. Net sales decreased 18.7%, from $28.4 million in 1997 to $23.1
million in 1998. The decrease is attributable primarily to a decline in sales at
the AVE and the Flapdoodles divisions. The sales declines were offset to some
extent by higher sales at the MC division. The decline in sales at the
Flapdoodles division was principally the result of lower sales to department
stores as the result of management's decision to no longer sell certain low
margin accounts.
Gross profit. Gross profit decreased 23.8%, from $8.4 million in 1997 to $6.4
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 29.6% in 1997 to 27.6% in 1998. The
decline in the gross profit percentage for the 1998 three months was
attributable primarily to the impact that certain fixed costs associated with
design and production had on a significantly lower sales volume.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 11.7%, from $7.7 million in 1997 to $6.8
million in 1998. As a percentage of net sales, selling, general and
administrative expenses increased from 27.2% in 1997 to 29.5% in 1998. The
decrease in dollar amount is primarily attributable to variable expenses related
to lower sales volume and also to the Company's ongoing efforts to control
operating expenses. The percentage of net sales increase was attributable to
certain fixed costs on a lower sales volume.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis described above.
Asset impairment charge. Asset impairment charge relates to the writedown
of goodwill associated with the AVE division described above.
Other income, net. Other income, net consists of royalty, licensing and
copyright infringement income. The amount has increased as a result of higher
sales by Adrienne Vittadini licensees for the three months.
9
<PAGE> 11
Interest expense, net. Interest expense, net increased 51.8%, from $112 thousand
in 1997 to $170 thousand in 1998, primarily as the result of higher average
outstanding borrowings.
Income tax expense (benefit). Income tax expense (benefit) was $414 thousand
expense in 1997 and ($6.9) million benefit in 1998 as a result of the loss
incurred in 1998. The Company's effective income tax rates for the three months
ended September 30, 1997 and 1998 were 39.5% and (34.3%), respectively. The
lower effective tax rate in 1998 is the result of valuation allowances
established for operating losses in certain states.
The net operating loss for 1998 will be carried back to 1996 to recover federal
taxes paid in that year. However, the Company's write-down of the AVE goodwill
will not be deductible for income tax purposes in the current period. Rather,
the Company will continue to deduct the amount over its remaining tax life of
approximately 12 years. Management estimates that the Company will be able to
recover the deferred federal income tax benefit of such goodwill deductions
through earnings generated by the MC and Flapdoodles divisions in future years.
The Company has established a valuation allowance of approximately $1 million
for state net operating loss carryforwards generated by the AVE division since
these net operating losses will only be available to reduce future taxable
income of the AVE division.
Net earnings (loss). Net earnings (loss) declined from net earnings of $634
thousand in 1997 to net loss of ($13.2) million in 1998 as a result of the
aforementioned items.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net sales. Net sales decreased 23.4%, from $73.6 million in 1997 to $56.4
million in 1998. The decrease is attributable primarily to a decline in sales at
all three of the Company's operating divisions.
Gross profit. Gross profit decreased 32.1%, from $22.4 million in 1997 to $15.2
million in 1998 as a result of lower sales and gross margin. As a percentage of
net sales, gross profit decreased from 30.5% in 1997 to 27.1% in 1998. The
decline in the gross profit percentage for the 1998 nine months was attributable
primarily to the impact that certain fixed costs, associated with design and
production, had on lower sales volume.
Selling, general and administrative expense. Selling, general and administrative
expenses decreased 8.8%, from $21.5 million in 1997 to $19.6 million in 1998. As
a percentage of net sales of the Company, selling, general and administrative
expenses increased from 29.2% in 1997 to 34.8% in 1998, as a result of the lower
sales volume. The decrease in dollar amount is attributable to variable expenses
related to lower sales volume and also to the Company's ongoing efforts to
control operating expenses.
Restructuring charge. Restructuring charge relates primarily to the termination
of the Vittadinis described above.
Asset impairment charge. Asset impairment charge relates to the writedown of
goodwill associated with the AVE division described above.
Other income, net. Other income, net consists of royalty, licensing and
copyright infringement income. The amount has declined as a result of lower
sales by Adrienne Vittadini licensees for the nine months.
Interest expense, net. Interest expense, net increased 76.9% from $277 thousand
in 1997 to $490 thousand in 1998, primarily as the result of higher average
outstanding borrowings.
10
<PAGE> 12
Income tax expense (benefit). Income tax expense (benefit) changed from $1.0
million expense in 1997 to ($7.9) million benefit in 1998 as the result of the
loss incurred in 1998. The Company's effective income tax rates for the nine
months ended September 30, 1997 and 1998 were 39.5% and (33.5)%, respectively.
The lower effective tax rate in 1998 is the result of valuation allowances
established for operating losses in certain states.
Net earnings (loss). Net earnings (loss) declined from net earnings of $1.6
million in 1997 to net loss of ($15.6) million in 1998 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
Back-to-School, Fall and Holiday selling seasons. This is due to both a larger
volume of unit sales in these seasons and traditionally higher prices for these
garments, which generally require more costly materials than the Spring/Summer
and Resort seasons. Merchandise from Back-to-School and Fall collections, the
Company's largest selling seasons and Holiday, the Company's next largest
season, are shipped in the last two fiscal quarters. Merchandise for Resort,
Spring/Summer and Early Fall, the Company's lower volume seasons, is shipped
primarily in the first two quarters. In addition, prices of products in the
Resort, Spring/Summer and Early Fall collections average 5 to 10% lower than in
other selling seasons.
LIQUIDITY AND CAPITAL RESOURCES
The Company has line of credit facilities with two banks, aggregating
$23,000,000, which may be utilized for commercial letters of credit, banker's
acceptances, commercial loans and letters of indemnity. Borrowings under the
arrangements are secured by certain of the Company's assets and bear interest at
the banks' prime rate plus 0.25% to 1.0% or Libor plus 2.5%, at the Company's
option. The arrangements expire on June 30, 1999. As of September 30, 1998,
$10,700,000 of borrowings and $3,596,905 of commercial letters of credit were
outstanding under the credit facilities.
