UNZIPPED APPAREL, LLC
REVIEWED FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 2000
<PAGE>
Unzipped Apparel, LLC
Contents
Accountants' Report on Reviewed Financial Statements 3
Reviewed Financial Statements
Balance Sheet 4
Statement of Operations 5
Statement of Members' Deficit 6
Statement of Cash Flows 7
Notes to Reviewed Financial Statements 8-12
2
<PAGE>
Accountants' Report on Reviewed Financial Statements
Board of Directors
Unzipped Apparel, LLC
We have reviewed the accompanying balance sheet of Unzipped Apparel, LLC as of
January 31, 2000, and the related statements of operations, members' deficit,
and cash flows for the year then ended, in accordance with Statements on
Standards for Accounting and Review Services issued by the American Institute of
Certified Public Accountants. All information included in these financial
statements is the representation of the Company's management.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the combined financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/BDO Seidman, LLP
New York, NY
July 27, 2000, except Note 4 which
is as of October 18, 2000
3
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Unzipped Apparel, LLC
Reviewed Balance Sheet
January 31, 2000
<TABLE>
<S> <C>
Assets (Note 4)
Current assets:
Cash $ 61,498
Accounts receivable 36,698
Due from factor, net of $640,892 allowance for customer credits (Note 2) 4,180,708
Inventory 6,719,259
------------
Total current assets 10,998,163
Property and equipment, net of accumulated depreciation (Note 3) 233,640
Other assets 22,677
------------
Total assets $ 11,254,480
============
Liabilities and Members' Equity
Current liabilities:
Accounts payable $ 49,520
Accrued expenses 105,272
Revolving credit agreement (Note 4) 8,620,137
Due to related parties (Notes 4 and 6) 2,123,042
------------
Total current liabilities 10,897,971
Due to related party (Notes 4 and 6) 3,500,000
Commitments and contingencies (Note 5)
Members' equity:
Contributions 2,192,048
Accumulated deficit (5,335,539)
------------
Total members' deficit (3,143,491)
------------
$ 11,254,480
============
</TABLE>
See accompanying notes to reviewed financial statements.
4
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Unzipped Apparel, LLC
Reviewed Statement of Operations
Year Ended January 31, 2000
Net sales $ 32,111,939
Cost of goods sold (Note 6) 28,065,924
------------
Gross profit 4,046,015
Operating expenses 7,315,752
------------
Loss from operations (3,269,737)
Interest expense, net (586,785)
Loss on disposal of fixed assets (Note 7) (389,453)
------------
Net loss $ (4,245,975)
============
See accompanying notes to reviewed financial statements.
5
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Unzipped Apparel, LLC
Reviewed Statement of Members' Deficit
Michael
Sweet Caruso and Total
Sportswear, Company, Members'
LLC Incorporated Equity
(50%) (50%) (Deficit)
----------- ----------- -----------
Balance at January 31, 1999 $ 51,242 $ 51,242 $ 102,484
Capital contributions 500,000 500,000 1,000,000
Allocation of net loss (2,122,987) (2,122,988) (4,245,975)
----------- ----------- -----------
Balance at January 31, 2000 $(1,571,745) $(1,571,746) $(3,143,491)
=========== =========== ===========
See accompanying notes to reviewed financial statements.
6
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Unzipped Apparel, LLC
Reviewed Statement of Cash Flows
Year Ended January 31, 2000
Cash flows from operating activities
Net loss $(4,245,975)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 71,772
Loss on disposal of assets 389,453
Allowance for customer credits 640,892
Changes in operating assets and liabilities:
Accounts receivable (36,698)
Due from factor (2,107,133)
Inventory (5,074,787)
Due from related parties 4,323,639
Account payable (4,228)
Accrued expenses 27,395
-----------
Net cash used in operating activities (6,015,670)
-----------
Cash flows from investing activities
Acquisition of property and equipment (608,347)
Deposits (4,359)
-----------
Net cash used in investing activities (612,706)
-----------
Cash flows from financing activities
Borrowings under revolving credit agreement 6,680,846
-----------
Net cash provided by financing activities 6,680,846
-----------
Net increase in cash 52,470
Cash at beginning of period 9,028
-----------
Cash at end of period $ 61,498
===========
Supplemental disclosures of cash flow information
Cash paid for interest $ 586,785
===========
Non cash:
Capital contributions of $1,000,000 that were applied to accounts
payable, were made by related parties.
See accompanying notes to reviewed financial statements.
7
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Unzipped Apparel, LLC
Notes to Reviewed Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization of Basis of Presentation
Unzipped Apparel LLC, a Delaware limited liability company (the "Company"), was
formed on September 17, 1998, between Sweet Sportswear, LLC (Sweet) and Michael
Caruso & Co., Inc. (Caruso), a subsidiary of Candie's, Inc. (Candie's), to
contract, produce, distribute and market products with the Candie's and Bongo
trademarks. The Company entered into an agreement (the Operating Agreement) with
Sweet and Caruso, and obtained an exclusive license to use the trademarks
effective September 17, 1998. The Company uses Azteca Production International
(Azteca), a related party, to produce substantially all of its goods. The
Company's LLC agreement specifies that the Company will terminate on December
31, 2020, unless terminated earlier based on provisions in the Operating
Agreement. The Company has provided for a mandatory sale of Sweet's interest in
the Company to Candie's on January 31, 2003. Under the Company's LLC agreement,
profits and losses are allocated and cash is distributed equally according to
each member's ownership interest in the Company.
