<PAGE>
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the Fiscal year ended December 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
the transition period from __________ to ___________
Commission file number: 333-29295
RETROSPETTIVA, INC.
(Name of small business issuer in its charter)
California 95-4298051
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8825 West Olympic Boulevard
Beverly Hills, CA 90211
(Address of principal executive offices)
(310) 657-1745
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
No Par Value Common Stock Redeemable Common Stock Purchase Warrants
-------------------------- -----------------------------------------
Title of Class Title of Class
Check whether the issue (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $27,534,536.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. As of March 9, 1999, 2,985,000 shares of the Registrant's no par value
common stock were outstanding and the aggregate market value of the shares held
by non-affiliates based on that days market close of $3.063 was approximately
$9,143,055.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [ X ] No [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1 Description of Business 3
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 9
Item 6 Management's Discussion and Analysis or Plan of Operation 10
Item 7 Financial Statements 15
Item 8 Changes in and Disagreements with Accountants on Accounting and 16
Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons; 17
Compliance with section 16(a) of the exchange act
Item 10 Executive Compensation 19
Item 11 Security Ownership of Certain Beneficial Owners and Management 21
Item 12 Certain Relationships 22
PART IV
Item 13 Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
The Company was organized in November 1990 initially to manufacture and import
textile products from Italy including finished garments and fabrics. By 1993,
the Company was purchasing fabrics from firms and factories around the world and
contracting for the manufacture of finished garments in Macedonia for
importation into the United States.
The Company contracts for the manufacture of a variety of garments, primarily
basic women's sportswear which includes suits, skirts, blouses, blazers, pants,
shorts, vests and dresses, using assorted fabrics including rayons, linens,
cotton and wool. The Company arranges for the manufacture of garments for
customers under private labels selected by its customers. It markets its
products exclusively in the United States directly to large wholesalers,
national retailers and buying organizations, and directly to women's chain
clothing stores, boutiques and catalogues.
Substantially most of the Company's garments are sold on a "package" basis
pursuant to which the Company markets at fixed prices finished garments to the
customer's specifications and quantity requirements, arranges for production of
the garments and delivers the garments directly to the customer at the port of
entry. In its marketing, the Company emphasizes these package arrangements and
what it believes to be the better quality and lower prices of garments produced
by skilled Macedonian workers as compared to lower paid workers in certain other
regions.
As a package provider, the Company sources and purchases fabrics and trims,
arranges for cutting and sewing, and coordinates any other services required to
provide a completed garment. The Company manufactures its finished products only
upon receipt of purchase orders from its wholesale and retail customers, which
the Company believes minimizes the marketing and fashion risk generally
associated with the apparel industry. Fabrics and trims are purchased from
suppliers in China, India, Russia, Romania, Italy and the United States. After
dying the fabric, if necessary, the fabric and trim are shipped to factories
selected by the Company (primarily located in Macedonia) where they are
manufactured into completed garments under the Company's management and quality
control guidance. The finished products are then shipped directly to New York
City where the Company's customers claim the goods either at the port in New
York City or at a consolidating warehouse in Astoria, New York.
NATO action against Yugoslavia may cause an escalation of the conflict into
Macedonia where the Company manufactures substantially all of its garments. Any
such escalation could adversely affect the Company's ability to manufacture and
deliver garments to its customers.
In September 1997, the Company completed an initial public offering ("IPO") of
its securities pursuant to which the Company sold 575,000 units for $12.00 per
unit, each unit consisting of two shares of no par value common stock and one
warrant exercisable at $7.50 expiring five years from the date of the IPO. Net
proceeds to the Company were $6,104,190.
STRATEGY
The Company intends to continue to offer better quality, popular priced women's
apparel in a wide variety of styles, patterns, colors and fabrics. The Company's
business strategy is as follows:
MAINTAIN FOCUS ON THE COMPANY'S CORE BUSINESS. The Company plans to continue to
contract for the manufacture and market basic women's sportswear on a package
basis. This strategy emphasizes concentrating on `cut-to-order' business where
the customer provides the specifications and design of the garments which have
historically been less fashion oriented. The
3
<PAGE>
Company believes that by avoiding the production of trendier fashion apparel
ordered by customers it will be able to reduce costs commonly associated in the
industry with discounts, returns and allowances. Consistent with this strategy,
the Company will focus on the sale of private label apparel using the brand
names ordered by its customers. The Company, however, will continue to evaluate
the marketplace in an effort to assess its current market strategies and manage
those strategies to remain responsive to market demand.
INCREASE PENETRATION OF CURRENT MARKETS. The Company seeks to further penetrate
its current markets by offering lower product prices while maintaining a high
degree of quality control. The Company's relationships with its Macedonian
manufacturers are good. Lower transportation costs compared to other parts of
the world (e.g.; the Pacific Rim) offer a competitive advantage. Limited quota
importation rules for garments imported from Macedonia also contribute to the
Company's ability to offer competitive prices.
Many countries have quotas that can apply to different types of manufactured
fabrics, trim and finished goods. These quotas are imposed on goods and
components imported to and exported from those countries and contribute to the
overall cost of the apparel imported to and exported from those countries. In
comparison, Macedonia has a quota imposed on only one category of finished goods
which the Company is currently not subject to.
In the event that Macedonia or the United States enacts quota restrictions and
charges to export or import apparel, then the costs associated with that quota
could increase the unit cost of the goods exported from Macedonia and imported
into the United States.
The Company constantly looks at other parts of the world to explore new
opportunities for quality affordable manufacturing.
EXPAND DISTRIBUTION CHANNELS AND PRODUCT LINES. The Company plans to continue to
expand to new geographic markets within the United States for its existing
products while expanding its existing product lines within the basic women's
sportswear market.
PRODUCTS
The Company offers to its customers a variety of women's sportswear. Its apparel
includes 228 styles manufactured in rayon and linen mixes, 41 styles
manufactured in linen and cotton mixes, 35 styles manufactured in all cotton, 69
styles manufactured in wool and 31 styles manufactured in other materials. The
Company's garments are moderately priced ranging at retail from $12.99 to $49.99
and are marketed by the Company's customers and the Company to working women.
MARKETING
The Company arranges for the manufacture of garments for customers under private
labels selected by its customers. It markets its products exclusively in the
United States directly to large wholesalers, directly and indirectly to national
retailers and buying organizations, directly to women's chain clothing stores
and catalogues and to retail stores.
Marketing is conducted through three in-house salespersons that call directly
upon customers, as well as outside sales associates, through customer referrals
and through the efforts of the Company's executive officers. The Company also
maintains a sales office in New York.
The Company's customers include United States retailers and wholesalers as
described above. The Company's customers for the year ended December 31, 1998
included three that accounted for more than 10% of sales (David N at 34%, V.S.
Sports at 30% and Koret 17% or a total of 81%). A loss of any of these customers
would have a material adverse effect on the Company's results of operations.
4
<PAGE>
MANUFACTURING AND SUPPLIERS
The Company arranges for the manufacture of garments based on the fabric,
design, styling and quality specifications of individual customer orders. The
Company does not own or operate any manufacturing facilities. It obtains its
products from manufacturers in Macedonia who contract with the Company to
manufacture specific items of apparel in predetermined amounts and for agreed
upon unit prices. The Company contracts for the purchase of fabric and the
manufacture and sewing of its products with Yucan Trade International ("Yucan")
a manufacturing agent.
The Company believes that outsourcing allows it to enhance production
flexibility and capacity while reducing capital expenditures and avoiding the
costs of managing a large production work force. In addition, the Company
believes that outsourcing allows the Company to utilize the expertise of its
suppliers and manufacturers in fabric selection and manufacturing processes. The
Company is currently assessing the viability of expanding and geographically
diversifying its manufacturing resources in regions other than Macedonia.
The Company arranges for the production of its products based on orders
received. The Company obtains all of its customers' orders prior to placement of
its contract manufacturing orders. The Company's customer orders may change with
respect to colors, sizes, allotments or assortments prior to commencement of
production of the garments, and any costs associated with such a change will be
borne by the Company. Accordingly, there is some risk associated with the
Company's practice of allowing change orders after fabric is purchased. However,
costs associated with change orders have not been material in the past and the
Company does not believe that they will be material in the future.
The Company purchases fabric and trim from the manufacturers of these garment
components. These manufacturers ship their products directly to the Company's
manufacturing agent or to fabric dyers (currently in Slovenia) who in turn ship
the fabric per the instructions of the agent. The Company does not have written
contracts with any of its fabric or trim suppliers or contractors, however, the
Company believes that its relationships with its suppliers and contractors are
good.
The Company has retained Yucan as its manufacturing agent in Macedonia. Yucan is
responsible for selecting the factories that will manufacture the Company's
finished goods, to oversee this production and to warehouse and arrange for
shipping the finished goods to the Company in the United States. Yucan is paid a
fee that ranges from $0.15 to $0.50 per garment manufactured. Although Yucan is
currently responsible for the manufacture, warehousing and shipping of all of
the Company's finished goods, the Company believes that there are other
manufacturing agents in Macedonia which the Company could retain for the same
purpose on substantially similar terms. The Company does not have written
contracts with Yucan or any of its suppliers or contractors. Although the loss
of certain suppliers or contractors (including Yucan) could have a significant
material adverse effect on the Company's operating results, the Company believes
it would be able to replace such suppliers and contractors within a reasonable
amount of time if required to do so.
The Company delivers finished goods directly from its manufacturing agent to its
customers at the port of entry in New York City or at the Company's
consolidating warehouse in Astoria, New York or ships from the warehouse to the
customers' warehouses. Since the Company assumes the risk of loss when the
finished goods leave its manufacturer, the goods are insured until delivery is
made to the customer.
For the year ended December 31, 1998, Newbel Inc. ("Newbel") and Yucan accounted
for 22% and 28% respectively, of the Company's total fabric and finished goods
purchases.