During 1998, the Company has planned capital expenditures of approximately
$500,000, primarily to upgrade computer systems and open new outlet stores.
These capital expenditures will be funded by internally generated funds and, if
necessary, bank borrowings under the Company's line of credit facilities.
Capital expenditures during the nine months ended September 30, 1998 were
approximately $395,000.
The Company believes that funds generated by operations, if any, and the
expected renegotiated line of credit facility will provide financial resources
sufficient to meet all of its working capital and letter of credit requirements
for at least the next twelve months.
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 an impact
on the Company's cost of merchandise. The Company does not engage in hedging
activities with respect to such exchange rate risk.
11
<PAGE> 13
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.
INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from a programming convention in which computer
programs use two digits rather than four to define the applicable year. The
inability of computer programs to recognize a year that begins with "20" could
result in system failures, miscalculations or errors causing disruptions of
operations or other business activities.
The Company has undertaken a program to address the Year 2000 issue with respect
to (i) the Company's information systems, (ii) the Company's non-information
systems, and (iii) certain systems of the Company's major customers and
suppliers. As described below, the Company's Year 2000 program includes (i)
assessment of the problem, (ii) development of remedies, (iii) testing of such
remedies and (iv) the preparation of contingency plans to deal with the worst
case scenarios.
Information Systems - The Company maintains information systems at each of its
three operating divisions. Information systems at the Company's MC and AVE
divisions have been remediated, tested and have been determined by management to
be Year 2000 compliant. The Company is in the process of remediating information
systems at the Flapdoodles division. The Company expects to have this system
remediated and tested by March 1999.
Non-Information Systems - The Company has not completed its assessment of the
Year 2000 issue with respect to critical non-information systems. However,
management believes that such issues, if any, would be limited to the Company's
telephone systems. The Company expects to complete this assessment by December
1998. Remediation required, if any, will be completed by March 1999.
Customer and Supplier Systems - The Company has begun informal discussions with
major customers and suppliers with respect to the Year 2000 issue. The Company
currently has limited electronic interfaces with customers and vendors and,
accordingly, is focused on its customers, and vendors, ability to operate
following January 1, 2000. The Company intends to make formal inquiries of its
key customers and suppliers during 1999 to complete this assessment and
establish contingency plans as necessary.
Costs Related to the Year 2000 Issue - To date the Company has incurred less
than $50 thousand to remediate its Year 2000 information systems issues and
expects to incur an additional $100 thousand to complete the remediation and
testing of the Flapdoodles information systems. Costs, if any, to remediate the
non-information systems are not expected to be material.
Risk Related to the Year 2000 Issue - Although the Company's Year 2000 efforts
are intended to minimize the adverse effects of the Year 2000 issue on the
Company's operation, the actual effects of the issue cannot be known until the
Year 2000. Failure of the Company and its major customers and suppliers to
appropriately remediate the Year 2000 issue could have a material adverse effect
on the Company's financial condition and results of operations.
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<PAGE> 14
FORWARD LOOKING INFORMATION
Except for historical information contained herein, the statements in this form
are forward looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward
looking statements involve known and unknown risks and uncertainties which may
cause the Company's actual results in future periods to differ materially from
forecasted results. Those risks include, among others, risks associated with the
success of future advertising and marketing programs, the receipt and timing of
future customer orders, price pressures and other competitive factors and a
softening of retailer or consumer acceptance of the Company's products leading
to a decrease in anticipated revenues and gross profit margins. Those and other
risks are described in the Company's filings with the Securities and Exchange
Commission (SEC), copies of which are available from the SEC or may be obtained
upon request from the Company.
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<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings required to be disclosed in response to Item 103
of Regulation S-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 10.22. Termination Agreement dated September 30, 1998 by and among
Adrienne Vittadini, Gianluigi Vittadini and Marisa Christina,
Incorporated.
Exhibit 27. Financial Data Schedules
Exhibit 28. Press release dated November 11, 1998
Reports on Form 8-K - no reports on Form 8-K were filed during the quarter ended
September 30, 1998.
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<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 /s/ S. E. Melvin Hecht
----------------- -------------------------------------
S. E. Melvin Hecht
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
-------------
Exhibit 10.22. Termination Agreement dated September 30, 1998 by and among
Adrienne Vittadini, Gianluigi Vittadini and Marisa Christina,
Incorporated.
Exhibit 27. Financial Data Schedules
Exhibit 28. Press release dated November 11, 1998
<PAGE> 1
EXHIBIT 10.22
AGREEMENT dated September 30, 1998, by and among ADRIENNE VITTADINI, an
individual ("AV"), GIANLUIGI VITTADINI, an individual ("GV"), VITTADINI, LTD., a
Delaware corporation ("VLTD"), AV HONG KONG LTD., a Hong Kong corporation
("AVHK"), AV and GV collectively, the "VITTADINIS", and MARISA CHRISTINA, INC.,
a Delaware corporation ("MCI"), ADRIENNE VITTADINI ENTERPRISES, INC., a Delaware
corporation ("AVEI"), FLAPDOODLES, INC., a Delaware corporation ("FL"),
INTERNATIONAL APPAREL MARKETING LTD., a Hong Kong corporation ("IAML"), and
MARISA CHRISTINA APPAREL, INC., a Delaware corporation ("MCA") (MCI, AVEI, FL,
IAML and MCA, collectively, the MCI GROUP"); all of the above collectively, the
"PARTIES".
