<PAGE>
EXHIBIT 99.4
CCS, Inc.
Financial Statements
Periods from August 14, 1999 through February 29, 2000
and March 1, 1999 through August 13, 1999
and for the years ended February 28, 1999 and 1998
Contents
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Income....................................................... 3
Statements of Stockholders' Equity......................................... 4
Statements of Cash Flows................................................... 5
Notes to Financial Statements.............................................. 7
<PAGE>
Report of Independent Auditors
To the Stockholders
CCS, Inc.
We have audited the accompanying balance sheets of CCS, Inc. (Note 1) as of
February 29, 2000 (New CCS) and February 28, 1999 (Old CCS), and the related
statements of income, stockholders' equity and cash flows for the period from
August 14, 1999 through February 29, 2000 (New CCS) and the period from March 1,
1999 through August 13, 1999 (Old CCS) and for the years ended February 28, 1999
and 1998 (Old CCS). 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits 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 CCS, Inc. at February 29, 2000
(New CCS) and February 28, 1999 (Old CCS), and the results of its operations and
its cash flows for the period from August 14, 1999 through February 29, 2000
(New CCS) and the period from March 1, 1999 through August 13, 1999 (Old CCS)
and for the years ended February 28, 1999 and 1998 (Old CCS) in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young, LLP
Los Angeles, California
August 25, 2000
<PAGE>
CCS, Inc.
Balance Sheets
<TABLE>
<CAPTION>
New CCS Old CCS
February 29, February 28,
2000 1999
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 179 $ 2,596,625
Accounts receivable, net of allowance for doubtful accounts of
$15,667 in 2000 and $5,145 in 1999 16,437 44,965
Inventories, net of provision for obsolescence of $117,785 in
2000 and $90,000 in 1999 4,123,608 3,181,982
Prepaid expenses and other current assets 316,830 253,491
----------------------------
Total current assets 4,457,054 6,077,063
Due from Parent 4,922,827 -
Property and equipment, net of accumulated depreciation of $96,500
in 2000 and $505,027 in 1999 1,477,384 903,764
Excess of purchase price over fair market value of net assets
acquired, net of accumulated amortization of $487,241 in 2000 16,314,744 -
Deposits and other assets 114,021 25,810
----------------------------
Total assets $ 27,286,030 $ 7,006,637
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,494,821 $ 1,501,179
Cash overdraft 801,292 -
Income taxes payable (due to Parent at February 29, 2000) 1,098,071 109,745
Accrued liabilities 708,374 522,506
Current portion of bank term debt 1,081,300 -
Current portion of obligation under capitalized leases 317,383 -
----------------------------
Total current liabilities 5,501,241 2,133,430
Bank term debt 8,257,200 -
Obligation under capitalized leases, less current portion 126,148 -
----------------------------
Total liabilities 13,884,589 2,133,430
Commitments and contingencies
Stockholders' equity:
Common stock, par value $1.00 per share, authorized
1,000 shares, issued and outstanding 918 shares in 2000 and
1,000 shares in 1999 918 1,000
Additional paid-in capital 12,398,750 53,250
Retained earnings 1,001,773 4,818,957
----------------------------
Total stockholders' equity 13,401,441 4,873,207
----------------------------
Total liabilities and stockholders' equity $ 27,286,030 $ 7,006,637
============================
</TABLE>
See accompanying notes.
<PAGE>
CCS, Inc.