During the year ended January 31, 2000, the Company terminated its Candie's
division as well as the Caruso license for Candie's products. It continues to
sell under the Bongo trademarks.
Revenue Recognition
Revenues are recorded, net of anticipated returns, allowances and discounts, at
the time of shipment of merchandise.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. The amount charged to
advertising expense during the year ended January 31, 2000 was approximately
$1,054,000.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consists exclusively of finished goods.
Property and Equipment
Property and equipment is recorded at cost. Depreciation of property and
equipment is being provided by use of the straight-line method over the
estimated useful lives of the assets which range from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
lesser of their estimated useful lives or the term of the lease. Property and
equipment includes capital lease obligations which are by their terms equivalent
to purchase agreements.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original
maturity of three months or less when purchased.
8
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Unzipped Apparel, LLC
Notes to Reviewed Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
No provision has been made in the accompanying financial statements for Federal,
state or local taxes of the members. Each member is individually responsible for
reporting their share of each item of income, gain, loss, deduction, or credit.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration of
credit risk consist primarily of cash and cash equivalents, and amounts due from
the factor. In order to minimize the risk of loss, the Company assigned accounts
receivable to a factor who assumes all credit risk with respect to collections
on nonrecourse receivables. The Company generally does not require collateral
from its customers.
Significant Customers
Individual customers aggregating in excess of 10% of net sales for the period
ended January 31, 2000, are summarized as follows:
Customer A 16%
Customer B 11%
Customer C 10%
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" (SFAS 121), which requires impairment losses to be recorded
on long-lived assets used in operations when indications of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. In such cases, the amount of
the impairment is to be determined based on the relative fair value of the
impaired assets. Statement 121 also addresses the accounting for long-lived
assets to be disposed of. No equipment losses have been incurred through January
31, 2000.
NOTE 2--DUE FROM FACTOR
The Company entered into a factoring agreement with Congress Talcott Corporation
and a credit agreement with Congress Financial (Western) (collectively,
Congress), effective October 9, 1998 and December 1, 1998, respectively.
Effective March 31, 1999, Congress Talcott Corporation was acquired by CIT
Group/Commercial Services, Inc. (CIT). The Company assigns to CIT, without
recourse for the financial inability of the customer to pay at maturity, all
trade receivables of the Company acceptable to CIT at their net invoice price
less a commission of 0.4% of the gross amount of each receivable for the first
60-day term. Extended terms approved by CIT beyond 60 days require an additional
25% increase on the factor commission for each additional 30 days or portion
thereof of extended terms or additional dating. The Company bears the entire
risk of nonapproved receivables and accounts receivable returned by the factor
to the Company for disputed items. The factor agreement has an initial term of
two years. All rights of Congress Talcott Corporation under the original
agreement have been assigned to CIT.
9
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Unzipped Apparel, LLC
Notes to Reviewed Financial Statements
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 2000, consists of the following:
Amount
--------
Machinery and equipment $ 1,104
Computer equipment 42,275
Furniture and fixtures 213,408
Leasehold improvements 8,435
--------
265,222
Less accumulated depreciation 31,582
--------
$233,640
========
NOTE 4--REVOLVING CREDIT AGREEMENT
On December 1, 1998, the Company entered into a credit facility with Congress
Financial (Congress) with an initial term of two years. Under the facility as
amended, the Company may borrow up to $10,000,000 under revolving loans.
Borrowings are limited by advance rates against eligible accounts receivable and
inventory balances, as defined. Under the facility, the Company may also arrange
for letters of credit. The borrowings bear interest at the lender's prime rate
or at a rate of 2.25% per annum in excess of the Eurodollar rate.
Borrowings under the facility are secured by substantially all of the assets of
the Company, and are guaranteed by the Vice-chairman/manager of the Company and
his family trust, with such guarantee being limited to $500,000. Borrowings up
to a maximum of $500,000 are also guaranteed by Candie's.
At January 31, 2000, no additional funds were available to be borrowed under the
revolving credit agreement.
The facility requires the Company to be in compliance with certain financial and
nonfinancial covenants. The Company was in default of its net worth financial
covenant at January 31, 2000. On October 18, 2000 Congress retroactively waived
the covenant. As a condition to the waiver, Azteca agreed to subordinate to
Congress $3,500,000 of amounts payable at January 31, 2000 by Unzipped to
Azteca. Additionally, the credit facility term was extended to October 31, 2001
(Note 8).
