J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
COMBINED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
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Report of Independent Registered Public Accounting Firm 2
Combined Financial Statements
Balance Sheets as of December 31, 2004 3
and June 30, 2005 (Unaudited)
Statements of Operations for the Year Ended December 31, 2004
and the Six Months Ended June 30, 2005 and 2004 (Unaudited) 4
Statements of Owners' Equity for the Year Ended December 31, 2004
and the Six Months Ended June 30, 2005 (Unaudited) 5
Statements of Cash Flows for the Year Ended December 31, 2004
and the Six Months Ended June 30, 2005 and 2004 (Unaudited) 6
Notes to Financial Statements 7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Owners of
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
We have audited the accompanying combined balance sheet of J. Percy for Marvin
Richards, Ltd. and CK Outerwear, LLC as of December 31, 2004 and the related
combined statements of operations, owners' equity and cash flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the combined financial position of J. Percy for Marvin
Richards, Ltd. and CK Outerwear, LLC as of December 31, 2004, and the combined
results of their operations and their combined cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
EISNER LLP
New York, New York
September 13, 2005
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
COMBINED BALANCE SHEETS
(in thousands)
ASSETS December 31, June 30,
2004 2005
---- ----
(Restated) (Unaudited)
---------- -----------
Current assets
Cash $ 135 $ 19
Accounts receivable 1,707 427
Inventories 10,093 17,500
Prepaid expenses and other current assets 193 480
-------- --------
Total current assets 12,128 18,426
Property, plant, and equipment, net 892 824
Intangible, net 800 1,450
Other assets 111 87
-------- --------
$ 13,931 $ 20,787
======== ========
LIABILITIES AND OWNERS' EQUITY
Current liabilities
Accounts payable $ 3,647 $ 5,526
Accrued expenses 2,247 4,367
Due to factor 545 7,592
Due to related parties 719 534
Other current liabilities 592 562
-------- --------
Total current liabilities 7,750 18,581
-------- --------
Deferred rent 568 583
-------- --------
Commitments and contingencies
Owners' equity
Common stock - no par value; 1,000 shares authorized,
15 shares issued and outstanding 116 116
Additional paid in capital 928 928
Retained earnings 5,968 1,978
-------- --------
7,012 3,022
Less common stock held in treasury -
15 shares at cost (1,399) (1,399)
-------- --------
5,613 1,623
-------- --------
$ 13,931 $ 20,787
======== ========
See notes to combined financial statements
3
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Year ended
December 31, Six months ended
2004 June 30, 2005 June 30, 2004
---- ------------- -------------
(Restated) (Unaudited)
Net sales $78,281 $ 13,336 $ 8,140
Cost of goods sold 62,758 10,044 5,889
------- -------- -------
Gross profit 15,523 3,292 2,251
Selling, general and administrative expenses 13,884 5,258 4,799
------- -------- -------
Operating income (loss) 1,639 (1,966) (2,548)
Interest and financing charges 594 238 66
------- -------- -------
Income (loss) before income taxes 1,045 (2,204) (2,614)
Income tax expense 81 6 3
------- -------- -------
Net income (loss) $ 964 $ (2,210) $(2,617)
======= ======== =======
See notes to combined financial statements
4
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
COMBINED STATEMENTS OF OWNERS' EQUITY
(in thousands)
Common
Additional stock
Common paid-in Retained held in
stock capital earnings Treasury Total
----- ------- -------- -------- -----
Balance as of January 1, 2004 $116 $928 $ 8,964 $(1,399) $ 8,609
Distribution to owners (3,960) (3,960)
Net income 964 964
---- ---- ------- ------- -------
BALANCE AS OF DECEMBER 31, 2004
(Restated) 116 928 5,968 (1,399) 5,613
==== ==== ======= ======= =======
Distribution to owners (1,780) (1,780)
Net loss (2,210) (2,210)
---- ---- ------- ------- -------
BALANCE AS OF JUNE 30, 2005
(Unaudited) $116 $928 $ 1,978 $(1,399) $ 1,623
==== ==== ======= ======= =======
See notes to combined financial statements
5
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31, Six months Ended Six months Ended
2004 June 30, 2005 June 30, 2004
---- ------------- -------------
(Restated) (Unaudited) (Unaudited)
Cash flows from operating activities
Net income (loss) $ 964 $(2,210) $ (2,617)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 371 191 176
Deferred rent 186 15 93
Changes in:
Accounts receivable 8,401 1,280 9,937
Inventories, net (7,434) (7,407) (16,762)
Prepaid expenses and other assets (5) (263) (656)
Accounts payable 65 1,879 8,696
Accrued expenses 775 2,120 (423)
Other liabilities 915 (215) (252)
------- ------- --------
Net cash provided by (used in) operating activities 4,238 (4,610) (1,808)
------- ------- --------
Cash flows from investing activities
Capital expenditures (719) (23) (359)
Intangibles (750)
------- ------- --------
Net cash used in investing activities (719) (773) (359)
------- ------- --------
Cash flows from financing activities