Statements of Income
<TABLE>
<CAPTION>
New CCS Old CCS
Period from Period from
August 14, 1999 March 1, 1999 Old CCS
to February 29, to August 13, Year ended February 28
2000 1999 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 21,904,392 $ 12,817,509 $ 31,583,370 $ 31,078,826
Cost of sales 13,103,715 7,901,132 19,863,971 19,369,527
------------------------------------------------------------------
Gross profit 8,800,677 4,916,377 11,719,399 11,709,299
Selling, general and
administrative expenses 5,813,894 4,426,788 10,394,730 9,789,541
Amortization of intangible assets 497,991 - - -
------------------------------------------------------------------
Operating income 2,488,792 489,589 1,324,669 1,919,758
Other expense (income):
Interest expense 512,175 358 3,423 16,328
Other income, net (25,156) (43,806) (46,470) (98,790)
------------------------------------------------------------------
Income before provision for
income taxes 2,001,773 533,037 1,367,716 2,002,220
Provision for income taxes 1,000,000 214,000 568,000 785,000
------------------------------------------------------------------
Net income $ 1,001,773 $ 319,037 $ 799,716 $ 1,217,220
==================================================================
</TABLE>
See accompanying notes.
<PAGE>
CCS, Inc.
Statements of Stockholders' Equity
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C>
Old CCS (Note 1):
Balance at February 28,
1997 222 $ 222 $ 53,250 $ 2,802,021 $ 2,855,493
Issuance of shares 778 778 - - 778
Net income - - - 1,217,220 1,217,220
-------------------------------------------------------------------------
Balance at February 28,
1998 1,000 1,000 53,250 4,019,241 4,073,491
Net income - - - 799,716 799,716
-------------------------------------------------------------------------
Balance at February 28,
1999 1,000 1,000 53,250 4,818,957 4,873,207
Noncash distribution (82) (82) - (657,939) (658,021)
Net income - - - 319,037 319,037
-------------------------------------------------------------------------
Balance at August 13, 1999 918 $ 918 $ 53,250 $ 4,480,055 $ 4,534,223
=========================================================================
New CCS (Note 1):
Acquisition of shares 918 $ 918 $ 11,603,462 $ - $ 11,604,380
Noncash contribution by - - 795,288 - 795,288
Parent
Net income - - - 1,001,773 1,001,773
-------------------------------------------------------------------------
Balance at February 29, 2000 918 $ 918 $ 12,398,750 $ 1,001,773 $ 13,401,441
=========================================================================
</TABLE>
See accompanying notes.
<PAGE>
CCS, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
New CCS Old CCS
Period from Period from
August 14, 1999 March 1, 1999 Old CCS
to February 29, to August 13, Year ended February 28
2000 1999 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 1,001,773 $ 319,037 $ 799,716 $ 1,217,220
Adjustments to reconcile net income
to net cash (used in) provided
by operating activities:
Depreciation and amortization 612,598 100,674 201,500 137,877
Interest funded by Parent 303,788 - - -
Loss on disposal of property
and equipment - 18,436 10,999 (5,701)
Changes in operating assets and
liabilities:
Accounts receivable 130,287 (101,759) 55,811 (12,035)
Inventories (663,798) (653,431) (244,111) (840,225)
Prepaid expenses and other
current assets (109,661) (63,129) 179,132 (266,016)
Due from Parent (4,922,827) - - -
Deposits and other assets (7,988) 3,200 300 (6,915)
Accounts payable 602,092 (608,450) 775,478 493,876
Accrued liabilities 279,243 (86,606) 128,119 88,624
Cash overdraft 801,292 - - -
Income taxes payable 1,064,088 (75,762) 174,643 (732,429)
---------------------------------------------------------------------
Net cash (used in) provided by
operating activities (909,113) (1,147,790) 2,081,587 74,276
Investing activities:
Capital expenditures (490,483) (49,060) (463,339) (197,178)
Proceeds from sale of equipment - - 33,146 16,000
---------------------------------------------------------------------
Net cash used in investing activities (490,483) (49,060) (430,193) (181,178)
Financing activities:
Borrowings under note payable to bank - - 2,718,173 2,832,024
Payments on note payable to bank - - (2,718,173) (2,832,024)
Principal payments on long-term debt - - - (37,531)
---------------------------------------------------------------------
Net cash used in financing activities - - - (37,531)
Net increase (decrease) in cash and
cash equivalents (1,399,596) (1,196,850) 1,651,394 (144,433)
Cash and cash equivalents at
beginning of period 1,399,775 2,596,625 945,231 1,089,664
---------------------------------------------------------------------
Cash and cash equivalents at
end of period $ 179 $ 1,399,775 $ 2,596,625 $ 945,231
=====================================================================
</TABLE>
<PAGE>
CCS, Inc.