W I T N E S S E T H :
WHEREAS, Adrienne Vittadini, Inc. ("AVI") has been liquidated
and AV and GV jointly are successors in interest to AVI;
WHEREAS, the PARTIES have entered into certain agreements
dated as of January 1, 1996, including: (i) that certain Asset Purchase
Agreement, by and among Adrienne Vittadini, Inc., a Delaware corporation, which
was liquidated in or about 1997 ("AVI"), MCI and AVEI (the "ASSET PURCHASE
AGREEMENT"); (ii) that certain Employment Agreement, by and among AVEI, MCI and
AV (the "AV EMPLOYMENT AGREEMENT"); (iii) that certain Employment Agreement, by
and among AVEI, MCI and GV (the "GV EMPLOYMENT AGREEMENT"); and (iv) that
certain Trademark Assignment Agreement, by and among VLTD, MCI and AVEI (the
"TRADEMARK ASSIGNMENT AGREEMENT") the above agreements, collectively, the
"AGREEMENTS"; and
<PAGE> 2
WHEREAS, the PARTIES are desirous of modifying, in part,
and/or terminating certain of the AGREEMENTS; and
WHEREAS, MCI is willing to pay or cause to be paid to AV and
GV and AV and GV are willing to accept the sum of Two Million Seven Hundred
Fifty Thousand Dollars ($2,750,000.00) in consideration of their termination of
certain compensation rights under the AV EMPLOYMENT AGREEMENT and the GV
EMPLOYMENT AGREEMENT and the sum of Two Hundred Fifty Thousand Dollars
($250,000.00), and in settlement of certain claims for ADDITIONAL CONSIDERATION
under Section 3.3.1 of the ASSET PURCHASE AGREEMENT and the TRADEMARK ASSIGNMENT
AGREEMENT, all pursuant to the terms and conditions hereinafter set forth.
NOW, THEREFORE, the PARTIES hereto agree as follows:
1. Capitalized terms used but not otherwise defined herein
shall have the meanings ascribed to them in the AGREEMENTS.
2. As consideration for the agreements among the PARTIES as
set forth herein in paragraphs 3, 4, and 5, MCI agrees:
(a) to pay to AV and GV, upon the execution of this Agreement,
the sum of Three Million Dollars ($3,000,000), by wire transfer of immediately
available funds, to such account as previously has been designated in writing to
MCI by AV and GV, and such payment
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<PAGE> 3
shall be allocable Two Million Seven Hundred Fifty Thousand Dollars
($2,750,000.00) in consideration of the termination of certain compensation
rights under the AV EMPLOYMENT AGREEMENT and the GV EMPLOYMENT AGREEMENT and the
sum of Two Hundred Fifty Thousand Dollars ($250,000.00), in settlement of
certain claims for ADDITIONAL PURCHASE PRICE PAYMENTS for calendar years 1996,
1997 and the first nine (9) months of 1998 under Section 3.4.1 of the ASSET
PURCHASE AGREEMENT and the TRADEMARK ASSIGNMENT AGREEMENT;
(b) to pay to AV and GV jointly, as successors in interest to
AVI, upon the execution of this Agreement, the sum of One Hundred Fifty Thousand
Dollars ($150,000.00) representing the ADDITIONAL PURCHASE PRICE PAYMENTS for
calendar years 1996, 1997, and the first nine (9) months of 1998 under Section
3.4.1 of the ASSET PURCHASE AGREEMENT, by wire transfer of immediately available
funds, to such account as previously has been designated in writing to MCI by AV
and GV; and
(c) to transfer to AV such books and publications which MCI
and AVEI acknowledge are the personal property of AV and which are currently
held in the library of MCI, as well as such costumes as AV may select, from the
archives of AVEI and MCI, subject to MCI's consent, provided, however, that AV
may select and retain up to four hundred (400) costumes from the archives, and
provided, further, that AV may borrow such additional
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<PAGE> 4
costumes, with the consent of MCI (which consent shall not be unreasonably
withheld) for the purpose of public retrospectives of the designs of AV. The
archives are deemed to consist of garments at least one (1) year old.
3. The GV EMPLOYMENT AGREEMENT is hereby terminated in all
respects, including, without limitation, GV's rights with respect to
compensation pursuant to Section 2 thereof, employee and fringe benefits
pursuant to Section 3 thereof, and expenses pursuant to Section 4 thereof;
provided, however, that Section 9 entitled: "CONFIDENTIALITY: NON-COMPETITION,
NON-SOLICITATION", Section 10.1 relating to "INDEMNIFICATION UNDER DELAWARE LAW"
and Section 11.3 relating to the Guaranty of MCI shall remain in full force and
effect in accordance with their terms, and all financial obligations of the
PARTIES with regard to the GV EMPLOYMENT AGREEMENT are considered to be paid in
full and are deemed satisfied as if same had been paid in a timely manner
pursuant to the terms of the GV EMPLOYMENT AGREEMENT. At the option of GV, AVEI
shall terminate, or if possible, assign to GV, those insurance policies, listed
on Schedule "A" hereto, on the life of GV with regard to which AVEI or MCI is a
partial or full owner or beneficiary, provided, however, that (i) within thirty
(30) days after the date hereof, GV shall provide to AVEI or MCI written notice
of his option to cause AVEI or MCI to terminate or assign any or all of the
insurance policies listed on Schedule "A" hereto, and (ii) GV shall be
responsible for the payment of all premiums on those policies which have been
assigned to him. Any cash surrender value relating to such insurance policies
shall be the property of AVEI, whether such policies are terminated or assigned
to GV. With respect to health insurance coverage for GV, MCI and/or AVEI, if
4
<PAGE> 5
permitted, will continue such coverage, subject to and conditioned upon GV
immediately reimbursing MCI and/or AVEI for all expenses incurred by it relative
to such health insurance coverage.