5
<PAGE>
QUALITY CONTROL
The Company's quality control program is designed to provide that all of the
Company's products meet the Company's and its customer's standards. The Company
maintains a staff of four quality control employees in the United States and
seven such employees in Macedonia. The Company develops and inspects samples of
each product prior to production, establishes fittings based on the sample and
inspects sample fabric prior to cutting and several times during the production
process. The Company, Yucan and (in the case of private label products)
representatives of the Company's customers inspect final products prior to
shipment.
COMPETITION
The apparel industry is highly competitive and consists of numerous
manufacturers, importers and distributors. Many of the Company's competitors are
significantly larger, more diversified and have significantly greater financial,
distribution, marketing, name recognition and other resources than the Company.
The Company believes it has certain competitive advantages resulting from its
contractual relationships with Macedonian manufacturers. These advantages
include the availability in Macedonian factories of highly skilled workers at
relatively lower costs than in more economically developed regions. They also
include a lack of quotas and lower tariffs in the importation into the United
States of finished goods from Macedonia. Finally they also include lower
shipping costs as a result of the closer geographical proximity to the United
States of the Company's Macedonian contract manufacturers compared to
manufacturers in the Pacific Rim nations.
TRADENAMES
The Company has developed two apparel trade names, "Magellan" and
"Retrospettiva" in connection with the marketing of its apparel. The Company
regards its trade names as assets although no trade name registrations have been
filed in the United States or in foreign countries. While the use of a trade
name may provide certain common law rights of further usage, there can be no
assurance the Company could prohibit the use of its trade names by others. The
Company currently does not actively use either trade name since its current
business is private label utilizing the trade names ordered by its customers.
CREDIT POLICY AND CREDIT CONTROL
Prior to accepting a purchase order and purchasing fabric and components, the
Company investigates the customer's credit history through traditional credit
reporting services, through asset-based lenders of the customer and through
other contract partners of the customer. The Company sometimes obtains a deposit
or advance payment before purchasing fabric or commencing garment production for
the customer.
The Company accepts commercial letters of credit for the purchase of raw
materials. This is similar to a progress payment from the customer whereby they
pay for the cost of the materials used in the manufacture of their order. The
Company also accepts arrangements whereby a customer will purchase directly the
raw materials and or trim used in the production of their order.
The Company also accepts commercial letters of credits from customers covering
existing orders. When the order is shipped and all of the requirements of the
letter of credit are met, the Company presents the letter of credit for payment
by the customer's authorized bank. The Company also utilizes its own line of
credit facility to request commercial documentary letters of credit naming
suppliers as beneficiaries in an effort to obtain more favorable credit terms.
The line of credit facility enables the Company to receive extended credit terms
while not drawing on its line of credit until the supplier presents the letter
of credit for payment to the Company's bank.
6
<PAGE>
In December 1997, the Company entered into a factoring agreement with a New York
based Factoring Company to factor its accounts receivable. The Company will
receive up to 80% of the receivables at the time of factoring. This is a
non-recourse factoring agreement and the Company assigns the responsibility of
the factored receivables to the Factor, except in cases of charge backs due to
quality.
GOVERNMENT REGULATION
The Company's import operations are subject to constraints imposed by bilateral
textile agreements between the United States and a number of foreign countries.
These agreements, which have been negotiated bilaterally either under the
framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable statutes,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. However, apparel imported from Macedonia
is not subject to such quotas. These agreements also allow the signatories to
adjust the quantity of imports for categories of merchandise that, under the
terms of the agreements, are not currently subject to specific limits. The
Company's imported products are also subject to United States customs' duties
that may comprise a material portion of the cost of the merchandise.
Apparel products are subject to regulation by the Federal Trade Commission in
the United States. Regulations relate principally to the labeling of the
Company's products. The Company believes that it is in substantial compliance
with such regulations, as well as applicable federal, state, local and foreign
rules and regulations governing the discharge of materials hazardous to the
environment. There are no significant capital expenditures for environmental
control matters either estimated in the current year or expected in the near
future.
EMPLOYEES
As of December 31, 1998, the Company employed 17 individuals in Los Angeles,
California, New York, New York and Macedonia including but not limited to its
four executive officers, three inventory management and order control personnel,
three administrative personnel and four quality control workers.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 2,200 square feet for its executive and
administrative offices at 8825 West Olympic Boulevard, Beverly Hills, California
90211 at $2,341 per month pursuant to a lease expiring December 31, 2000. At the
present time, the Company's current facility provides adequate space to conduct
its operations.
The Company subleases 2,000 square feet of office and showroom facilities at
1359 Broadway, Suite 2102, New York, New York 10018, on a month to month basis
at $2,575 per month. The Company subleases two small New York apartments for use
by its employees traveling from Los Angeles, California and Macedonia to New
York City.
The Company leases approximately 16,500 square feet for its New York warehouse
at 4-05 26th Avenue, Astoria, New York at $6,875 per month.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation and claims that arise in the normal course
of business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the financial position,
capital resources, liquidity or results of operations of the Company.
7
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND USE OF
PROCEEDS
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the calendar year ended December 31, 1998.
8
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock has been traded on the NASDAQ National Market System
("NASDAQ NMS") under the symbol "RTRO" since September 24, 1997. On March 18,
1999, the closing bid price for the Company's common stock was $3.09 per share.
The following table sets forth for the quarters indicated, the range of high and
low bid prices of the Company's common stock as reported by NASDAQ.
<TABLE>
<CAPTION>
BY QUARTER ENDED: COMMON STOCK
HIGH LOW
----- ----
<S> <C> <C>
Calendar 1997
September 30, 1997.................................... $7.25 $6.63
December 31, 1997..................................... $7.25 $5.75
Calendar 1998
March 31, 1998........................................ $7.81 $5.50
June 30, 1998 ........................................ $6.88 $5.50
September 30, 1998 ................................... $6.19 $1.63
December 31, 1998 ................................... $4.19 $1.53
Calendar 1999
March 31, 1999 (Through March 18,1999).............. $4.88 $3.06
</TABLE>
The above quotations were reported by NASDAQ and reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
HOLDERS
The approximate number of the Company's record and beneficial stockholders as of
March 18, 1999 was 850.
DIVIDENDS
The Company has not paid any dividends on its common stock since inception and
does not plan to pay dividends in the foreseeable future. The Company
anticipates that any future earnings will be retained to finance growth.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 and is incorporating this
statement into this report in order to do so. This report includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended which represent the Company's expectations of beliefs concerning
future events that involve risks and uncertainties.
All statements (other than statements of historical facts) included in the
Company's SEC filings, including its Proxy Statements and this Report may
include forward-looking statements that are subject to risks and uncertainty
that may cause actual results to differ materially.
Such forward-looking statements that may be contained in this Report could
include in particular statements concerning business back-logs, operating
efficiencies and capacities, capital spending, and other expenses. Other factors
that could also cause actual results to differ materially include dependence
upon unaffiliated manufacturers and fabric suppliers, dependence on certain
customers, foreign operations, competition, risks associated with significant
growth, uncertainties in the apparel industry, general economic conditions,
seasonality, political instability, inflation and monetary fluctuations, import
and other charges or taxes, changes in laws and regulations, other activities of
governments, agencies and similar organizations, trade restrictions or
prohibitions, concentration of accounts receivable, possible fluctuations in
operating results, effects of changes within the Company's organization or in
compensation and benefit plans, the amount, type and cost of the Company's
financing and any changes to that financing, the amount, and rate of growth in,
the Company's selling, general and administrative expenses, changes in
accounting policies and practices and the application of such policies and
practices and nationalizations and unstable governments and legal systems and
intergovernmental disputes. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the Company's
expectations are disclosed in this Report to the extent that the Company is
currently aware of them. There may be additional factors that could arise that
are not listed above that could also result in having a material adverse impact
on the Company's liquidity, capital resources and results of operations.
OVERVIEW
The Company contracts for the manufacture of a variety of garments, primarily
basic women's sportswear which includes skirts, blouses, blazers, pants, shorts,
vests and dresses, using assorted fabrics including rayons, linens, cotton and
wool. The Company arranges for the manufacture of garments for customers under
private labels selected by its customers. It markets its products exclusively in
the United States directly to large wholesalers, directly and indirectly to
national retailers and buying organizations, and directly to women's chain
clothing stores and catalogues.
Substantially most of the Company's garments are sold on a "package" basis
pursuant to which the Company markets at fixed prices finished garments to the
customer's specifications and quantity requirements, arranges for production of
the garments and delivers the garments directly to the customer at the port of
entry. In its marketing, the Company emphasizes these package arrangements and
what it believes to be the better quality and lower prices of garments produced
by skilled Macedonian workers as compared to lower paid workers in certain other
regions. See Item 1.
10
<PAGE>
As a package provider, the Company sources and purchases fabrics and trims,
arranges for cutting and sewing, and coordinates any other services required to
provide a completed garment. Since the Company manufactures its finished
products only upon receipt of purchase orders from its wholesale and retail
customers, it therefore does not maintain an inventory of finished products. The
Company believes that in this way it minimizes the marketing and fashion risk
generally associated with the apparel industry.
Fabrics and trims are purchased from suppliers in China, India, Russia, Romania,
Italy and the United States. After dying the fabric, if necessary, the fabric
and trim are shipped to factories selected by the Company (primarily located in
Macedonia) where they are manufactured into completed garments under the
Company's management and quality control guidance. The finished products are
then shipped directly to New York City where the Company's customers claim the
goods either at the port in New York City or at a consolidating warehouse in
Astoria, New York or the Company arranges for direct shipping of goods to
retailers.
The following is a discussion of the financial condition and results of
operations of the Company for the years ended December 31, 1998, 1997 and 1996.