Due to factor 545 7,047 4,326
Owners' distributions (3,960) (1,780) (2,135)
------- ------- --------
Net cash (used in) provided by financing activities (3,415) 5,267 2,191
------- ------- --------
Net increase (decrease) in cash 104 (116) 24
Cash at beginning of period 31 135 31
------- ------- --------
Cash at end of period $ 135 $ 19 $ 55
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 536 $ 323 $ 83
Income taxes 229 6 126
See notes to combined financial statements
6
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying combined financial statements are as
follows:
1. Business Description and Basis of Presentation
J. Percy for Marvin Richards, Ltd. ("JPMR"), a New York S-Corporation
and CK Outerwear, LLC ("CK"), a New York Limited Liability Company,
(collectively the "Company"), are manufacturers, through contractors,
and importers of outerwear and market their products at the wholesale
level and acts as an agent in brokering sales between its customers and
overseas factories, earning commission for such services.
The combined financial statements include the accounts of J. Percy for
Marvin Richards, Ltd. and CK Outerwear, LLC, which are affiliated
through common ownership. All material intercompany balances and
transactions have been eliminated.
2. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash, amounts due
from factor and accounts receivable. The Company maintains its cash in
bank deposit accounts, which at times may exceed federally insured
limits. The amount due from factor arises from the sale of accounts
receivable to the factor. The Company holds no collateral for this
instrument. Accounts receivable arise from sales made to major U.S
based mass merchandisers, specialty retailers and distributors which
represent significant customers of the Company.
3. Inventories
Inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market.
4. Revenue Recognition
Inventory is shipped in accordance with specific customer orders. The
Company recognizes sales when the risks and rewards of ownership have
transferred to its customer, determined by the Company to be when title
to the merchandise passes to its customer. The Company recognizes
commission fee income on sales that are financed by
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J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and shipped directly to its customers. Title to goods shipped from the
Company's overseas vendors transfers to customers when the goods have
been delivered to the customer. The Company recognizes commission
income upon the completion of the delivery by its vendor to its
customer.
5. Depreciation and Amortization
Depreciation and amortization are provided by straight-line methods in
amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives.
The following are the estimated lives of the Company's fixed assets:
Machinery and equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements 5 - 10 years
Leasehold improvements are amortized over the lives of the respective
leases or the service lives of the improvements, whichever is shorter.
6. Valuation of Long Lived Assets
Long-lived assets such as property and equipment, and intangibles are
reviewed at least annually for impairment or when events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. An impairment loss is recognizable when estimated
future undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount.
7. Income Taxes
JPMR is a subchapter S corporation, which is treated as a pass through
entity for federal, New York State and New Jersey income taxes. JPMR is
subject to general corporate business tax in New York City.
CK is a limited liability corporation, which is treated as a
partnership for Federal, New York State, New Jersey and is subject to
unincorporated business tax in New York City.
8
J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
No federal income taxes are payable by the Company, and no amount has
been provided for in the accompanying financial statements. The owners
include their respective share of the Company's profit or losses in
their respective tax returns, and the owners are individually liable
for federal income taxes on their share of the Company's earnings.
Provision has been made for income taxes due to certain jurisdictions
that do not recognize limited liability and S-corporation status for
tax purposes and for minimum taxes that may be due in those
jurisdictions.
Income tax expense includes New Jersey, New York State and New York
City taxes currently payable.
8. Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
charged to expense were $1,624,000, $462,000 and $70,000 for the year
ended December 31, 2004 and the six months ended June 30, 2005 and
2004, respectively.
9. Shipping and Handling Costs
Shipping and handling costs consist of warehouse facility costs,
freight out costs, and warehouse supervisory wages and are included in
selling, general and administrative expense.
10. Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Such estimates include depreciation and amortization. Actual results
could differ from those estimates.