4. The AV EMPLOYMENT AGREEMENT is hereby terminated in all
respects, including, without limitation, AV's rights with respect to
compensation pursuant to Section 2 thereof, employee and fringe benefits
pursuant to Section 3 thereof, and expenses pursuant to Section 4 thereof;
provided, however, that Section 9 entitled: "CONFIDENTIALITY, NON-COMPETITION,
NON-SOLICITATION" (as amended in accordance with the terms and conditions of
Section 5 of this Agreement), Section 10.1 relating to "INDEMNIFICATION UNDER
DELAWARE LAW" and Section 11.3 relating to the Guaranty of MCI shall remain in
full force and effect in accordance with their terms, and all financial
obligations of the PARTIES with regard to the AV EMPLOYMENT AGREEMENT are
considered to be paid in full and are deemed satisfied as if same had been paid
in a timely manner pursuant to the terms of the AV EMPLOYMENT AGREEMENT. At the
option of AV, AVEI shall terminate, or if possible, assign to AV, those
insurance policies, listed on Schedule "B" hereto, on the life of AV with regard
to which AVEI or MCI is a partial or full owner or beneficiary, provided,
however, that (i) within thirty (30) days after the date hereof, AV shall
provide to AVEI or MCI written notice of her option to cause AVEI or MCI to
terminate or assign any or all of the insurance policies listed on Schedule "B"
hereto, and (ii) AV shall be responsible for the payment of all premiums on
those policies which have been assigned to her. Any cash surrender value
relating to such insurance policies shall be the property of AVEI, whether such
policies are terminated or
5
<PAGE> 6
assigned to AV. In consideration of this Agreement and notwithstanding the
foregoing, AV agrees to continue her efforts through November 30, 1998 in
assisting in the completion of apparel lines bearing the Trademarks, consistent
with past efforts and practices but without further payments to her, provided,
however, that in order to enable her to carry out such assistance, MCI and AVEI
shall continue to make available to AV until November 30, 1998: (i) the use of
the office located at 1441 Broadway, New York, New York; (ii) staff to assist AV
with such apparel lines; (iii) the automobile and driver, in accordance with the
terms of Section 3.5 of the AV EMPLOYMENT AGREEMENT; and (iv) an expense account
with respect to all business expenditures reasonably related to AV's assistance
in completion of such apparel lines. With respect to health insurance coverage
for AV, MCI and/or AVEI, if permitted, will continue such coverage, subject to
and conditioned upon AV immediately reimbursing MCI and/or AVEI for all expenses
incurred by it relative to such health insurance coverage.
5. Section 9.2 of the AV EMPLOYMENT AGREEMENT is hereby
deleted in its entirety, and the following is substituted in lieu thereof:
"The Executive covenants and agrees that, for a period of up
to 10 years and 3 months after October 1, 1998, as provided
below, the Executive shall not compete with the Company
anywhere in the world. For purposes of this Section 9.2, the
term "compete" shall mean (a) engaging in and/or rendering any
services on the Executive's own behalf in respect of, or to or
on behalf of, and/or (b) being an officer, director, partner,
shareholder (other than the owner of less than 5% of the
outstanding equity interest of any publicly traded company),
owner, agent
6
<PAGE> 7
employee or associate of any business or enterprise which is
engaged in the business of designing, manufacturing,
licensing, marketing and/or selling (i) women's apparel or
children's apparel, (ii) men's apparel; provided, however,
that the Executive shall not be deemed to be competing with
the Company with respect to men's apparel if the Company is
not directly engaged in (as opposed to licensing to unrelated
third parties the rights to) the design, manufacture,
marketing or sale of men's apparel under the name "Adrienne
Vittadini" or any related trademark (collectively, the
"Trademarks") at the end of the Employment Period, and (iii)
any categories of goods listed on Schedule C to the agreement
dated as of September 30, 1998, to which Executive and the
Company are parties. For purposes of this Agreement, the term
"apparel" shall mean all wearing apparel and shall not include
any other items of clothing commonly known as accessories,
including, for example, shoes, hats, scarves, gloves, belts,
handbags or any other non-apparel related categories such as
home furnishings and textiles for which the Trademarks have
been licensed. Notwithstanding the foregoing, the provisions
of this Section 9.2 and Section 9.3 hereof shall be of no
further force and effect with respect to:
(a) men's apparel and any category of goods or
services not set forth in clauses (i) and (iii) immediately
above;
(b) any category of goods or services set forth in
clause (iii) immediately above at any time after January 1,
2000; and
(c) any category of goods set forth in clause (i)
immediately above
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<PAGE> 8
(i.e., women's apparel or children's apparel) at any time
after January 1, 2002; provided, however, that in the event
that (w) the Company shall pay to the Executive Five Hundred
Thousand Dollars ($500,000.00) for the calendar year 2001, the
release of the restriction as set forth in this subsection (c)
shall not be operable until any time after January 1, 2003;
(x) the Company shall pay to the Executive the sum of One
Million Dollars ($1,000,000.00) for the calendar year 2002 or
such lesser amount so that the aggregate payments for the
calendar years 2001 and 2002 equal at least One Million Five
Hundred Thousand Dollars ($1,500,000.00), then the release of
the restriction as set forth in this subsection (c) shall not
be operable until any time after January 1, 2004; (y) the
Company shall pay to the Executive the sum of at least One
Million Dollars ($1,000,000.00) for the calendar year 2003,
then the release of the restriction as set forth in this
subsection (c) shall not be operable until any time after
January 1, 2005; and (z) for each successive calendar year
commencing with calendar year 2004, the Company shall pay to
the Executive such sum, but in no event less than Five Hundred
Thousand Dollars ($500,000.00), so that the aggregate sum paid
to the Executive in such calendar year and the prior calendar
year shall be at least Two Million Dollars ($2,000,000.00),
then the release of such restriction as set forth in this
subsection (c) shall not be operable for the calendar year
commencing with the first anniversary of the expiration of
such calendar year for which the sum required immediately
above was paid. For purpose of example, if the Company pays
the Executive One Million Two Hundred Thousand Dollars
($1,200,000.00)
8
<PAGE> 9
for calendar year 2004, then at least Eight Hundred Thousand
Dollars ($800,000.00) shall be paid for calendar year for 2005
for the restriction to continue for an additional calendar
year. With respect to all such payments which the Company
shall make to the Executive pursuant to this subsection (c),
all Additional Purchase Price Payments (as defined in the
Asset Purchase Agreement, dated as of January 1, 1996, among
the Company, Parent and Adrienne Vittadini, Inc.) made in
accordance with the ASSET PURCHASE AGREEMENT and shall be
applied to those payments applicable to such calendar year."