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
New CCS Old CCS
Period from Period from
August 14, 1999 March 1, 1999 Old CCS
to February 29, to August 13, Year ended February 28
2000 1999 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 139 $ 358 $ 3,423 $ 16,328
==============================================================
Income taxes $ 144,012 $ 262,437 $ 385,900 $ 1,500,410
==============================================================
Supplemental disclosure of noncash
investing and financing
activities:
Equipment acquired under capital
lease obligations $ 443,531 $ - $ - $ -
==============================================================
Noncash distribution (Note 1) $ - $ 658,021 $ - $ -
==============================================================
</TABLE>
See accompanying notes.
<PAGE>
CCS, Inc.
Notes to Financial Statements
February 29, 2000
1. Organization and Basis of Presentation
CCS, Inc., a California corporation, markets and distributes skateboards,
snowboards and related apparel, shoes and accessories. Orders are obtained
through catalog mailorder and the Internet.
On August 13, 1999, Kubic Marketing, Inc. (Kubic or Parent) acquired, through a
series of transactions, all of the outstanding stock of Central Coast Surfboards
(Old CCS) (the Acquisition). Concurrently, Central Coast Surfboards became known
as CCS, Inc. (New CCS). The consideration paid to acquire Central Coast
Surfboards was $12,500,000 in cash, $4,000,000 in subordinated promissory notes
bearing interest at 9% and 1,080,320 shares of Kubic common stock valued at
$3,964,774. The cash purchase consideration and transaction costs were funded
through the sale of approximately $3,500,000 of Kubic common stock and
incremental borrowings of approximately $9,830,000 (Acquisition Debt) by Kubic.
Substantially all of the assets of CCS, Inc. collateralize the Acquisition Debt
and other borrowings by Kubic under Kubic's bank credit facility.
New CCS and Old CCS are collectively referred to as the Company in the
accompanying financial statements and related notes where the discussion relates
to the continuing business of New CCS and Old CCS.
Kubic accounted for the Acquisition under the purchase method of accounting,
following the accounting treatment in accordance with push-down accounting,
whereby the Company recorded the purchase price allocation and related debt and
debt issue costs in its financial statements effective as of August 13, 1999.
The purchase price has been allocated to assets purchased and liabilities
assumed based upon estimates of the fair market values at the date of
acquisition. Such estimates may be revised at a later date. The excess of the
purchase price over the fair value of the net assets acquired was $16,801,985,
which is being amortized on a straight-line basis over 20 years. Payments of
principal and interest on the Acquisition Debt by the Parent are reflected as
noncash contributions by the Parent in these financial statements.
As part of the transaction, certain assets and liabilities related to a retail
store operated by Old CCS were transferred to a former stockholder of Old CCS.
The net book value of assets distributed in exchange for shares held by the
former stockholder in Old CCS was $658,021. Such transfer included the rights to
the name Central Coast Surfboards.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less and investments in money market accounts to
be cash equivalents.
Revenue Recognition and Accounts Receivable
The Company recognizes revenue when goods are shipped less a provision for
estimated returns. Accounts receivable are mainly comprised of sales shipped on
a COD basis by UPS. These sales are recorded as accounts receivable until UPS
submits the payment collected from the customer.
Advertising Costs
The Company expenses advertising costs, other than the cost of producing and
mailing catalogs, as incurred. Advertising expenses, including the cost of
catalogs, for the periods of August 14, 1999 through February 29, 2000 and March
1, 1999 through August 13, 1999 and for the years ended February 28, 1999 and
1998 were $1,043,346, $790,528, $1,975,013, and $1,628,274, respectively. Costs
associated with producing and mailing catalogs are capitalized and amortized
over the life of the catalog, generally three months or less. Capitalized
catalog costs at February 29, 2000 and February 28, 1999 are $139,774 and
$60,204, respectively.