This discussion should be read in conjunction with the Company's financial
statements, the notes related thereto, and the other financial data included
elsewhere in this filing.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NOTE: ALL FIGURES IN PERCENTAGES
EXCEPT EARNINGS PER SHARE 1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
Net sales 100% 100.0% 100.0%
Cost of goods sold 87.1 85.8 85.3
Gross profit 12.9 14.2 14.7
Selling, general and admin. Exp. 7.6 4.6 5.6
Interest expense 0.39 0.02 0.5
Net income 3.0 5.8 5.1
Earnings per share $ 0.28 $ 0.55 $ 0.37
</TABLE>
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, AND 1997 (THE "1998
YEAR" AND "1997 YEAR", RESPECTIVELY.)
SALES
Sales for the 1998 Year were $27,534,536 which represented an increase of
$7,809,785 or 39.6% over the 1997 Year net sales of $19,724,751. The increase in
sales was primarily attributable to the increase in the volume of business
ordered by existing customers and new customers.
The Company intends to continue to evaluate its strategies to remain
competitively responsive to the market. The Company may in the future elect to
adopt different market strategies including but not limited to start
manufacturing under it's own labels.It is one of the Company's strategies to
continue to simultaneously increase productive capacity to meet the growth in
orders and to create a more diverse and less concentrated portfolio of business.
This strategy is designed to reduce the extent of impact, which could be
material and adverse, that the loss of any one or more customers might have on
the Company's overall results of operations and capital resources. The Company
currently can not assess the extent to which this strategy will be successful.
11
<PAGE>
GROSS PROFIT
Gross profit was $3,542,630 for the 1998 Year, an increase of $742,444 from
$2,800,186 for the 1997 Year. The gross profit percentage was 12.9% in the 1998
Year, a decrease from 14.2% in the 1997 Year. The decrease in gross profit was
primarily attributable to increased cost of freight forwarding as a result of
air freight costs, an increase in costs related to technicians, inspection,
merchandise repairs, warehouse expenses and sample expenses
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $2,099,884 or 7.6% of
sales for the 1998 Year, an increase of $1,190,629 from $909,255 or 4.6% of
sales for the 1997 Year. The increase in expenses was attributable to the
increase in commission expenses, trade show expenses, printing, license fees,
office salaries, officer salaries, bank charges and factor charges.
INTEREST EXPENSE
Interest expense for the 1998 Year was $105,440 an increase of $60,154 compared
to $45,286 for the 1997 Year. Interest expense was primarily attributable to the
Company's utilization of its line of credit. Also, interest expenses increased
due to utilization of its factoring arrangement.
PROVISION FOR INCOME TAXES
The provision for income taxes was $629,363 and $775,000 for the 1998 and
1997 Years, respectively. The marginal tax rate experience of the Company has
been approximately 40%.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (THE "1997
YEAR" AND "1996 YEAR", RESPECTIVELY.)
SALES
Sales for the 1997 Year were $19,724,751 which represented an increase of
$6,822,566 or 52.9% over the 1996 Year net sales of $12,902,195. The increase in
sales was primarily attributable to the increase in the volume of business
ordered by existing customers and new customers. Sales of the Company's own
labeled products and private label products were $306,774 and $19,417,977
respectively, in 1997 compared to $3,381,524 and $9,520,671, respectively, in
1996. Effective January 1, 1997 the Company adopted a strategy to focus
exclusively on private label production and accordingly stopped production of
its own labeled products as of that date forward. The Company intends to
continue to evaluate its strategies to remain competitively responsive to the
market. The Company may in the future elect to adopt different market
strategies.
It is one of the Company's strategies to continue to simultaneously increase
productive capacity to meet the growth in orders and to create a more diverse
and less concentrated portfolio of business. This strategy is designed to reduce
the extent of impact, which could be material and adverse, that the loss of any
one or more customers might have on the Company's overall results of operations
and capital resources. The Company currently can not assess the extent to which
this strategy will be successful.
GROSS PROFIT
Gross profit was $2,800,186 for the 1997 Year, an increase of $904,044 from
$1,896,142 for the 1996 Year. The gross profit percentage was 14.2% in the 1997
Year, a slight decrease from
12
<PAGE>
14.7% in the 1996 Year. The decrease in gross profit was primarily attributable
to an increase in freight forwarding as a result of air freight costs. The
Company continues to attempt to increase consumption rates in the utilization of
raw materials for the manufacture of finished goods and management of delivery
costs. Consumption rates of raw materials refers to the continual process of
managing the customer-provided design specs so that the Company can produce the
required garment using the least amount of raw material practicable and creating
production and cutting methodologies enabling the Company to utilize more of the
fabric, minimizing waste.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses were $909,255 or 4.6% of
sales for the 1997 Year, an increase of $181,879 from $727,376 or 5.6% of sales
for the 1996 Year. The increase in expenses was attributable to the increase in
insurance coverage costs that increases as the number of units and shipments
increase.
INTEREST EXPENSE
Interest expense for the 1997 Year was $45,286, a decrease of $16,171 compared
to $61,457 for the 1996 Year. Interest expense was primarily attributable to the
Company's bridge loan financing and its utilization of its line of credit
facility. The Company expects interest expense to increase as it more fully
utilizes this line of credit and to the extent that the Company is able to
increase the line of credit. It also expects interest expenses to increase in
that it intends to increase the utilization of its factoring arrangement
commencing with the 1998 Year. As of the end of the 1997 Year, the Company had
not started to utilize its factoring arrangement.
PROVISION FOR INCOME TAXES
The provision for income taxes was $775,000 and $462,455 for the 1997 and 1996
Years, respectively. The marginal tax rate experience of the Company has been
approximately 40%.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company has 575,000 warrants outstanding with an exercise price of $7.50 per
warrant expiring September 23, 2002. The Company has 50,000 underwriter warrants
outstanding with an exercise price of $14.40 per unit. Each unit consists of two
shares of the Company's common stock and one warrant as described above. The
Company does not know whether the warrants will be exercised in 1999. Without
exercise of those warrants, the Company may need to limit its growth in order to
more efficiently manage its available funds and funds generated by operations.
The Company is utilizing a $2.5 million line of credit and its credit facility
arrangement with a New York factoring company.
CASH FLOWS USED BY OPERATING ACTIVITIES
Operating activities used net cash of $2,616,776. Cash flows used by operating
activities were primarily attributable to purchases of raw materials, trim and
finished goods required to support the Company's corresponding increase in
customer orders, increases in accounts receivable and utilization of customer
advances.
13
<PAGE>
CASH FLOWS USED FOR INVESTING ACTIVITIES
The Company's cash flow used by investing activities totaled $144,302. Cash
flows used by investing activities were primarily attributable to the purchase
of equipment and an increase in stockholder loans.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities totaled $1,307,063. Cash flows from
financing activities were primarily attributable to the Company's use of it's
line of credit.
CAPITAL RESOURCES
Since its formation, the Company has financed its operations and met its capital
requirements primarily through its public offering, cash flows from operations,
customer advances and credit facilities.
The initial use of IPO funds was to repay certain debt and to purchase raw
materials, for working capital and the eventual purchase of wool manufacturing
equipment. The Company's primary need for cash is for working capital purposes.
The Company may raise capital through the issuance of long-term or short-term
debt, or the issuance of securities in private or public transactions to fund
future expansion of its business. There can be no assurance that acceptable
financing for future transactions can be obtained.
INFLATION AND CURRENCY VOLATILITY
The Company does not anticipate a significant increase in inflation in the
United States over the short-term. All of the Company's transactions worldwide
are conducted on a dollar-denominated basis which is intended to mitigate the
possible impact of volatile currencies that may arise as a result of global
corporations crowding emerging markets in search of growth.
SEASONALITY
The Company's revenues and operating results have exhibited some degree of
seasonality in past periods. Typically, the Company experiences its highest
sales in the first and fourth quarters and its lowest sales in the second and
third quarters. In 1998 the Company experienced its highest sales in the first
and third quarters.
YEAR 2000 ISSUES
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the year 2000 as "00". This could cause many computer applications to fail
completely or to create erroneous results unless corrective measures are taken.
The Company currently uses software and related computer technologies essential
to its operations that the Company believes will not be affected by the year
2000 issue.
The Company, however, can not determine the extent to which its vendors and
customers may be affected by the year 2000 issue. The Company is in the process
of implementing a plan to obtain information from its external service
providers, significant suppliers and customers, and financial institutions to
confirm their plans and readiness to become Year 2000 compliant, in order to
better understand and evaluate how their Year 2000 issues may affect the
Company's operations. The Company currently is not in a position to assess this
aspect of the Year 2000 issue. The Company intends over the next 2 years to
establish relationships with customers that may require the use of EDI
(electronic data interchange) whereby all invoicing and payments will take place
electronically over the internet through computers. The Company believes that
since
14
<PAGE>
these prospective customers already utilize EDI, that they either have in place
now, or will have successfully taken whatever steps are necessary to solve the
year 2000 issue.
While the Company believes that its own internal assessment and planning efforts
with respect to external service providers, suppliers, customers and financial
institutions are and will be adequate to address its year 2000 concerns there
can be no assurance that these efforts will be successful or will not have a
material adverse affect on the Company's operations.
ITEM 7. FINANCIAL STATEMENTS
15
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance Sheets F-3
Statements of Income F-5
Statements of Changes in Stockholders'
Equity F-6
Statements of Cash Flows F-7
Notes to Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
RETROSPETTIVA, INC.
