J. PERCY FOR MARVIN RICHARDS, LTD. AND CK OUTERWEAR, LLC COMBINED FINANCIAL STATEMENTS TABLE OF CONTENTS Page ---- 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 7 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. 9 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 ========== ========== 10 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: 11 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). 12
G-III Apparel (GIII)
Filed: 27 Sep 05, 12:00am