Inventories
Inventories, net of allowance for excess quantities and obsolescence, primarily
consist of finished goods which are stated at the lower of cost (first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Assets under capitalized leases are
recorded at the present value of the net minimum lease payments. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets, ranging from three to fifteen years. Leasehold improvements and leased
assets related to capital leases are amortized using the straight-line method
generally over the term of the related lease.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Property and Equipment (continued)
Depreciation expense for the periods of August 14, 1999 through February 29,
2000 and March 1, 1999 through August 13, 1999, and for the years ended February
28, 1999 and 1998 amounted to $115,935, $99,592, $201,500, and $137,877,
respectively. Maintenance and repair costs are charged to expenses as incurred.
Intangible and Long-Lived Assets
The excess of purchase price over the fair value of net assets acquired related
to the Acquisition (Note 1) has been pushed down to the Company's books and is
being amortized on a straight-line basis over 20 years. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
the Company periodically evaluates whether indicators of impairment are present
and then whether the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount, which would require that an impairment
loss be recorded. There were no indications of impairment at February 29, 2000.
Deferred financing costs in the amount of $98,090 related to the Acquisition
(Note 1) have been pushed down to the Company's books and are being amortized
using the straight-line method over the five-year term of the related debt.
Deferred financing costs are included in other long-term assets in the balance
sheets.
Taxes on Income
Beginning August 14, 1999, CCS, Inc. is included in a consolidated tax return
with other members of a controlled group. Current and deferred income taxes have
been allocated to the Company based on a separate return basis, as if CCS, Inc.
had not been included in a consolidated return with its Parent. Amounts
reflecting the allocated expense are due to the Parent. Prior to August 14,
1999, Old CCS used the liability method to compute differences between tax basis
of assets and liabilities and the related financial reporting amounts using
currently enacted tax laws and rates.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Fair Values and Derivative Transactions
The Company believes that the fair value of its monetary assets and liabilities
approximates the carrying value in these financial instruments. The Company does
not engage in derivative transactions.
Recent Accounting Pronouncements
The Company is not aware of any pending accounting pronouncements that it
believes will have a material impact on the Company's financial position,
results of operations or cash flows, including the provisions of Staff
Accounting Bulletin 101, which was recently issued by the Securities and
Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
3. Property and Equipment
Property and equipment consist of the following:
New CCS Old CCS
February 29, February 28,
2000 1999
-------------------------------
Machinery and equipment $ 1,133,043 $ 815,079
Leasehold improvements 272,796 263,036
Furniture and fixtures 151,730 161,229
Vehicles 16,315 169,447
-------------------------------
Total 1,573,884 1,408,791
Accumulated depreciation and amortization (96,500) (505,027)
===============================
Property and equipment, net $ 1,477,384 903,764
===============================
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
3. Property and Equipment (continued)
In connection with the Acquisition, property and equipment was recorded at fair
market value and the related accumulated depreciation was eliminated.
The Company leases equipment under capital leases. At February 29, 2000, assets
acquired under capital leases have an original cost of $443,531. Such equipment
had not been placed into service as of February 29, 2000.
4. Bank Borrowings
Prior to the Acquisition (Note 1), the Company had a credit agreement with a
bank providing for borrowings on a revolving line of up to $900,000 at 1.00%
above the bank's reference rate, as defined. The line was secured by accounts
receivable, inventories and equipment, and was guaranteed by the Old CCS
stockholders. There was no amount outstanding under this line at February 29,
1999. The line was repaid and closed in connection with the Acquisition (Note
1).