6. The ASSET PURCHASE AGREEMENT shall remain in full force and
effect, except as modified in this Section 6. The PARTIES acknowledge that the
PURCHASE PRICE under the ASSET PURCHASE AGREEMENT has been paid or is due and
payable in accordance with the following:
(a) the INITIAL CONSIDERATION described in Section 3.2 of the
ASSET PURCHASE AGREEMENT has been paid in full;
(b) the 1998 ADDITIONAL CONSIDERATION described in Section
3.3.1 of the ASSET PURCHASE AGREEMENT has yet to be determined, and such sum, if
any, shall be due and owing to AV and GV in accordance with the terms of the
ASSET PURCHASE AGREEMENT;
(c) the 2000 ADDITIONAL CONSIDERATION described in Section
3.3.1 of the ASSET PURCHASE AGREEMENT has yet to be determined, and such sum, if
any, shall be due and owing to AV and GV in accordance with the terms of the
ASSET PURCHASE
9
<PAGE> 10
AGREEMENT;
(d) the biannual ADDITIONAL PURCHASE PRICE PAYMENTS described
in Section 3.4.1 of the ASSET PURCHASE AGREEMENT, and referred to there as 10%
EBIT bonus and 10% net licensing income payment to the extent not previously
paid or not paid pursuant to Sections 2(a) and 2(b) of this Agreement are hereby
expressly waived by AV and GV as being due and owing as part of the PURCHASE
PRICE, provided that such waiver is for the purposes of the ASSET PURCHASE
AGREEMENT only;
(e) the biannual ADDITIONAL PURCHASE PRICE PAYMENTS described
in Section 3.4.2 of the ASSET PURCHASE AGREEMENT, and referred to there as the
.825% Royalty Payment shall be due and owing to AV and GV, in accordance with
the terms of the ASSET PURCHASE AGREEMENT, except that the period for which such
payment shall be due, shall commence on January 1, 2001 as opposed to January 1,
2002.
7. The Trademark Assignment Agreement among VLTD, MCI and AVEI
is modified and/or supplemented as follows:
(a) AV's twenty-five (25) days per year of personal
appearances as set forth in Section 2.4 shall begin to be effective as of
January 1, 1999, and the PARTIES acknowledge and agree that no such personal
appearances shall be required or requested of AV during the remainder of
calendar year 1998. Personal appearances shall be only be those appearances as
requested by AVEI. With respect to such personal appearances, the PARTIES
additionally agree as follows: (i) AV shall be permitted to travel at all times
with a qualified assistant employed by MCI or AVEI, or an assistant selected by
AV, if same is acceptable to AVEI. AV shall be
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<PAGE> 11
permitted to fly first class when travelling to and from any venues for such
personal appearances; (ii) all expenses, including, but not limited to,
transportation, first class lodgings, meals, and personal amenities (including,
but not limited to, hair dressing and make-up) shall be reimbursed by AVEI
and/or MCI; (iii) all such personal appearances shall be related to "events"
which shall include, but not be limited to, appearances at galas and other
fashion events; (iv) AV shall not be required to make any appearances on the
Home Shopping Network, QVC, or similar formats, or in "info-mercials"; and (v)
travel time which is less than six (6) hours shall be deemed one-half (1/2) of a
day, and travel time which is six (6) hours or more shall be deemed one (1) full
day; and (vi) AVEI and/MCI shall use its reasonable efforts to schedule
successive appearances in "blocks" of days.
(b) The PARTIES hereby agree that neither AVEI nor MCI shall
be deemed in default of the TRADEMARK ASSIGNMENT AGREEMENT for not having
immediately caused the recordation with the relevant trademark authorities of
the assignments of the TRADEMARKS under the TRADEMARK ASSIGNMENT AGREEMENT. The
PARTIES further agree that AVEI or MCI shall cause the recordation of such
assignments at such time when the renewals for the individual TRADEMARKS become
due. In connection therewith, AV or GV, individually and/or as an officer of
VLTD shall sign such documents required by law relating to the registration of
the assignments and/or renewal of the TRADEMARKS which documents are presented
to them for execution, or execute an appropriate power of attorney to Darby &
Darby, trademark attorneys for AVEI.
8. AV hereby resigns as an officer and member of the Board of
Directors of
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<PAGE> 12
MCI and AVEI, effective as of September 30, 1998, and GV hereby resigns as an
officer and member of the Board of Directors of both MCI and AVEI, effective
September 30, 1998.
9. MCI and AVEI agree: (i) to permit AV and GV continued
access to their respective offices located at 575 Seventh Avenue, New York, New
York, for a period of thirty (30) days from November 30, 1998 with respect to
AV, and thirty (30) days from September 30, 1998 with respect to GV, as the case
may be, and provided that AV and GV, as the case may be, provides reasonable
notice to MCI of the intention to access such offices and provided further that
MCI and AVEI shall make available to AV and GV, during their use of such
offices, reasonable telephone and secretarial services; (ii) to fax to GV, or a
person designated by GV, a daily phone log of all messages received for AV or
GV; and (iii) if possible MCI and AVEI will permit to be transferred the private
phone lines of AV and GV located at their offices at 575 Seventh Avenue, New
York, New York to such other location as specified in writing by AV and GV,
respectively to MCI.
10. The PARTIES shall keep the terms and conditions of this
Agreement strictly confidential unless otherwise required by law and SEC
regulations.
11. AV and GV agree not to disparage MCI, AVEI or any of its
officers or directors and MCI and AVEI agree to cause its officers, directors
and employees not to disparage AV or GV. MCI, AV and GV have agreed upon the
text of a press release, which press release will be released promptly after the
execution and delivery of this Agreement.