BEVERLY HILLS, CALIFORNIA
We have audited the accompanying balance sheets of Retrospettiva, Inc. as of
December 31, 1998, and 1997 and the related statements of income, changes in
stockholders' equity and cash flows for the years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Retrospettiva, Inc. as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
AJ. ROBBINS, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
FEBRUARY 8, 1999
F-2
<PAGE>
RETROSPETTIVA, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1998 1997
----------------- ----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 115,890 $ 1,569,905
Accounts receivable, net, pledged 1,716,697 2,958,770
Due from factor 333,053 -
Note receivable, current portion 100,333 115,210
Note receivable, stockholder 291,738 288,496
Inventories, pledged 8,470,702 6,389,896
Accrued interest receivable - stockholder 55,370 21,042
Prepaid income taxes 82,016 -
Due from vendors 1,540,791 123,709
Other current assets 74,520 79,999
---------------- ----------------
Total Current Assets 12,781,110 11,547,027
PROPERTY AND EQUIPMENT, at cost, net 70,256 59,584
DEFERRED TAX ASSETS, net of current portion 41,000 34,000
OTHER ASSETS 19,110 4,610
---------------- ----------------
$ 12,911,476 $ 11,645,221
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
RETROSPETTIVA, INC.
BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1997
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable, trade $ 2,024,580 $ 2,881,620
Line of credit 1,507,216 95,610
Note payable 26,580 131,124
Accrued expenses 97,723 66,140
Accrued income taxes - 160,966
Customer advances 267,454 137,385
---------------- ----------------
Total Current Liabilities 3,923,553 3,472,845
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 1,000,000
shares- none issued or outstanding - -
Common stock - authorized 15,000,000
shares, no par value; issued and
outstanding 2,900,000 and 2,900,000
shares 6,258,190 6,258,190
Additional paid-in capital 230,000 230,000
Retained earnings 2,499,733 1,684,186
---------------- ----------------
Total Stockholders' Equity 8,987,923 8,172,376
---------------- ----------------
$ 12,911,476 $ 11,645,221
---------------- ----------------
---------------- ----------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
RETROSPETTIVA, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
SALES $ 27,534,536 $ 19,724,751 $ 9,520,671
SALES, related party - - 3,381,524
------------------ ------------------ ------------------
Total Sales 27,534,536 19,724,751 12,902,195
COST OF SALES 23,991,906 16,924,565 11,006,053
------------------ ------------------ ------------------
GROSS PROFIT 3,542,630 2,800,186 1,896,142
------------------ ------------------ ------------------
OPERATING EXPENSES:
Selling expenses 638,893 260,200 170,179
General and administrative 1,460,991 649,055 557,197
------------------ ------------------ ------------------
Total Operating Expenses 2,099,884 909,255 727,376
------------------ ------------------ ------------------
INCOME FROM OPERATIONS 1,442,746 1,890,931 1,168,766
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE):
Interest income - related party 34,332 21,042 -
Interest expense (105,440) (45,286) (61,457)
Other income (expense) 73,272 46,756 11,202
------------------ ------------------ ------------------
Net Other Income (Expense) 2,164 22,512 (50,255)
------------------ ------------------ ------------------
INCOME BEFORE INCOME TAXES 1,444,910 1,913,443 1,118,511
INCOME TAX PROVISION 629,363 775,000 462,455
------------------ ------------------ ------------------
NET INCOME $ 815,547 $ 1,138,443 $ 656,056
------------------ ------------------ ------------------
------------------ ------------------ ------------------
NET INCOME PER COMMON SHARE $ .28 $ .55 $ .37
------------------ ------------------ ------------------
------------------ ------------------ ------------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,900,000 2,052,877 1,750,000
------------------ ------------------ ------------------
------------------ ------------------ ------------------
NET INCOME PER COMMON SHARE - ASSUMING DILUTION $ .22 $ .50 $ .37
------------------ ------------------ ------------------
------------------ ------------------ ------------------
WEIGHTED AVERAGE NUMBER OF DILUTED COMMON SHARES 3,682,828 2,271,976 1,750,000
OUTSTANDING ------------------ ------------------ ------------------
------------------ ------------------ ------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
RETROSPETTIVA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------------ Paid-in Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCES,
DECEMBER 31, 1995 1,095,984 $ 20,000 $ 230,000 $ (110,313) 139,687
Stock issued for
compensation 81,007 34,000 - - 34,000
Stock issued for bridge
loans 238,250 100,000 - - 100,000
Net income for the year - - - 656,056 656,056
----------- ----------- ----------- ------------ ------------
BALANCES,
DECEMBER 31, 1996 1,415,241 154,000 230,000 545,743 929,743
Stock issued in private
offering net of offering
costs 334,759 382,630 - - 382,630
Stock issued in initial
public offering net of
offering costs 1,150,000 5,721,560 - - 5,721,560
Net income for the year - - - 1,138,443 1,138,443
----------- ----------- ----------- ------------ ------------
BALANCES,
DECEMBER 31, 1997 2,900,000 6,258,190 230,000 1,684,186 8,172,376
Net income for the year - - - 815,547 815,547
----------- ----------- ----------- ------------ ------------
BALANCES,
DECEMBER 31, 1998 $ 2,900,000 $ 6,258,190 $ 230,000 $ 2,499,733 $ 8,987,923
----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
RETROSPETTIVA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income $ 815,547 $ 1,138,443 $ 656,056
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Bad debt expense 102,699 158,970 -
Depreciation and amortization 27,940 21,217 17,491
Stock issued for compensation - - 34,000
Deferred income taxes (7,000) (18,000) 7,000
Services provided to reduce note receivable 102,824 72,373 8,417
Stock issued to bridge loan holders - - 100,000
Utilization of deferred offering costs - (1,258,269) -
Changes in:
Accounts receivable 1,139,374 (2,357,245) (572,917)
Accounts receivable, related party - 1,182,202 (740,372)
Due from factor (333,053) - -
Inventories (2,080,806) (3,277,218) (592,610)
Accrued interest - related party (34,328) (21,042) -
Due from vendors (1,417,082) (123,709) -
Other current assets 5,479 34,181 (11,225)
Prepaid income taxes (82,016) - -
Accounts payable and accrued expenses (825,457) 89,878 (138,765)
Accrued income taxes (160,966) (305,303) 456,948
Customer advances 130,069 (772,296) 909,681
------------- ------------ -----------
Cash flows provided (used) by
operating activities (2,616,776) (5,435,818) 133,704
------------- ------------ -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of property and equipment (38,612) (19,415) (6,825)
Loans to stockholder (91,189) (357,503) -
Collections on note receivable, stockholder - 69,007 -
Other assets (14,501) (110) -
------------- ------------ -----------
Cash flows provided (used) by investing
activities (144,302) (308,021) (6,825)
------------- ------------ -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Proceeds from note payable, stockholder - - 170,856
Payments on note payable, stockholder - - (354,176)
Proceeds from notes payable, bridge loans - - 250,000
Payments on notes payable - bridge loans - (250,000) -
Proceeds from note payable - 181,124 -
Payments on note payable (104,544) (287,580) (19,725)
Proceeds from line of credit 3,827,106 577,207 -
Payments on line of credit (2,415,499) (481,597) -
Payments for deferred offering costs - - (101,354)
Proceeds from issuance of common stock - 7,463,813 -
------------- ------------ -----------
Cash flows provided (used) by
financing activities 1,307,063 7,202,967 (54,399)
------------- ------------ -----------
NET INCREASE (DECREASE) IN CASH (1,454,015) 1,459,128 72,480
CASH AND CASH EQUIVALENTS, beginning of period 1,569,905 110,777 38,297
------------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 115,890 $ 1,569,905 $ 110,777
------------- ------------ -----------
------------- ------------ -----------
</TABLE>
SEE NOTE 13
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACTIVITY
Retrospettiva, Inc. (the Company) located in Beverly Hills, California was
organized in November 1990 to manufacture and import textile products from
Europe including finished garments and fabrics. By 1993, the Company was
purchasing fabrics from firms and factories around the world and contracting for
the manufacture of the fabrics in Eastern Europe (primarily Macedonia) for
importation into the United States.
The Company designs contracts for manufacture and markets a variety of garments.
Fabrics are purchased from suppliers worldwide including firms in China, India,
Russia, Romania, Italy and the United States. The fabrics are shipped to
contractor factories primarily in Macedonia to be manufactured into finished
garments for shipment to the Company's customers in the United States.
STOCK SPLITS
In May 1996, the Company's Board of Directors authorized a 46 for one stock
split. In May 1997, the Company's Board of Directors authorized a 2.3826 for one
stock split approved by the Company's stockholders in June 1997. The financial
statements have been presented as if the splits had occurred at the beginning of
each period presented.
CASH AND CASH EQUIVALENT
Cash and cash equivalents include cash on hand and investments with original
maturities of three months or less.
ACCOUNTS RECEIVABLE
The Company provides an allowance for doubtful accounts, as needed, for accounts
deemed uncollectible. Allowance for uncollectible accounts was recorded at
$186,054 and $100,000 at December 31, 1998 and 1997, respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
F-8
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of 5-10 years for equipment. Leasehold improvements are amortized over the
lesser of the estimated useful life of the asset or the term of the lease.
Depreciation and amortization expense of property and equipment was, $27,940,
$21,217 and $17,491 for the years ended December 31, 1998, 1997 and 1996,
respectively.
REVENUE RECOGNITION
Revenue is recognized when sold merchandise has cleared customs in the United
States and is available to be shipped to customers from a port of entry.
INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
109), Accounting for Income Taxes. Under this method, deferred income taxes are
recorded to reflect the tax consequences in future years of temporary
differences between the tax basis of the assets and liabilities and their
financial statement amounts at the end of each reporting period. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable for the
current period and the change during the period in deferred tax assets and
liabilities. The deferred tax assets and liabilities have been netted to reflect
the tax impact of temporary differences. The adoption of SFAS 109 did not have a
material effect on the Company's financial statements.
EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
No. 128) was issued in February 1997 (effective for financial statements issued
for periods ending after December 15, 1997). This Statement simplifies the
standards for computing earnings per share (EPS) previously found in Accounting
Principles Board Opinion No. 15, Earnings Per Share, and makes them more
comparable to international EPS standards. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
Common shares issued by the Company in the twelve months immediately preceding a
public offering plus the number of common equivalent shares which became
issuable during the same period pursuant to the grant of warrants and stock
options (using the treasury stock method) at prices substantially less than the
initial public offering price have been included in the calculation of common
stock and common stock equivalent shares as if they were outstanding for all
periods presented.
F-9
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In 1997, the FASB issued Statements No.130, Reporting Comprehensive income, No.
131, Disclosures About Segments of an Enterprise and Related Information, and
No. 132, Employers Disclosure about Pensions and Other Postretirement Benefits
effective for fiscal years beginning after December 15, 1997. The adoption by
the Company of these statements did not impact the Company's financial
statements.
RECLASSIFICATION
Certain amounts reported in the Company's financial statements for the years
ended December 31, 1997 and 1996 have been reclassified to conform to the
current year presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting periods. Actual results could
differ from those estimates and assumptions.
IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates its long lived assets by measuring the carrying amount of
the assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate the future undiscounted cash flows
of certain long lived assets are not sufficient to cover the carrying value of
such assets, the assets are adjusted to their fair values. No adjustment to the
carrying value of the assets have been made.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, which principally
include cash, trade receivables, notes receivable, accounts payable and
accrued expenses, approximates fair value due to the relatively short
maturity of such instruments. The fair value of the Company's debt
instruments are based on the current borrowing rates available for financings
with similar interest rates. At December 31, 1998 and 1997, respectively, the
carrying value of all financial instruments was not materially different from
fair value.
YEAR 2000 ISSUES
Many computer systems and other equipment with embedded chips or microprocessors
may not be able to appropriately interpret dates after December 31, 1999 because
such systems use only two digits to indicate a year in the date field rather
than four digits. If not corrected, many computers and computer applications
could fail or create miscalculations, causing disruptions to the Company's
operations. In addition, the failure of customer and supplier computer systems
could result in interruption of sales and deliveries of key supplies or
utilities. Because of the complexity of the issues and the number of parties
involved, the Company cannot reasonably predict with certainty the nature or
likelihood of such impacts.
F-10
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. The Company has addressed the Year 2000 issue by purchasing
and installing Year 2000 compatible software and computers, assessing critical
business relationships requiring modification prior to 2000 and developing
contingency and business continuation plans to mitigate any disruption of the
Company's operations arising from the Year 2000 issue. The cost of the Year 2000
compatible software and computers was approximately $24,000. The Company
believes no further expenditures will be necessary.
The Company is in the process of implementing a plan to obtain information from
its external service providers, significant suppliers and customers, and
financial institutions to confirm their plans and readiness to become Year 2000
compliant, in order to better understand and evaluate how their Year 2000 issues
may affect the Company's operations. The Company currently is not in a position
to assess this aspect of the Year 2000 issue, however, the Company plans to take
the necessary steps to provide itself with reasonable assurance that its service
providers, suppliers, customers and financial institutions are Year 2000
compliant.
While the Company believes that its own internal assessment and planning efforts
with respect to external service providers, suppliers, customers and financial
institutions are and will be adequate to address its Year 2000 concerns, there
can be no assurance that these efforts will be successful or will not have a
material adverse effect on the Company's operations.
CREDIT RISK
The Company sells its merchandise principally to customers throughout the United
States. Management performs regular evaluations concerning the ability of its
customers to satisfy their obligations and records a provision for doubtful
accounts based upon these evaluations. The Company's credit losses for the
periods presented have not exceeded management's estimates.
A limited number of customers accounted for 100% (9 customers) and 91% (2
customers) of the non-factored accounts receivable balance at December 31, 1998
and 1997, respectively.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced a loss in such
accounts.
F-11
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIGNIFICANT CUSTOMERS
Individual customers aggregating in excess of 10% of net sales are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
<S> <C> <C> <C>
SALES
Customer A $ - $ - $ 4,102,545
Customer B $ 9,414,735 $ 12,368,619 $ 3,745,836
Customer C, related party $ - $ - $ 3,381,524
Customer D $ 8,126,760 $ 5,614,994 $ -
Customer E $ 4,486,144 $ - $ -
</TABLE>
RELATED PARTY TRANSACTIONS
The Company had sales to a related party customer. The Company's
officer/stockholder was part owner of Customer C, above. Effective January 1,
1997, the Company's officer/stockholder relinquished his ownership in Customer
C.
NOTE 2 - DUE FROM VENDORS
Due from vendors consist of funds advanced by the Company to vendors and
chargebacks to vendors for insufficient quality. The amounts will be recouped
within one year in the form of vendor credits.
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------ ------------------
<S> <C> <C>
Finished goods $ 2,640,635 $ 2,875,471
Work-in-process 2,171,664 1,697,258
Raw materials 3,658,403 1,817,167
------------------ ------------------
$ 8,470,702 $ 6,389,896
------------------ ------------------
------------------ ------------------
</TABLE>
F-12
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES (CONTINUED)
The Company's import operations are subject to constraints imposed by bilateral
textile agreements between the United States and a number of foreign countries.
These agreements impose quotas on the amount and type of goods which can be
imported into the United States from these countries and can limit or prohibit
importation of products on very short notice. The Company's imported products
are also subject to United States customs duties which are a material portion of
the Company's cost of imported goods. A substantial increase in customs duties
or a substantial reduction in quota limits applicable to the Company's imports
could have a material adverse effect on the Company's financial condition and
results of operations.
NOTE 4 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 815,547 2,900,000 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Options - 782,828 (.06)
----------- ----------- -----------
DILUTED EPS
Income available to common
stockholders including assumed
conversions $ 815,547 3,682,828 $ .22
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
For the Year Ended December 31, 1997
----------------------------------------
Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 1,138,443 2,052,877 $ 0.55
EFFECT OF DILUTIVE SECURITIES
Options - 219,099 (.05)
----------- ----------- -----------
DILUTED EPS
Income available to common
stockholders including assumed
conversions $ 1,138,443 2,271,976 $ 0.50
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-13
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - EARNINGS PER SHARE (CONTINUED)
A reconciliation of Basic and Diluted EPS for the year ended December 31, 1996
is not presented as the affect of the options is antidilutive.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Automobile $ 20,568 $ 20,568
Furniture and fixtures 86,789 54,909
Leasehold improvements 57,246 50,514
----------- ------------
Total 164,603 125,991
Less accumulated depreciation and
amortization (94,347) (66,407)
----------- ------------
$ 70,256 $ 59,584
----------- ------------
----------- ------------
</TABLE>
NOTE 6 - NOTE RECEIVABLE
During 1994, the Company was owed an outstanding trade receivable of $266,000.
Approximately $70,000 was written off as uncollectible in 1994. On October 15,
1996, $196,000 was converted to a note receivable, bearing interest at 10%, and
requiring 24 monthly payments of $10,000 in consolidation services. Services are
valued at the market value of comparative consolidation services in the area.
The Company realized $8,417, $25,519 and $102,824 in services during 1996, 1997
and 1998, respectively.
The Company negotiated with a customer (former related party) to also use the
consolidation services. The customer reimburses the Company for the services and
the note receivable is reduced accordingly. During 1997 and 1998, the note
receivable was reduced by $72,373 and $102,824, respectively, by use of the
consolidation services by the Company and its customer. The customer is making
payments to the Company.
During 1998 the note receivable was increased by $87,947 due to an outstanding
debt due to the stockholder. This increased the stockholder loan and the Company
anticipates receiving consolidation services for this amount.
F-14
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - NOTE RECEIVABLE FROM STOCKHOLDER
The Company's note receivable ($350,000 maximum) due from an officer/stockholder
is unsecured, due on demand and bears interest at 10% per annum. The balance at
December 31, 1998 and 1997 is $291,738 and $288,496, respectively.
NOTE 8 - NOTES PAYABLE AND LINE OF CREDIT
On July 18, 1997 the Company refinanced its previous existing line of credit by
obtaining a new line of credit with Merrill Lynch Business Financial Services,
Inc. for $500,000 due August 31, 1998. This debt was collateralized by accounts
receivable, inventories, property and equipment, notes receivable and the
personal guarantee of an officer/stockholder. Interest was payable at 2.90% over
the 30 day commercial paper rate. The line of credit was increased to $1,500,000
on November 6, 1997. The line of credit was paid in July 1998.
On July 16, 1998 the Company refinanced its then previous line of credit by
obtaining a new line for $2,500,000 of credit with Imperial Bank. The new debt
is collateralized by accounts receivable, inventories, property and equipment,
notes receivable and the personal guarantee of an officer/stockholder. Interest
is payable at the banks announced prime rate. The line of credit contains
various restrictive covenants among which include maintaining a certain level of
tangible net worth, current ratio and working capital.
NOTE 9 - STOCK OPTION PLAN
STOCK OPTION PLAN
On May 1, 1996 the Company adopted the Stock Option Plan (the Plan) which
provides for the granting of options to officers, directors, employees and
consultants. Initially, 1,786,930 shares of common stock were reserved under the
plan for the granting of options. The Plan will be in effect until April 30,
2006, unless extended by the Company's shareholders. The options are exercisable
to purchase stock for a period of ten years from the date of grant.
Incentive Stock Options granted pursuant to this Plan may not have an option
price that is less than the fair market value of the stock on the date the
option is granted. Incentive stock options granted to significant stockholders
shall have an option price of not less than 110% of the fair market value of the
stock on the date of the grant. No options were granted during the year ended
December 31, 1997. During 1998, the plan was amended to reserve an additional
1,000,000 shares.