Acquisition Debt (Note 1) of $9,830,000 has been pushed down to the Company's
books as substantially all of the assets of the Company collateralize the debt
of its Parent. The bank term debt is payable in monthly installments over five
years beginning September 1, 1999 and bears interest at either 1.75% over the
Base Rate (as defined) or 3.5% over the Euro Rate (as defined) (9.75% at
February 29, 2000).
Maturities of bank term debt are as follows:
Year ending
-----------
2001 $ 1,081,300
2002 1,356,540
2003 1,533,480
2004 1,533,480
2005 3,833,700
============
$ 9,338,500
============
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
5. Income Taxes
Provision for income taxes is as follows:
<TABLE>
<CAPTION>
New CCS Old CCS
Period from Period from
August 14, 1999 March 1, 1999 Old CCS
to February 29, to August 13, Year ended February 28
2000 1999 1999 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ 912,000 $ 154,000 $ 435,000 $ 584,000
State 241,000 51,000 125,000 176,000
----------------------------------------------------------------
Total current 1,153,000 205,000 560,000 760,000
Deferred:
Federal (134,000) 13,000 5,000 26,000
State (19,000) (4,000) 3,000 (1,000)
----------------------------------------------------------------
Total deferred (153,000) 9,000 8,000 25,000
----------------------------------------------------------------
$ 1,000,000 $ 214,000 $ 568,000 $ 785,000
================================================================
</TABLE>
Reconciliation between the statutory federal income tax rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
New CCS Old CCS
Period from Period from
August 14, 1999 March 1, 1999 Old CCS
to February 29, to August 13, Year ended February 28
2000 1999 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tax computed at statutory rate 34.0% 34.0% 34.0% 34.0%
State income tax net of federal
income tax benefit 5.8% 5.8% 5.8% 5.8%
Nondeductible amortization 8.3% - - -
Other, net 1.8% 0.3% 1.7% (0.6)%
==================================================================
49.9% 40.1% 41.5% 39.2%
==================================================================
</TABLE>
The Company's deferred tax liability at February 29, 2000 and February 28, 1999,
arises principally due to state income taxes, inventory costing, reserves and
depreciation.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
6. Commitments and Contingencies
Leases
The Company currently leases its office space and warehousing facilities under
operating leases that expire at various dates through 2002.
The Company leases certain computer equipment under agreements classified as
capital leases. Such equipment leases have bargain purchase options at the end
of the original lease terms.
Future minimum payments, by fiscal year and in the aggregate, under
noncancellable capital and operating leases with initial or remaining terms of
one year or more consist of the following at February 29, 2000:
Capital Operating
Year ending Leases Leases
--------------------------------------------------------------------------------
2001 $ 348,549 $ 430,110
2002 70,140 356,190
2003 70,140 268,320
2004 - 268,320
2005 - 134,160
------------------------------
Total minimum lease payments 488,829 $ 1,457,100
==============
Less amount representing interest (45,298)
-------------
Present value of net minimum payments 443,531
Less current portion (317,383)
-------------
$ 126,148
=============
The Company's rental expense for operating leases for the period of August 14,
1999 through February 29, 2000, March 1, 1999 through August 13, 1999, and for
the years ended February 28, 1999 and 1998 was $224,011, $190,436, $476,879, and
$307,193, respectively.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
6. Commitments and Contingencies (continued)
Contingencies
In the ordinary course of business, the Company is subject to various legal
proceedings and claims. In the opinion of management, the amount of ultimate
liability with respect to these proceedings will not materially affect the
financial position, results of operations or cash flows of the Company.
Taxes
The Company is currently under examination by the Internal Revenue Service for
the tax year ended February 28, 1999. Management believes that there will be no
significant impact on the financial position of the Company as a result of the
ultimate outcome of this examination.