12. MCI and AVEI represent and warrant that the MCI common
stock held by
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<PAGE> 13
GV and AV have been registered under the Securities Act of 1933, as amended. If
there are any restrictive legends on the certificates representing AV's and/or
GV's stock in MCI, then, upon the execution of this Agreement, and the delivery
by AV and GV to MCI of all stock certificates representing their equity
ownership in MCI, MCI shall release any and all restrictions on the common stock
of MCI held by AV and GV and shall remove any restrictions on AV's and/or GV's
stock in MCI and shall issue to AV and GV new stock certificates representing
the same number of shares of MCI held by AV and GV, respectively, without any
restrictive legend thereon. Notwithstanding the foregoing, such stock will only
be able to be sold during certain designated "window" periods, no less than
thirty (30) days in each calendar quarter, or as otherwise approved by Michael
H. Lerner, provided, however, that either AV or GV will be given a "window" of
at least one (1) month to sell their respective stock in MCI prior to December
31, 1998. MCI and AVEI agree that in the event that AV or GV desire to sell any
quantity of MCI stock, all PARTIES agree to use their best reasonable efforts to
arrange for a "block" sale of such shares.
13. AV and GV hereby reaffirm and acknowledge that they have
no rights with regard to any potential sale of MCI or a sale of AVEI by MCI
other than those rights as set forth in the certain AGREEMENTS and other
agreements dated as of January 1, 1996.
14. Each party to this Agreement acknowledges that each has
acted in good faith and has satisfied all existing AGREEMENTS both with respect
to their conduct and actions as well as to any financial obligations as of the
date hereof.
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<PAGE> 14
15. MCI hereby acknowledges that it has not entered into any
agreements which bind AV or GV to any obligations or liabilities which have not
been made known to them. AV and GV, individually and jointly, hereby acknowledge
that neither of them have entered into any agreements or have in any way bound
AVEI and/or MCI to any material obligations or liabilities not in the ordinary
course of business.
16. Except for the obligations as set forth above in
accordance with the terms of this Agreement, and except as to any future rights
or obligations of the PARTIES as set forth in the AGREEMENTS referenced herein,
and in the other agreements dated as of January 1, 1996, including, but not
limited to, indemnity obligations of AVEI and MCI to AV and GV, which have not
been terminated and as same have been modified and amended, and in consideration
of the payment provided for herein:
(a) The VITTADINIS, together with their respective heirs,
executors, administrators, officers, directors, employees, shareholders, agents,
successors and assigns, collectively, the "VITTADINI RELEASORS", hereby release
and discharge each member of the MCI RELEASORS (as defined in Section 16(b)
below) from any and all claims, causes of action, suits, debts, dues, sums of
money, accounts and demands of any kind, whether in law or in equity that any of
the VITTADINI RELEASORS had, now have or hereafter may have by reason of any
matter arising from, relating to, or in connection with any of the AGREEMENTS or
by reason of any matter from the beginning of the world to the day of the date
of this Agreement against any of the MCI RELEASORS.
(b) Each member of the MCI GROUP, together with their
respective officers,
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<PAGE> 15
directors, employees, shareholders, agents, successors and assigns, collective,
the "MCI RELEASORS" hereby releases and discharges the VITTADINI RELEASORS from
any and all claims, causes of action, suits, debts, dues, sums of money,
accounts and demands of any kind, whether in law or in equity, that any of the
MCI RELEASORS had, now have or hereafter may have by reason of any matter
arising from, relating to, or in connection with any of the AGREEMENTS, or by
reason of any matter from the beginning of the world to the day of the date of
this Agreement against any of the VITTADINI RELEASORS.
(c) Specifically excluded from the above releases is the
obligation of AV and GV to Kreindler & Relkin, P.C. for professional services
rendered with regard to the litigation entitled: Lazar Consulting Associates,
Inc. v. Adrienne Vittadini, Inc. and Adrienne Vittadini Enterprises, Inc.; Index
No. 602503/96.
17. MCI shall withhold on behalf of AV and GV applicable
Federal, State, City, payroll withholding taxes, FICA and disability, in
accordance with the standard Employee Wage and Tax Statement (Form W-2) for AV
and GV on Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000.00)
described in Section 2(a) of this Agreement.
18. Except as specifically modified or terminated hereinabove,
each of the AGREEMENTS shall remain in full force effect, and are hereby
ratified and confirmed.
19. This Agreement shall not be changed, modified or amended
except by a writing signed by the party to be charged and this Agreement may not
be discharged except by performance in accordance with its terms or by a writing
signed by the party to which performance is to be rendered and only to the
extent set forth therein.
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<PAGE> 16
20. No waiver shall be deemed to be made by any of the PARTIES
to any of its rights hereunder unless that waiver shall be in a writing signed
by the waiving party and then only to the extent therein set forth. No failure
of any of the PARTIES to exercise any power given such party hereunder or to
insist upon strict compliance by any other party with its obligations hereunder,
and no custom or practice of the parties at variance with the terms hereof shall
constitute a waiver of the right of any party to demand precise compliance with
the terms of the Agreement.
21. All references to any representation or obligation of MCI
and AVEI or AV and GV shall be deemed to be joint and several.
22. If any provision of this Agreement or the application of
any provision hereof to any party or in any circumstances is held invalid, the
remainder of this Agreement and the application of such provision to other
PARTIES or circumstances shall not be affected unless the provision held invalid
shall substantially impair the benefits of the remaining portions of this
Agreement, except if the wire transfer of the sums provided for in Section 2
herein are deemed invalid, the entire Agreement is deemed void and the
AGREEMENTS shall be deemed to have been in full force and effect.
23. This Agreement shall be binding upon and insure to the
benefit of the PARTIES hereto and their respective heirs, executors,
administrators, successors and permitted assigns.
24. This Agreement shall be governed by, and construed and
enforced in
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accordance with the laws of the State of New York without reference to its
principles of conflicts of law. This Agreement, or any modification or extension
thereof, shall not be resolved by arbitration.
25. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same document.
26. This Agreement sets forth the entire agreement and
understanding among the PARTIES as to the subject matter hereof and all prior
agreements and understandings are merged into this Agreement.