F-15
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Options Price Per
Available Number Share
------------- ------------- -------------
<S> <C> <C> <C>
Initial reserved shares 1,786,930 - $ -
Granted during 1996 1,701,635 1,701,635 $ .63-6.75
------------- ------------- -------------
Balance, December 31, 1997 and 1996 85,295 1,701,635 $ .63-6.75
Additional shares reserved 1,000,000 - -
Granted during 1998 1,035,000 1,035,000 2.50
------------- ------------- -------------
Balance, December 31, 1998 50,295 2,736,635 .63-6.75
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
At December 31, 1998 and 1997, 2,301,635 and 1,701,635 options granted under the
plan were exercisable, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company signed a 61 month lease agreement for its offices commencing
December 1, 1995. The monthly lease payment is $2,341.
The Company has a sublease in New York, with a one year term through March 31,
1999. The terms require monthly payments of $2,425.
The Company signed a 24 month lease agreement for its New York warehouse,
commencing on September 1, 1998. The monthly lease payment is $6,875.
Future minimum rental payments under non-cancelable operating leases at December
31, 1998 are as follows:
<TABLE>
<C> <C>
1999 $ 118,691
2000 58,989
---------------
Total $ 177,680
---------------
---------------
</TABLE>
The Company rents office and showroom space from a major supplier in New York on
a month to month basis.
Rent expense for the years ended December 31, 1998 and 1997 was $142,371and
$75,082, respectively.
F-16
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
In April 1996, the Company entered into employment agreements with an
officer/stockholder and its chief financial officer, providing for minimum
annual salaries of a total of $155,000, a total of 81,007 shares of common stock
upon signing and options to purchase 1,310,428 shares of common stock at $6.25
per share, exercisable for a period of 10 years. During 1998, the chief
financial officer resigned.
In December 1998, the Company entered into an employment agreement with a vice
president of investor relations, providing for a minimum annual salary, stock
options to purchase shares of the Company's common stock exercisable upon
execution of the agreement and additional options to be granted during the term
of his employment.
LITIGATION
The Company is a party to various claims, complaints, and other legal actions
that have arisen in the ordinary course of business. The Company believes that
the outcome of all pending legal proceedings, in the aggregate, will not have a
material adverse effect on the Company's financial condition or the results of
its operation of cash flows.
In August 1997, the Company settled a lawsuit with its former contract
manufacturer for $181,000 payable as follows: $50,000 due September 15, 1997,
$50,000 due November 14, 1997, $50,000 due January 15, 1998, and $31,000 due
February 27, 1998.
The Company discovered that the plaintiff continued to pursue a similar suit
against the Company in another jurisdiction. A judgement of $176,000 was entered
against the Company on December 23, 1997. The Company has appealed the judgement
and is awaiting the results of its appeal. The Company believes it will only be
liable for the original settlement less payments previously made. The Company is
currently in default on the note payable. At December 31, 1998 the balance was
$26,580.
F-17
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES
The components of deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Total deferred tax $ 41,000 $ 34,000
assets
Total deferred tax
(liabilities) - -
------------ ------------
Net deferred tax assets $ 41,000 $ 34,000
------------ ------------
------------ ------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and (liabilities) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Temporary differences:
Allowance for bad debts $ 56,000 $ 40,000
Property and equipment - 2,000
Other (15,000) (8,000)
------------ ------------
Total deferred tax assets $ 41,000 $ 34,000
------------ ------------
------------ ------------
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current $ 636,363 $ 793,000 $ 455,455
Deferred (benefit) (7,000) (18,000) 7,000
------------ ------------ ------------
Provision (Benefit) $ 629,363 $ 775,000 $ 462,455
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-18
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - INCOME TAXES (CONTINUED)
Following is a reconciliation of the amount of income tax (benefit) expense that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense for the periods:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Tax expense at federal statutory rates $ 492,000 $ 651,000 $ 375,000
State tax, net of federal benefit 93,000 121,000 104,170
Alternative minimum tax (credit) - - (3,000)
Other 51,363 21,000 6,285
(Benefit) of net operating loss
carryforward - - (27,000)
------------ ------------ ------------
$ 636,363 $ 793,000 $ 455,455
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The components of deferred income tax (benefit) expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Bad debts $ (16,000) $ (33,000) $ -
Depreciation 2,000 2,000 (3,000)
Other 7,000 13,000 (4,000)
Net operating loss carryover - - 14,000
------------ ------------ ------------
$ (7,000) $ (18,000) $ 7,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
NOTE 12 - STOCK-BASED COMPENSATION
The Company utilizes Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). The standard requires the
Company to present the "fair value" method with respect to stock-based
compensation of consultants and other non-employees.
F-19
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - STOCK-BASED COMPENSATION (CONTINUED)
The Company did not change its method of accounting with respect to employee
stock options; the Company continues to account for these under the "intrinsic
value" method. Had the Company adopted the fair value method with respect to
options issued to employees as well, an additional charge to income of $52,300
would have been required in 1996; proforma net income would have been $603,756
and earnings per share would have been $.35 on both a primary and fully diluted
basis. In estimating the above expense, the Company used the Modified
Black-Scholes European pricing model. The average risk-free interest rate used
was 6.2%, volatility was estimated at 31%; the expected life was less than two
years.
On December 16, 1998 the Company granted options to purchase 600,000 shares of
the Company's common stock to an employee exercisable at $2.50 per share. Had
the Company adopted the fair value method with respect to options issued to
employees an additional change to income of $10,500 would have been required in
1998; proforma net income would have been $805,047 and earnings per share would
have been $.28 on a basic basis and $.22 on the diluted basis. In estimating the
above expense, the Company used the Modified Black-Scholes European pricing
model. The average risk-free interest rate used was 5.5%, volatility was
estimated at 65%; the expected life was less than two years.
NOTE 13 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH
INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for interest $ 105,440 $ 63,817 $ 26,820
------------ ------------ ------------
------------ ------------ ------------
Cash paid for income taxes $ 796,000 $ 718,300 $ 2,196
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
During 1998, a stockholder assigned $87,947 of amounts personally due to him,
from a customer (Note 6). This amount was applied to reduce amounts owed to the
Company, by the stockholder.
NOTE 14 - COMMON STOCK
In September 1997, the Company completed an initial public offering of common
stock. The Company issued 1,150,000 shares of common stock and warrants to
purchase 500,000 shares of common stock for $7.50 per share and received
proceeds of $5,721,560, net of offering costs. The value of the warrants were
immaterial to the offering.
F-20
<PAGE>
RETROSPETTIVA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - COMMON STOCK (CONTINUED)
In March 1997, the Company completed a private placement of common stock. The
Company issued 334,759 shares of common stock and received proceeds of $382,630
net of offering costs.
NOTE 15 - FACTORING AGREEMENT
In December 1997, the Company entered into a factoring agreement with Commodore
Factors, to factor its accounts receivable up to $2,000,000. The Company will
receive up to 80% of the receivables at the time of factoring. Interest on the
factored receivables will be at the prime rate plus 2%, but never less than 10%
per annum.
The Company assigns a portion of its accounts receivable to the factor without
recourse. Under the terms of the agreement, the factor has a continuing security
in the Company's receivables and inventories. Personal and cross-corporate
guarantees have been given to the factor by the stockholders. The agreement
provides for a letter of credit facility and periodic overadvances based on
negotiated lines of credit
F-21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, KEY EMPLOYEES AND CONTROL PERSONS
<TABLE>
<CAPTION>
NAME AGE POSITION OFFICER OR
---- --- -------- DIRECTOR
SINCE
-----
<S> <C> <C> <C>
Borivoje Vukadinovic 40 Chief Executive Officer, President, Chairman of the 1991
Board (1)
Hamid Vaghar 34 Chief Financial Officer 1998
Ivan Zogovic 39 Manager-Export/Import, Director 1996
Mojgan Keywanfar 36 Accounting Manager, Director, Corporate Secretary 1996
S. William Yost 70 Director (1), (2) 1996
Donald E. Tormey 67 Director (1), (2) 1996
Philip E. Graham 42 Director (1) 1996
Michael D. Silberman 42 Director (2)
KEY EMPLOYEES
Jovica Kecman 39 General manager-International Quality Control
</TABLE>
(1) Member of the compensation committee.
(2) Member of the audit committee.
DIRECTORS AND EXECUTIVE OFFICERS
BORIVOJE VUKADINOVIC has been a director and executive officer of the Company
since January 1991, and its Chief Executive Officer since January 1993. From
June 1990 to August 1993, he was Vice President and a principal stockholder of
Celtex ENT, a Los Angeles, California based company that established and
administered production of yarns and raw textiles in Yugoslavia, Turkey and
Macedonia. From May 1988 to June 1990, he was founder, owner and President of
DUTY OFF, Inc., a Los Angeles, California based company that produced young
men's apparel. He earned a Bachelor of Arts degree in Business from the
University of Banja Luka in Yugoslavia and a Bachelor of Arts degree in Art from
Bern University in Switzerland.
HAMID VAGHAR has served as Controller of Retrospettiva since the Company's
inception and was promoted to Chief Financial Officer in October 1998. From
March 1990 to January 1993, he was an accountant with EB Accounting a California
based accounting firm which conducted various accounting services for companies
in garment district of Los Angeles. In January 1993 he became a partner in
Mid-West Consultants and continued his accounting carrier in that capacity until
1998. He earned a Bachelor degree in Natural Sciences and an MBA from University
of Poona, India.
IVAN B. ZOGOVIC has been employed by the Company as its Manager-Export/Import
since January 1994 and was appointed a director in May 1996. Mr. Zogovic is
responsible for the export and import of raw materials and finished goods
including customs clearing, scheduling and freight forwarding, between the
United States and the Company's contract manufacturers in Eastern Europe. He
earned a law degree from the University of Belgrade Law School and practiced law
in Yugoslavia from 1984 until 1992.
MOJGAN KEYWANFAR has been employed by the Company as its accounting manager
since February 1991 and was appointed a director in December 1996. Ms. Keywanfar
manages the
17
<PAGE>
Company's bookkeeping and management information systems. She holds a B.A.
degree in Economics from the California State University, Northridge.