7. Profit Sharing Plan
The Company established a profit sharing plan in 1994. The plan covers all
full-time employees who have been with the Company for at least one year and are
21 years of age. All contributions to the plan are at the discretion of the
Company. The Company elected to contribute $77,277 to the plan for the
twelve-month period ended February 29, 2000 ($73,127 was expensed for the period
of August 14, 1999 through February 29, 2000 and $4,150 was expensed for the
period of March 1, 1999 through August 13, 1999). Amounts contributed and
expensed for the years ended February 28, 1999 and 1998 were $157,803 and
$160,876, respectively.
8. Related Party Transactions
The Company, in the ordinary course of business, purchases product from various
subsidiaries of its Parent. Such purchases occurred both prior to and subsequent
to the Acquisition (Note 1) and aggregated $1,264,116, $930,952, and $2,141,531
for the periods of August 14, 1999 through February 29, 2000 and March 1, 1999
through August 13, 1999 and for the year ended February 28, 1999, respectively.
Amounts due to these related parties for product purchases at February 29, 2000
totaled $225,553 and at February 28, 1999 totaled $351.
<PAGE>
CCS, Inc.
Notes to Financial Statements (Continued)
8. Related Party Transactions (continued)
On February 17, 1999, the Company had entered into a loan agreement with one of
its stockholders, in which it lent the stockholder $100,000 with interest
payable monthly at the rate of 5.87%. The principal balance of this note was due
August 17, 1999 and was paid on that date.
9. Significant Suppliers
During the periods of August 14, 1999 through February 29, 2000, March 1, 1999
through August 13, 1999, and for the year ended February 28, 1999, purchases
from five suppliers represented 24%, 30% and 21% of cost of sales,
respectively.
10. Subsequent Event - Acquisition (unaudited)
On June 19, 2000, New CCS changed its name from CCS, Inc. to Phase Three, Inc.
Through a series of transactions, the Company was sold on July 18, 2000 to Alloy
Online, Inc. (Alloy) for $10,000,000 cash, 3,267,981 shares of Alloy common
stock and contingent consideration in the form of a warrant to purchase
additional Alloy common shares. The $10,000,000 cash consideration was used to
pay off the Acquisition Debt (Note 1).
<PAGE>
Interim Financial Statements at May 31, 2000 and for the three month periods
ended May 31, 2000 and May 31, 1999
CCS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, 2000 Feb. 29, 2000
------------ -------------
ASSETS (unaudited) (audited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 209,959 $ 179
Accounts receivable, net 95,970 16,437
Inventories, net 4,371,217 4,123,608
Prepaids and other current assets 508,029 316,830
------------ -------------
Total current assets 5,185,175 4,457,054
------------ -------------
Due from Parent 4,738,852 4,922,827
Property and equipment, net 1,754,038 1,477,384
Goodwill, net 16,104,719 16,314,744
Deposits and other assets, net 109,046 114,021
------------ -------------
Total assets $ 27,891,830 $ 27,286,030
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 4,254,291 $ 4,102,558
Current portion of bank term debt 1,130,450 1,081,300
Current portion of obligation under capitalized leases 174,995 317,383
------------ -------------
Total current liabilities 5,559,736 5,501,241
------------ -------------
Bank term debt 7,962,300 8,257,200
Obligation under capitalized leases, less current portion 348,721 126,148
------------ -------------
Total liabilities 13,870,757 13,884,589
------------ -------------
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value 918 918
Additional paid-in capital 12,780,881 12,398,750
Retained earnings 1,239,274 1,001,773
------------ -------------
Total stockholders' equity 14,021,073 13,401,441
------------ -------------
Total liabilities and stockholders' equity $ 27,891,830 $ 27,286,030
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CCS, INC.