11. Fair Value of Financial Instruments
The carrying value of financial instruments potentially subject to
valuation risk (principally consisting of cash, due to/from factor,
accounts receivable and accounts payable) approximates their fair
values as of the balance sheet dates.
12. Effects of Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 requires certain
abnormal expenditures to be recognized as expenses in the current
period. It also requires that the amount of fixed production overhead
allocated to inventory be based on the normal capacity of the
production facility. The standard is effective for fiscal years
beginning on or after June 15, 2005. The Company does not expect SFAS
No. 151 to have a material effect on the Company's Combined Financial
Statements.
13. Interim Financial Statement
The accompanying balance sheet as of June 30, 2005, and the statements
of operations, owners' equity and cash flows for the six months ended
June 30, 2005 and 2004 are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring items) which are considered
necessary for a fair presentation of the Company's combined financial
position and results of operations and cash flows for the six months
ended June 30, 2005 and 2004. The financial data and other information
disclosed in the notes to the financial statements related to the six
month periods are unaudited. The results for the six months ended June
30, 2005 are not necessarily indicative of the results to be expected
for the year ending December 31, 2005.
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J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE B - DUE TO/FROM FACTOR
The Company has a factoring agreement with a factor pursuant to which
it sells and assigns a substantial portion of its receivables,
principally without recourse, to the factor. The factor assumes the
credit risk of all assigned accounts approved by it, but maintains
liens on all inventory, trade receivables (whether or not assigned) and
the goods represented thereby. The Company has a credit line in the
amount of $12,000,000. Under the terms of its factoring agreement, the
Company may request advances from the factor up to 90% of aggregate
receivables purchased by the factor at an interest rate of prime minus
0.5%. The Company also pays a fee equal to 0.375% of the gross invoice
amount of each receivable purchased.
NOTE C - INVENTORIES
Inventories consist of :
December 31, June 30,
2004 2005
---- ----
Finished goods $ 6,960,000 $12,277,000
Work-in-process 157,000 1,351,000
Raw materials 2,976,000 3,872,000
----------- -----------
$10,093,000 $17,500,000
=========== ===========
Raw materials of approximately $1.4 million were maintained in the
Dominican Republic at December 31, 2004.
NOTE D - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (at cost) consist of:
December 31, June 30,
2004 2005
---- ----
Machinery and equipment $ 227,000 $ 227,000
Leasehold improvements 757,000 780,000
Furniture and fixtures 727,000 727,000
---------- ----------
1,711,000 1,734,000
Less: accumulated depreciation and amortization 819,000 910,000
---------- ----------
$ 892,000 $ 824,000
========== ==========
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J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE E - INTANGIBLES
During August 2003, CK entered into a trademark license agreement in
connection with women's outerwear for an aggregate purchase price of
$1,000,000 from Calvin Klein, Inc. for a period of five years expiring
December 31, 2008. The license agreement, effective January 1, 2004, is
being amortized over a period of five years and accordingly, the Company
recorded an amortization of $200,000, $100,000 and $100,000 during the year
ended December 31, 2004 and the six months ended June 30, 2005 and 2004,
respectively. The license agreement is also subject to certain minimum
advertising and royalty payments based on volume of sales (See Note F).
NOTE F - COMMITMENTS AND CONTINGENCIES
The Company leases warehousing, executive and sales facilities under
operating leases with options to renew at varying terms. Leases with
provisions for increasing rents have been accounted for on a straight-line
basis over the life of the lease.
The following schedule sets forth the future minimum rental payments for
operating leases having non-cancelable lease periods in excess of one year
at December 31, 2004:
Operating
Leases
------
Year ending December 31,
2005 $ 880,000
2006 929,000
2007 521,000
2008 626,000
2009 650,000
Thereafter 2,513,000
-----------
Minimum lease payments $ 6,119,000
===========
Rent expense, including common area charges and escalations, on the above
operating leases was $1.2 million, $506,000 and $443,000 for the year ended
December 31, 2004 and the six months ended June 30, 2005 and 2004,
respectively.
The Company has entered into license agreements that provide for royalty
payments as a percentage of net sales of licensed products. The Company
incurred royalty expense (included in cost of goods sold) of approximately
$2.3 million, $456,000 and $183,000 for the year ended December 31, 2004
and the six months ended June 30, 2005 and 2004, respectively. Based on
minimum sales requirements, future minimum royalty and advertising payments
required under these agreements are:
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J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Information for the six months ended June 30, 2005 and 2004 is unaudited
NOTE F - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Year ending December 31, Amount
------------------------ ------
2005 $ 1,825,000
2006 2,265,000
2007 2,600,000
2008 2,800,000
-----------
$ 9,490,000
===========
The Company has standby letters of credit in an aggregate amount of
$237,000 outstanding for security deposits on its leased corporate office
and warehouse space as of all periods presented.