S. WILLIAM YOST became a director of the Company in May 1996. He has been an
adjunct professor of Operations and Technology Management at the Anderson
Graduate School of Management of the University of California, Los Angeles,
since 1986. During his tenure at Anderson, Dr. Yost has developed two new
graduate courses, Managing Service and Managing Entrepreneurial Operations. In
addition, he has over 20 years experience in industrial positions together with
four years as a presidential appointee in the executive branch of the federal
government. three years in Management Consulting and in the early 1980's as the
Assistant Commissioner of the Trademark and Patent Office of the United States
Government in Washington, D.C.. Dr. Yost holds a doctorate in Business
Administration (DBA) from the Harvard Business School, and MBA from the Anderson
Graduate School of Management at the University of California, Los Angeles, and
a B.A. from the University of California, Berkeley. He serves on the Board of
Directors of a number of small privately held companies and is a consultant to a
variety of public and private clients.
DONALD TORMEY became a director of the Company in May 1996. From 1958 until he
retired in 1995, Chevron Corporation employed him in a number of positions
culminating as the Refinery General Manager in El Segundo, California from 1994
until his retirement. He holds a BSCE degree in engineering from the University
of Wisconsin School of Engineering.
PHILIP E. GRAHAM became a director of the Company in May 1996. Since February
1997, he has been the Information Technology Executive at the Avionics and
Communications Finance and Information Technology department of Rockwell
Avionics and Communications, Inc. From 1989 until February 1997, AirTouch
Cellular employed him in a number of positions, culminating as its director of
Information Technology from July 1989 to February 1997. Mr. Graham holds an MBA
degree from the Anderson Graduate School of Management at the University of
California, Los Angeles, and M.S. degree from the California State University at
Fullerton and a B.S. degree from the University of California at Irvine.
MICHAEL D. SILBERMAN currently a Director of the Company served as Chief
Financial Officer from April 1996 to October 1998. From May 1994 until he joined
the Company in April 1996, Mr. Silberman was a financial advisor with Prudential
Securities Inc. From April 1992 to February 1994, he was a portfolio manager for
Private Investment Fund. From September 1991 to April 1992, Mr. Silberman was
president of UMB Commercial Capital. From 1983 to 1991, Mr. Silberman served as
the Executive Vice President of Allied Business Capital. Mr. Silberman received
his Bachelor of Arts degree from the University of California, Los Angeles . and
his MBA degree from the Anderson School at the University of California, Los
Angeles .
KEY EMPLOYEES
JOVICA KECMAN has been employed by the Company as general manager of
international quality control since 1990. Mr. Kecman earned a degree in
economics from the University of Banja Luka. He is Mr. Vukadinovic's
brother-in-law.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table discloses all compensation awarded to, received by, and paid
to the Chief Executive Officer of the Company for the year ended December 31,
1998. No other executive officer's annual compensation exceeded $100,000 in
1998.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------------------------
ANNUAL AWARDS PAYOUTS
COMPENSATION
----------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (j)
OTHER RESTRICTED ALL
NAME AND PRINCIPAL ANNUAL STOCK OPTIONS/SA LTIP OTHER
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) RS(#) PAYOUTS($) COMPENSATION($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Borivoje Vukadinovic 1998 95,000 7,917 -0- -0- 100,000 -0- -0-
Chief Exe.Officer 1997 80,001 -0- -0- -0- -0- -0- -0-
1996 40,928 -0- -0- -0- 1,358,067(1) -0- -0-
1995 26,500 -0- 34,258(2) -0- -0- -0- -0-
1994 46,576 -0- 25,886(2) -0- -0- -0- -0-
</TABLE>
(1) See "1996 Stock Option Plan" for description of the options and certain
re-pricing information.
(2) Represents sales commission paid to Mr. Vukadinovic.
1996 STOCK OPTION PLAN
In May 1996, the Company adopted a stock option plan for officers, directors,
employees and consultants (the "Plan") which provides for the grant of options
intended to qualify as "incentive stock options" and "nonqualified stock
options" within the meaning of Section 422 of the United States Internal Revenue
Code of 1986 (the "Code"). Incentive stock options are issuable only to eligible
officers and key employees of the Company, and nonqualified options may be
granted to officers, employees, directors and consultants.
The Plan is administered by at least three members of the Board, at least two of
whom are not executive officers or salaried employees of the Company. As of May
1996, the Company had reserved 1,786,930 shares of Common Stock for issuance
under the Plan. Under the Plan, the Board of Directors determines which
individuals shall receive options, the time period during which the options may
be partially or fully exercised, the number of shares of Common Stock that may
be purchased under each option and the option price. Each option granted under
the Plan shall be evidenced by a stock option agreement.
The per share exercise price of options granted under the Plan may not be less
than the fair market value of the Common Stock on the date the options are
granted. No person who owns, directly or indirectly, at the time of the granting
of an incentive stock option, more than 10% of the total combined voting power
of all classes of stock of the Company is eligible to receive incentive stock
options under the Plan unless the option price is at least 100% of the fair
market value of the Common Stock subject to the option on the date of grant.
No options may be transferred by an optionee other than by will or the laws of
descent and distribution, and during the lifetime of an optionee, the option may
only be exercisable by the optionee. Options under the Plan must be granted
within 10 years from the effective date of the Plan and the exercise date of an
option cannot be later than 10 years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by
19
<PAGE>
the Company become available once again for issuance. Shares issued upon
exercise of an option will rank equally with other shares then outstanding.
As of the date of this filing, 2,736,634 options have been granted under the
Plan to officers, directors, employees and consultants including 1,577,195
options granted to Messrs. Vukadinovic and Silberman, an aggregated 71,478
options granted to the Company's three non-employee directors and 1,087,961
options to other employees and consultants. The per share exercise prices range
from $0.63 to $6.25, which prices represent at least the fair market value of
Company's Common Stock on the respective dates the options were granted, based
on prior sales of the Company's Common Stock. The table below sets for the total
number of options issued to each executive officer and director of the Company
and the exercise price. Messrs. Vukadinovic's and Silberman's options are
exercisable until April 2006. The remaining options expire at various times in
2006. There was an amendment filed to the 1996 Stock Option Plan which provided
for an additional one million options.
In May 1996, the Board granted to Mr. Silberman (I) a stock option to purchase
238,440 shares of Common Stock at an exercise price of $3.04 per share, (ii) a
stock option to purchase 59,610 shares of Common Stock at an exercise price of
$2.91 per share, and (iii) a stock option to purchase 59,610 shares of Common
Stock at an exercise price of $3.88 per share.
In November 1996, the Board amended Mr. Silberman's option grant to reduce the
number of stock options granted to Mr. Silberman from 357,657 to 119,128
options. 59,564 of these options were re-priced to the exercise price of $3.15
per share. The remaining 59,564 options were re-priced to the exercise price of
$3.78 per share. In December 1996, the Company amended Mr. Silberman' stock
option grants to provide for an adjustment of the exercise price of both of his
stock option grants in the event of an initial public offering of the Company's
securities, a merger or acquisition. In June 1997, the Board re-priced all
119,128 of Mr. Silberman's options to the current exercise price of $6.25 per
share.
In June 1997, the exercise prices of 1,191,290 of Mr. Vukadinovic's options were
re-priced from $2.83 per share to $6.75 per share.
Effective December, 1996 the exercise price of 1,191,290 of Mr. Vukadinovic's
options and 119,128 of Mr. Silberman's options were re-priced from $6.75 to
$6.25 by the Board per the Minutes of Action taken by Consent of the Board of
Directors meeting in December, 1996 whereby Mr. Silberman's and Mr.
Vukadinovic's stock option grants were amended to provide for an adjustment of
the exercise price in the event of an initial public offering of the Company's
securities, a merger or acquisition. Such adjustment was to occur only one time
and be a decrease in the exercise price per share equal to the amount that a
share of common stock is less than $6.50 at the time of the event requiring
adjustment. Since the initial public offering price of the shares of common
stock was $6.00 versus $6.50 the option exercise prices have been re-priced
accordingly.
In December 1998, the Board granted 600,000 options to Frank Trible. 85,000
options were vested immediately and the remaining 515,000 will vest in twelve
monthly installments of 42,916 options per month starting March 1999. The Board
also approved incentive option grants to various officers, employees and
consultants. The following table sets forth all stock options granted to the
Company's executive officers and directors through December 31, 1998.
20
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
TOTAL OPTIONS
TOTAL NUMBER OF GRANTED TO EXERCISE EXPIRATION
NAME OF EXECUTIVE OFFICER OR DIRECTOR OPTIONS ISSUED EMPLOYEES PRICE DATE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Borivoje Vukadinovic 1,458,067 [1] 53.3 (1) (1)
Michael D. Silberman 119,128 4.4 $ 6.25 2006
Ivan Zogovic 81,712 3.0 [2] [3]
Mojgan Keywanfar 81,712 3.0 [2] [3]
Hamid Vaghar 50,000 1.8 $ 2.50 2008
S. William Yost 23,826 0.9 $ 2.94 2006
Donald E. Tormey 23,826 0.9 $ 2.94 2006
Philip E. Graham 23,826 0.9 $ 2.94 2006
-------------- ---------------
Totals 1,862,097 68.2
</TABLE>
(1) Consists of 166,777 options exercisable at $.63 per share, 1,191,290
options exercisable at $6.25 per share and 100,000 options exercisable
at $2.50 per share.
(2) Number of options and exercise prices; consists of 35,739 options
exercisable at $2.94 per share and 30,973 options exercisable at $1.68
per share and 15,000 options exercisable at $2.50 per share as to each
individual.