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the three months ended May 31,
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 9,617,662 $ 6,724,785
Cost of sales 5,961,196 4,111,287
------------ ------------
Gross profit 3,656,466 2,613,498
Selling, general and administrative expenses 2,657,790 2,326,771
Amortization of intangible assets 214,929 -
------------ ------------
Operating income 783,747 286,727
OTHER EXPENSE (INCOME):
Interest expense, net 245,782 (24,133)
Intercompany charges 105,000 -
------------ ------------
Income before provision for income taxes 432,965 310,860
Provision for income taxes 195,464 125,000
------------ ------------
Net income $ 237,501 $ 185,860
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CCS, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Additional
Stock Stock Paid-In Retained
Shares Amount Capital Earnings Total
---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Old CCS (Note 1):
Balance at February 28, 1997 222 $ 222 $ 53,250 $ 2,802,021 $ 2,855,493
Issuance of shares 778 778 - - 778
Net income - - - 1,217,220 1,217,220
-------- ---------- ----------- ----------- -------------
Balance at February 28, 1998 1,000 1,000 53,250 4,019,241 4,073,491
Net income - - - 799,716 799,716
-------- ---------- ----------- ----------- -------------
Balance at February 28, 1999 1,000 1,000 53,250 4,818,957 4,873,207
Noncash distribution (82) (82) - (657,939) (658,021)
Net income - - - 319,037 319,037
-------- ---------- ----------- ----------- -------------
Balance at August 13, 1999 918 $ 918 $ 53,250 $ 4,480,055 $ 4,534,223
======== ========== =========== =========== =============
New CCS (Note 1):
Acquisition of shares 918 918 11,603,462 - 11,604,380
Noncash contribution by Parent - - 795,288 - 795,288
Net income - - - 1,001,773 1,001,773
-------- ---------- ----------- ----------- -------------
Balance at February 29, 2000 918 $ 918 $12,398,750 $ 1,001,773 $ 13,401,441
Noncash contribution by Parent (unaudited) - - 382,131 - 382,131
Net Income (unaudited) - - - 237,501 237,501
-------- ---------- ----------- ----------- -------------
Balance at May 31, 2000 (unaudited) 918 $ 918 $12,780,881 $ 1,239,274 $ 14,021,073
======== ========== =========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CCS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended May 31,
----------------------------------
2000 1999
----------------------------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 237,501 $ 185,860
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 222,783 53,800
Interest funded by Parent 136,381 -
Changes in operating assets and liabilities:
Accounts receivable (79,533) (12,870)
Inventories (247,609) 976,543
Prepaid expenses and other current assets (10,779) (19,806)
Due from Parent 183,975 -
Deposits and other assets 71 3,200
Accounts payable and accrued liabilities (28,688) (1,147,423)
------------ ------------
Net cash provided by operating activities 414,102 39,304
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (89,602) (24,686)
------------ ------------
Net cash used in investing activities (89,602) (24,686)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capitalized leases (114,720) -
------------ ------------
Net cash used in financing activities (114,720) -
------------ ------------
Net increase in cash and cash equivalents 209,780 14,618
Cash and cash equivalents at beginning of period 179 2,596,625
------------ ------------
Cash and cash equivalents at end of period $ 209,959 $ 2,611,243
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest $ 0 $ 358
============ ============
Income taxes $ 0 $ 0
============ ============
Non-cash financing related to capital leases $ 194,905 $ 0
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
CCS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
CCS, Inc., (the "Company") markets and distributes skateboards, snowboards and
related apparel, shoes and accessories. Orders are obtained through catalog
mailorder and the Internet.
On August 13, 1999, Kubic Marketing, Inc., ("Kubic" or "Parent") acquired,
through a series of transactions, all of the outstanding stock of Central Coast
Surfboards ("Old CCS") ("the Acquisition"). Concurrently, Central Coast
Surfboards became known as CCS, Inc. ("New CCS"). The consideration paid to
acquire Central Coast Surfboards was $12,500,000 in cash, $4,000,000 in
subordinated promissory notes bearing interest at 9% and 1,080,320 shares of
Kubic common stock valued at $3,964,774. The cash purchase consideration and
transaction costs were funded through the sale of approximately $3,500,000 of
Kubic common stock and incremental borrowings of approximately $9,830,000
("Acquisition Debt") by Kubic. Substantially all of the assets of CCS, Inc.
collateralize the Acquisition Debt and other borrowings by Kubic under Kubic's
bank credit facility.