27. The notice provisions under the AGREEMENTS and the other
agreements dated January 1, 1996, addressed to Joel Yunis, Esq., shall be
changed to Pavia & Harcourt, 600 Madison Avenue, New York, New York 10022,
attention Ralph Galasso, Esq.
17
<PAGE> 18
IN WITNESS WHEREOF, each of the PARTIES hereto has executed
this Agreement as of the day and year first above written.
MARISA CHRISTINA, INC.
By:
ADRIENNE VITTADINI
ADRIENNE VITTADINI ENTERPRISES, INC.
GIANLUIGI VITTADINI
By:
VITTADINI, LTD.
By: FLAPDOODLES, INC.
By:
MARISA CHRISTINA APPAREL, INC.
By:
INTERNATIONAL APPAREL MARKETING LTD.
By:
AV HONG KONG LTD.
18
<PAGE> 19
By:
19
<PAGE> 20
SCHEDULE A
ADRIENNE VITTADINI
DOB 10-9-43
SUMMARY OF INSURANCE
<TABLE>
<CAPTION>
====================================================================================================================================
COMPANY FACE PLAN ISSUE ANNUAL PREMIUM GROSS LOAN OWNER & BENEFICIARY
AMOUNT DATE PREMIUM PD-TO- CASH
DATE VALUE*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Guardian $1,000,000 Whole 11-12-87 $16,438 11-12-98 $152,001 $24,869 Prin Owner: Split $ AVEI &
3106326 Life $1,989 Int** Insured
Waiver '97 DIV $5,310 $26,858 Total Bene: Split $ AVEI &
Gianluigi Vittadini
- ------------------------------------------------------------------------------------------------------------------------------------
Guardian $1,000,000 Whole 10-07-85 $18,375 10-07-98 $233,056 $36,981 Prin Owner: Split $ AVEI &
2988561 Life $2,959 Int*** Insured
Waiver '97 DIV $9,450 $39,940 Total Bene: Split $ AVEI &
Gianluigi Vittadini
- ------------------------------------------------------------------------------------------------------------------------------------
Aetna $5,000,000 10 Year 08-05-97 $12,330 08-05-98 N/A N/A Owner/Bene: AVEI
W4315303 Level
Term
- ------------------------------------------------------------------------------------------------------------------------------------
Cigna $5,000,000 10 YLT 08-05-97 $13,275 08-05-98 N/A N/A Owner/Bene: AVEI
7053032
====================================================================================================================================
</TABLE>
* Cash values do not reflect policy loans
** Loan interest paid to 11/12/98
*** Loan interest paid to 10/07/98
20
<PAGE> 21
SCHEDULE B
GIANLUIGI VITTADINI
DOB 7-2-38
SUMMARY OF INSURANCE
<TABLE>
<CAPTION>
====================================================================================================================================
COMPANY FACE PLAN ISSUE ANNUAL PREMIUM GROSS CASH LOAN OWNER &
AMOUNT DATE PREMIUM PD-TO- VALUE* BENEFICIARY
DATE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Guardian $1,000,000 base Whole 10-28-87 $25,980 10-28-98 $222,365 base $0 Owner: Split $ AVEI
3109819 $81 adds Life $42 adds & Insured
$1,000,081 total Waiver '97 DIV $9,792 $222,407 total Bene: Split $ AVEI
& Adrienne Vittadini
- ------------------------------------------------------------------------------------------------------------------------------------
Guardian $1,000,000 Whole 10-07-85 $28,505 10-07-98 $273,579 $61,663 Prin Owner: Split $ AVEI
2968560 Life $4,933 Int** & Insured
Waiver '97 DIV $9,410 $68,596 Total Bene: Split $ AVEI
& Adrienne Vittadini
- ------------------------------------------------------------------------------------------------------------------------------------
Cigna $3,000,000 10 Year 08-05-97 $18,225 08-05-98 N/A N/A Owner/Bene: AVEI
7053033 Level
Term
====================================================================================================================================
</TABLE>
* Cash values do not reflect policy loans
** Loan interest paid to 10/07/98
21
<PAGE> 22
SCHEDULE C
1. Women's Footwear as described in the License Agreement with AV Footwear
dated 12/15/93.
2. Women's Scarves, Ascots, Mufflers and Shawls as described in the License
Agreement with Accessory Street dated 1/1/97.
3. Cosmetic Travel Bags as described in the License Agreement with Designs on
Travel dated 1/1/97.
4. Yarn as described in the License Agreement with JCA dated 1/1/95.
5. Fragrance Products as described in the License Agreement with Khepra Beauty
Group dated 7/23/93 and proposed unsigned License Agreement with Riviera
Concepts.
6. Handbags and Small Leather Goods as described in the License Agreement with
AV Handbags dated 9/1/97.
7. Bedroom, Bath and Household Products as described in the License Agreement
with Fieldcrest Cannon dated 1/1/93 as specifically designated.