(3) Represents stock options to purchase up to 11,913 shares exercisable
until May 2001, 30,973 shares exercisable until April 2006, 23,826
shares exercisable until April 2006 and 15,000 shares exercisable until
December 16, 2008.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the ownership
of the Company's common stock as of December 31, 1998, by (I) each person who is
known by the Company to own of record of beneficially more than 5% of the
Company" common stock, (ii) the Company's Chief Executive Officer and each of
the Company'a directors and (iii) all directors and officers of the Company as a
group. The persons listed in the table have sole voting and investment powers
with respect to the shares of common stock and the address of each person is in
care of the Company at 8825 West Olympic Boulevard, Beverly Hills, California
90211.
<TABLE>
<CAPTION>
NAME AMOUNT OF PERCENT OF
---- OWNERSHIP CLASS
--------- ----------
<S> <C> <C>
Borivoje Vukadinovic(1) 2,404,054 46.3%
Hamid Vaghar(2) 50,000 1.0%
Ivan Zogovic(4) 81,712 1.6%
Mojgan Keywanfar(4) 81,712 1.6%
S. William Yost(5) 23,826 0.4%
Donald E. Tormey(5) 23,826 0.4%
Philip E. Graham(5) 23,826 0.4%
Michael D. Silberman(3) 175,735 3.4%
------------
All officers and directors as a group (8 persons) 2,864,691
</TABLE>
(1) Includes stock options to purchase up to 1,191,300 shares of common
stock at $6.25 per share, 166,777 shares at $.63 per share exercisable
until April 2006 and 100,000 shares at $2.50 until December 2008.
(2) Includes stock options to purchase up to 50,000 shares of common stock
at $2.50 until December 2008.
(3) Includes stock options to purchase up to 119,128 shares of common stock
at $6.25 per share exercisable until April 2006.
(4) Represents stock options to purchase up to 30,973 shares at $1.68 per
share exercisable until April 2001, 11,913 shares at $2.94 per share
exercisable until May 2001, 23,826 shares at $2.94 per share
exercisable until April 2006 and 15,000 share exercisable until
December 2008.
(5) Represents stock options to purchase up to 23,826 shares of common
stock at $2.94 per share exercisable until May 2001.
21
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1996, the Company executed three-year employment agreement with Mr.
Vukadinovic, its Chief Executive Officer, and Mr. Silberman, its Chief Financial
Officer until October 1998, providing for annual salaries of $95,000 and $60,000
respectively, upon an IPO or merger of the Company with a publicly-traded
company. In connection with their employment, Messrs. Vukadinovic and Silberman
received options under the plan to purchase 1,191,300 shares and 119,128 shares,
respectively, of the Company's common stock. Mr. Silberman also received 81,007
shares of common stock for services rendered valued at $.0042 per share on the
date of grant, or an aggregate value on such date of $34,000.
At December 31, 1998, Mr. Vukadinovic was indebted to the Company in the amount
of $291,738 advanced by the Company under a credit facility granted to Mr.
Vukadinovic in the maximum amount of $350,000 and evidenced by three promissory
notes. The three promissory notes are unsecured; bear interest at 10% per annum
and are due on demand. The sums advanced to Mr. Vukadinovic were primarily used
by him to pay certain medical and related expenses of a family member.
Until December 31, 1996, Mr. Vukadinovic was a 22.5% stockholder in Easy
Concepts, Inc. ("ECI"), and apparel customer of the Company. At December 31,
1996 and December 31, 1997, ECI was indebted to the Company for apparel
purchases on open account in the amounts of $1,182,202 and $218,457
respectively. On January 1, 1997 Mr. Vukadinovic returned all of his ECI stock
to ECI for no consideration. He elected to do so because he had received his ECI
stock for nominal consideration in the form of services rendered and he wanted
to eliminate any potential for conflict of interest caused by his ECI
stockholdings. He was never an officer or director of ECI and ECI is no longer a
customer of the Company.
The Company used a portion of a consolidating warehouse in Astoria, New York for
short term storage and for consolidating services in connection with finished
goods imported from Macedonia pending pick up by the Company's customer's
Positive Influence, Inc. ("PII"), the owner of the warehouse and the provider of
the consolidating services, is a non-affiliated former customer of the Company
which was indebted to the Company in the amount of $100,333 at December 31, 1998
for goods previously purchased from the Company. The Company was charged an
average of approximately $10,000 per month for use of the warehouse and for
consolidating services provided by PII which amount is deducted from the amount
owed by PII to the Company. PII also provides Easy Concepts, Inc. ("ECI"), a
former affiliate of the Company, with warehouse space and consolidating
services. Charges due from ECI to PII were also deducted from the amount owed by
PII to the Company and ECI paid such amounts directly to the Company.
Consolidating services involved accepting finished goods shipments, combining
the goods into larger quantities for pickup by, or delivery to, customers and
storage of the goods prior to customer acceptance.
In July 1997, Mr. Vukadinovic personally guaranteed the Company's line of credit
with Merrill Lynch Business Financial Services Inc. in the amount of up to
$500,000. In November 1997, the line of credit was increased to a maximum of
$1,500,000 based on a formula. In July 1998 this line of credit was paid off and
Mr. Vukadinovic guarenteed the Company's line of credit with Imperial Bank in
the maximum amount of $2,500,000 based on a formula.
At December 31, 1997, ECI's indebtedness to the Company was $218,457. The amount
related to apparel purchased through February 1997 and at that time was more
than 180 days past due. As the indebtedness was incurred on open account for
apparel purchases, the amount was not evidenced by a promissory note, no
interest had been charged and there was no maturity date for full payment.
However, the Company believed that ECI would pay off the remaining amount due by
December 1997 but if it failed to do so, the Company was prepared to take such
legal action as was necessary to enforce its claim against ECI. At December 31,
1997, ECI had $106,000 worth of pants at cost in the PII warehouse. The market
value of the pants was estimated to be
22
<PAGE>
$150,000 and it was ECI's intention to sell those goods to pay the indebtedness
to the Company. The Company believed that the goods would be sold by June 30,
1998 and the proceeds would be paid to the Company in its entirety. At December
31, 1998 the balance of this indebtness was $171,602.
In December 1998 the Company executed a one year employment agreement with Mr.
Trible as its Vice President of Investor Relations providing for an annual
salary of $54,000 and the issuance of 600,000 stock options. See "1996 Stock
Options Plan".
The Company believes that the transactions described above were fair, reasonable
and consistent with the terms of transactions that the Company could have
entered into with non-affiliated third parties. All future transactions with
affiliates will be approved by a majority of the Company's disinterested
directors.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the year ended
December 31, 1998.
(c) Exhibit Listing
EXHIBIT TITLE
NO.
1.01 Form of Underwriting Agreement (1)
1.02 Form of Agreement Among Underwriters(1)
1.03 Form of Selected Dealer Agreement (1)
1.04 Form of Representatives' Warrant(1)
1.05 Form of Amended Underwriting Agreement (1)
3.01 Restated Articles of Incorporation of the Registrant (1)
3.02 Bylaws of the Registrant (1)
4.01 Form of Warrant (1)
4.02 Form of Common Stock Certificate (1)
5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes
Consent) (1)
10.01 1996 Employee Stock Option Plan (1)
10.02 Office Lease and Amendments thereto (Beverly Hills, California) (1)
10.03 Employment Agreement with Mr. Vukadinovic, as amended (1)
10.04 Employment Agreement with Mr. Silberman, as amended (1)
10.05 Promissory Note issued by Mr. Vukadinovic (1)
10.06 License Agreement with J.G. Hook, Inc(1)
10.07 Consulting Agreement with Kevin Dieball(1)
10.08 Factoring Agreement with Commodore Factors, Inc.(1)
10.09 Agreement with David N(1)
10.10 Agreement with Frank Trible
11.01 Computation of Earnings Per Share (1)
11.02 Computation of Earnings Per Share (1)
23.02 Consent of Gary A. Agron (See 5.01, above) (1)
23.03 Consent of AJ. Robbins, P.C. (1)
27.00 Financial Data Schedule
(1) Previously filed
23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report be signed on behalf by the undersigned, thereunto duly
authorized on March 29, 1999.
RETROSPETTIVA, INC.
By: /s/ Borivoje Vukadinovic
------------------------------
Borivoje Vukadinovic
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 29, 1999.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
<S> <C>
/s/ Borivoje Vukadinovic
________________________________ Chairman of the Board of Directors, President,
Borivoje Vukadinovic Chief Executive Officer
/s/ Hamid Vaghar
________________________________ Chief Financial Officer (Principal Financial
Hamid Vaghar Officer)
/s/ Ivan Zogovic
________________________________ Director
Ivan Zogovic
/s/ Mojgan Keywanfar
________________________________ Director
Mojgan Keywanfar
/s/ S. William Yost
________________________________ Director
S. William Yost
/s/ Donald Tormey
________________________________ Director
Donald Tormey
/s/ Philip E. Graham
________________________________ Director
Philip E. Graham
/s/ Michael D. Silberman
________________________________ Director
Michael D. Silberman
</TABLE>
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
RETROSPETTIVA, INC. 10-KSB FOR YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 115,890
<SECURITIES> 0
<RECEIVABLES> 1,902,751
<ALLOWANCES> (186,054)
<INVENTORY> 8,470,702
<CURRENT-ASSETS> 12,781,110
<PP&E> 163,951
<DEPRECIATION> 93,695
<TOTAL-ASSETS> 12,911,476
<CURRENT-LIABILITIES> 3,923,553
<BONDS> 0
0
0
<COMMON> 6,258,190
<OTHER-SE> 2,729,733
<TOTAL-LIABILITY-AND-EQUITY> 12,911,476
<SALES> 27,534,536
<TOTAL-REVENUES> 27,534,536
<CGS> 23,991,906
<TOTAL-COSTS> 26,091,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105,440
<INCOME-PRETAX> 1,444,910
<INCOME-TAX> 629,363
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 815,547
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.22
</TABLE>