New CCS and Old CCS are collectively referred to as the Company in the
accompanying financial statements and related notes where the discussion relates
to the continuing business of New CCS and Old CCS.
Kubic accounted for the Acquisition under the purchase method of accounting,
following the accounting treatment in accordance with push-down accounting,
whereby the Company recorded the purchase price allocation and related debt and
debt issue costs in its financial statements effective as of August 13, 1999.
The purchase price has been allocated to assets purchased and liabilities
assumed based upon estimates of the fair market values at the date of
acquisition. Such estimates may be revised at a later date. The excess of the
purchase price over the fair value of the net assets acquired was $16,801,985,
which is being amortized on a straight-line basis over 20 years. Payments of
principal and interest on the Acquisition Debt by the Parent are reflected as
noncash contributions by the Parent in these financial statements.
As part of the transaction, certain assets and liabilities related to a retail
store operated by Old CCS were transferred to a former stockholder of Old CCS.
The net book value of assets distributed in exchange for shares held by the
former stockholder in Old CCS was $658,021. Such transfer included the rights to
the name Central Coast Surfboards.
The accompanying financial statements have been prepared by CCS, Inc., without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, comprehensive losses and cash flows at May 31, 2000 and
for all periods presented have been made. The results of operations for the
periods ended May 31, 2000 and 1999 are not necessarily indicative of the
operating results for a full year.
Certain information and footnote disclosures prepared in accordance with
generally accepted accounting principles and normally included in the financial
statements have been condensed or omitted. It is suggested that these financial
statements and notes be read in conjunction with the financial statements and
notes related to the Company's fiscal year ended February 29, 2000.
2. COMPREHENSIVE INCOME
The Company observes the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
companies to report all changes in equity during a period, except those
resulting from investments by owners and distributions to owners, for the period
in which they are recognized. Comprehensive income is the total of net income
and all other non-owner changes in equity (or other comprehensive income) such
as unrealized gains or losses on securities classified as available for sale,
foreign currency translation adjustments and minimum pension liability
adjustments. Other comprehensive income must be reported on the face of annual
financial statements or in the case of interim reporting, the footnote approach
may be utilized. For the quarters ended May 31, 2000 and 1999, the Company's
operations did not give rise to material items includible in comprehensive
income which were not already included in net income. Accordingly, the Company's
comprehensive income is the same as its net income for all periods presented.
<PAGE>
CCS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company is not aware of any pending accounting pronouncements that it
believes will have a material impact on the Company's financial position,
results of operations or cash flows, including the provisions of Staff
Accounting Bulletin 101, which was recently issued by the Securities and
Exchange Commission.
The Company complies with the provisions of Emerging Issues Task Force ("EITF")
Issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs". The
purpose of this issue discussion was to clarify the classification of shipping
and handling revenues and costs. The consensus reached was that all shipping and
handling billed to customers is revenue. No consensus was reached on the
classification of shipping and handling costs. The Company's historical policy
has been consistent with the consensus reached by the EITF and, accordingly, no
future adjustment is expected.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company is required to adopt the provisions of SFAS No.
133 commencing March 1, 2001. The Company currently does not use derivative
instruments or engage in hedging activities and, accordingly, does not expect
that this statement will have an impact on its consolidated financial statements
when adopted.
4. SUBSEQUENT EVENT - NAME CHANGE AND ACQUISITION (UNAUDITED)
On June 19, 2000, New CCS changed its name from CCS, Inc. to Phase Three, Inc.
Through a series of transactions, the Company was sold on July 18, 2000 to Alloy
Online, Inc., ("Alloy") for $10,000,000 cash, 3,267,981 of Alloy common stock
and contingent consideration in the form of a warrant to purchase additional
Alloy common shares. The $10,000,000 cash consideration was used to pay off the
Acquisition Debt (Note 1).