8. Frames and Accessories for Sunglasses and Ophthalmic Eyewear as described
in the License Agreement with VIVA International dated 1/1/95.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FOR MARISA CHRISTINA,
INCORPORATED'S CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30,
1998 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,152,570
<SECURITIES> 0
<RECEIVABLES> 14,341,243
<ALLOWANCES> (566,319)
<INVENTORY> 10,276,036
<CURRENT-ASSETS> 31,538,998
<PP&E> 5,372,056
<DEPRECIATION> 2,336,406
<TOTAL-ASSETS> 54,060,421
<CURRENT-LIABILITIES> 22,660,915
<BONDS> 0
0
0
<COMMON> 85,868
<OTHER-SE> 30,810,364
<TOTAL-LIABILITY-AND-EQUITY> 54,060,421
<SALES> 0
<TOTAL-REVENUES> 56,363,780
<CGS> 41,113,878
<TOTAL-COSTS> 41,113,878
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 497,803
<INTEREST-EXPENSE> 489,951
<INCOME-PRETAX> (23,435,438)
<INCOME-TAX> (7,860,604)
<INCOME-CONTINUING> (15,574,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (1.91)
<EPS-DILUTED> (1.91)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION FOR MARISA
CHRISTINA, INCORPORATED'S CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE COMPANY'S FORM 10-Q FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1997, WHICH HAS BEEN RESTATED TO REFLECT THE
COMPANY'S ADOPTION OF STATEMENT OF FINANCIAL POSITION (SFAS) NO. 128 EARNINGS
PER SHARE.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 993,241
<SECURITIES> 0
<RECEIVABLES> 21,500,417
<ALLOWANCES> 273,000
<INVENTORY> 12,056,286
<CURRENT-ASSETS> 38,600,380
<PP&E> 6,004,930
<DEPRECIATION> 3,032,923
<TOTAL-ASSETS> 74,700,666
<CURRENT-LIABILITIES> 80,582
<BONDS> 0
0
0
<COMMON> 85,868
<OTHER-SE> 55,727,483
<TOTAL-LIABILITY-AND-EQUITY> 74,700,666
<SALES> 73,545,760
<TOTAL-REVENUES> 73,545,760
<CGS> (51,096,887)
<TOTAL-COSTS> (51,096,887)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (276,579)
<INCOME-PRETAX> 2,642,192
<INCOME-TAX> 1,043,628
<INCOME-CONTINUING> 1,598,564
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,598,564
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.19
</TABLE>
<PAGE> 1
FOR: Marisa Christina, Inc.
CONTACT: Michael Lerner
Chairman and Chief Executive Officer
Melvin Hecht
Chief Financial Officer
(212) 221-5770
For Immediate Release
Morgen-Walke Associates
June Filingeri, Eric Boyriven, Andra Fogel
(212) 850-5600
MARISA CHRISTINA REPORTS THIRD QUARTER RESULTS
New York, New York, November 11, 1998 -- Marisa Christina, Incorporated
(Nasdaq:MRSA) today reported results for the third quarter and nine-month period
ended September 30, 1998.
Net sales for the 1998 third quarter were $23.1 million compared with
$28.4 million in the third quarter of 1997. The Company recognized one-time
restructuring and asset impairment charges of $3.8 million and $16.5 million
respectively, in the 1998 third quarter reflecting the previously announced
resignations of Adrienne and Gianluigi Vittadini and the writedown of goodwill
related to the purchase of Adrienne Vittadini Enterprises. As a result, the
Company reported a net loss for the quarter of $13.1 million, $1.62 per diluted
share, compared with net income of $633,739, or $0.08 per diluted share, in the
same period a year ago. Excluding these charges, income for the quarter was
$195,000, or $0.02 per diluted share.
Net sales for the first nine months of 1998 were $56.4 million compared
with $73.5 million in the same period a year ago. Including the one time
charges, the net loss for the current nine-month period was $15.6 million, or
$1.91 per diluted share, compared with net income of $1.6 million, or $0.19 per
diluted share, in the same period last year. Excluding these charges, the loss
for the first nine months of 1998 was $2.2 million, or $0.27 per diluted share.
Michael Lerner, Chairman and Chief Executive Officer, commented: "With the
management changes and restructuring actions behind us, we are now able to fully
focus on returning our Company to profitability. We are especially encouraged by
the fact that before the one time charges, we would have earned two cents per
share for the third quarter. While we now expect revenues to amount to
[MORGEN-WALKE ASSOCIATES LETTERHEAD] -MORE-
<PAGE> 2
MARISA CHRISTINA REPORTS THIRD QUARTER RESULTS PAGE 2
approximately $77 million for the full year, we feel we are on track to approach
breakeven in the 1998 fourth quarter."
Marisa Christina, Inc. designs, manufactures, sources and markets a broad
line of high quality "better" and "bridge" clothing for women and children. The
Marisa Christina label includes sweaters characterized by classic, timeless
styling and unique details. Flapdoodles apparel consists of casual children's
and infant's sportswear, swimwear, and outerwear featuring vibrant colors,
all-natural fabrics and unique patterns. The Adrienne Vittadini line includes
women's knit-oriented casual coordinates and licensed products characterized by
distinctive and elegant designer styling.
Except for historical information contained herein, the statements in this
release are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause the Company's actual results in future periods to differ
materially from forecasted results. Those risks include, among others, risks
associated with the success of future advertising and marketing programs, the
receipt and timing of future customer orders, price pressures and other
competitive factors and a softening of retailer or consumer acceptance of the
Company's products leading to a decrease in anticipated revenues and gross
profit margins. Those and other risks are described in the Company's filings
with the Securities and Exchange Commission (SEC), copies of which are available
from the SEC or may be obtained upon request from the Company.
-Financial Table Follows-
<PAGE> 3
MARISA CHRISTINA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 23,064 $ 28,375 $ 56,364 $ 73,546
Cost of goods sold 16,700 19,975 41,114 51,097
-------- -------- -------- --------
Gross profit 6,364 8,400 15,250 22,449
Selling, general and administrative expenses 6,792 7,726 19,583 21,512
Restructuring charge 3,750 -- 3,750 --
Asset impairment charges 16,525 -- 16,525 --
-------- -------- -------- --------
Operating earnings (loss) (20,703) 674 (24,608) 937
Other income, net 787 485 1,663 1,982
Interest expense, net (170) (111) (490) (277)
-------- -------- -------- --------
Earnings (loss) before income
tax expense (benefit) (20,086) 1,048 (23,435) 2,642
Income tax expense (benefit) (6,899) 414 (7,860) 1,043
-------- -------- -------- --------
Net earnings (loss) $(13,187) $ 634 $(15,575) $ 1,599
======== ======== ======== ========
Net earnings (loss) per share:
Basic $ (1.62) $ 0.08 $ (1.91) $ 0.19
======== ======== ======== ========
Diluted $ (1.62) $ 0.08 $ (1.91) $ 0.19
======== ======== ======== ========
Weighted average shares outstanding 8,126 8,385 8,149 8,385
======== ======== ======== ========
</TABLE>
# # #