At December 31, 2004, the Company was in violation of certain financial and
reporting requirement covenants with Calvin Klein under its license
agreement. In August 2005, the licensor entered into a new agreement with
CK Outerwear, LLC and G-III Apparel Group, Ltd. (See Note I(3)).
NOTE G - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) plan and trust for eligible employees.
Pension costs include service costs, which are accrued and funded on a
current basis. The Company provides for a discretionary matching
contribution. No contribution was made for the periods presented.
NOTE H - MAJOR CUSTOMERS
For the year ended December 31, 2004, three customers accounted for 13.4%,
11.2% and 10.0%, respectively, of the Company's net sales.
NOTE I - SUBSEQUENT EVENTS
1) In May 2005, General Electric Capital Corporation ("GECC") filed a
lawsuit against JPMR seeking payment of two outstanding invoices in the
total amount of approximately $63,000. GECC is a secured lender of a
vendor of the Company. Management believes it has substantial defenses
to the claims asserted in the lawsuit and intends to vigorously defend
this matter.
2) In June 2005, the Company entered into a license agreement, effective
July 8, 2005, to design, manufacture, and market men's outerwear with
Calvin Klein. The Company paid a license fee in the amount of $750,000
upon inception of the agreement. The agreement provides for minimum
royalty and advertising payments. The license agreement is through
December 31, 2010 with an automatic five-year renewal subject to certain
requirements.
3) On July 11, 2005, all of the outstanding capital stock of J. Percy for
Marvin Richards, Ltd., all of the membership interests of CK Outerwear,
LLC and 50% of the membership interests in Fabio Licensing, LLC, a
related entity 50% owned by the stockholders and members of the Company,
was acquired by G-III Leather Fashions, Inc., a wholly owned subsidiary
of G-III Apparel Group, Ltd. for $23.9 million in cash and stock. The
sellers are also entitled to receive additional contingent payments for
the years ending January 31, 2006 through January 31, 2009, based on the
future performance of the Company, as defined.
NOTE J - DUE TO RELATED PARTIES
The Company licenses women's outerwear from Fabio Licensing, LLC. Fabio
Licensing LLC is an entity 50% owned by certain stockholders and members of
the Company. During the year ended December 31, 2004 and the six months
ended June 30, 2005 and 2004, the Company incurred royalty expense of
$664,000, $1,000 and $4,000, respectively, in connection with this license
agreement. At December 31, 2004 and June 30, 2005, the Company owed
$721,000 and $537,000 to Fabio Licensing, LLC, respectively.
NOTE K - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The Company has recorded certain adjustments to its previously issued
financial statements as of December 31, 2004 and for the year then ended
audited by other auditors. The effect of these adjustments are as follows:
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
AS REPORTED ADJUSTMENTS AS RESTATED
------------------------------------------
Net Sales $ 78,757,000 $ (476,000) $ 78,281,000
Cost of Goods Sold 62,679,000 79,000 62,758,000
------------ ----------- -------------
Gross Profit 16,078,000 (555,000) 15,523,000
SG&A 13,940,000 (56,000) 13,884,000
------------ ----------- -------------
Income Before Income Taxes 2,138,000 (499,000) 1,639,000
Interest and Financing Charges 0 594,000 594,000
------------ ----------- -------------
Income (loss) Before Income Taxes 2,138,000 (1,093,000) 1,045,000
Provision for Income Taxes 81,000 0 81,000
------------ ----------- -------------
Net Income $ 2,057,000 $(1,093,000) $ 964,000
============ =========== =============
Adjustments related to the following:
Net sales decreased $476,000 primarily due to sales cut-offs at year end.
Cost of goods sold increased $79,000 primarily due to inventory costing at
the lower of cost or market and sales cut-offs above.
Interest and financing charges in the "As Reported" financial statements
were recorded in SG&A. The increase of approximately $538,000 in SG&A,
adjusted for interest and financing charges, is primarily attributed to
additional accruals of payroll ($284,000), straight-line rent expense
($186,000) and GAAP depreciation expense ($69,000).
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