NOTE 5--COMMITMENTS AND CONTINGENCIES
Leases
The Company occupies its office and showroom facilities in New York City in a
location leased by Caruso. The Company pays monthly rent pursuant to the terms
of the Caruso lease and remits payments directly to the lessor. The lease
expires in July 2001.
In addition to the lease referred to above, in April 1999, the Company and an
affiliated company of Candie's entered into a noncancelable lease for additional
office and showroom space which expires March 2003. See Note 7.
Total rent expenses charged to operations for the year ended January 31, 2000,
aggregated $273,000.
10
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Unzipped Apparel, LLC
Notes to Reviewed Financial Statements
NOTE 5--COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum payments for noncancelable operating leases referred to above
consisted of the following:
Operating
Year ending January 31, Leases
----------------------- ---------
2001 $ 339,840
2002 294,840
2003 249,840
2004 59,840
2005 16,380
---------
Total minimum lease payments $ 960,740
=========
NOTE 6--RELATED PARTY TRANSACTIONS
The Company has a supply agreement with Azteca for the exclusive development,
manufacturing, and supply of certain products bearing the Candie's and Bongo
brand names (see Note 7). As consideration for the development of the products,
the Company pays Azteca pursuant to a pricing schedule. The Company purchases
products from Azteca at a price which represents Azteca's cost plus 7%. The
supply agreement was consummated upon the Company's formation and extends
through January 31, 2003. Purchases for the year ended January 31, 2000,
approximated $33,100,000.
Azteca also allocated expenses to the Company for the Company's use of a portion
of Azteca's office space, design and production team and support personnel. The
Company also receives executive management services from employees of Azteca and
Candie's. Such services, provided for the benefit of Sweet and Caruso, are
performed without a charge to the Company. Expenses allocated to the Company by
Azteca approximated $837,000 for the year ended January 31, 2000. Candie's and
Caruso also permitted the Company to use the Bongo and Candie's trademarks for
apparel products without charge to the Company.
Pursuant to the Operating Agreement, the Company recorded advertising expense of
approximately $990,000 equal to 3% of defined net sales relating to advertising
and promotion of the Company's products primarily by Candie's.
The Company has a distribution agreement with Apparel Distribution Services
(ADS), a related party. The agreement provides for a $0.35 per unit fee for
warehousing and distribution functions and $0.15 per unit fee for processing and
invoicing orders. The agreement also provides for reimbursement for certain
operating costs incurred by ADS and charges for special handling fees at hourly
rates approved by management. These rates can be adjusted annually by the
parties to reflect changes in economic factors. The distribution agreement was
consummated upon the Company's formation and extends through December 31, 2002.
For the period ended January 31, 2000, distribution expenses under the agreement
were approximately $2,194,000, the amount due to ADS below represents unpaid
distribution fees at January 31, 2000.
11
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Unzipped Apparel, LLC
Notes to Reviewed Financial Statements
NOTE 6--RELATED PARTY TRANSACTIONS (Continued)
Amounts due from (to) related parties at January 31, 2000, consist of the
following:
Amount
----------
Current:
Azteca $ 261,467
Candie's 800,000
ADS 967,094
Commerce 94,481
----------
2,123,042
Non-current:
Azteca 3,500,000
----------
$5,623,043
==========
As a result of the refinancing of amounts payable to Azteca as described in Note
8, the amount has been reclassified as non-current retroactively as of January
31, 2000.
The Company occupies office space in a building rented by Commerce. Rent expense
allocated to the Company from Commerce for the period ended January 31, 2000 was
approximately $42,500.
NOTE 7--TERMINATION OF CANDIE'S APPAREL DIVISION
During the year ended January 31, 2000, the Company's Members committed to close
its Candie's apparel division. In connection with the closure, the Company
wrote-off approximately $368,000 of leasehold improvements and other equipment
which was abandoned when the Company ceased using its showroom.
Candie's has taken title to the leasehold improvements and assumed the
obligation of the showroom and various office equipment contained therein.
Additionally, in connection with the termination of the Candie's division, the
Company recorded a reserve for obsolete and discontinued inventory of
approximately $458,000 and an allowance for customer credits and returns of
approximately $245,000. These amounts are included in the cost of goods and net
sales components of the statement of operations, respectively, for the year
ended January 31, 2000.
NOTE 8--SUBSEQUENT EVENTS
As of May 31, 2000, the Company entered into a subordinated loan agreement with
Azteca and reclassified amounts payable to Azteca in the amount of $3,500,000
into a note bearing interest of 4% over prime. The note is payable on September
30, 2001 and interest is payable monthly beginning September 1, 2000.
12
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UNZIPPED APPAREL, LLC
FINANCIAL STATEMENTS
PERIOD FROM SEPTEMBER 17, 1998 (INCEPTION)
THROUGH JANUARY 31, 1999
<PAGE>
Unzipped Apparel, LLC
Contents
Report of independent auditors 3
Financial statements
Balance sheet 4
Statement of operations 5
Statement of members' equity 6
Statement of cash flows 7
Notes to financial statements 8-12
2
<PAGE>
Report of Independent Auditors
Board of Directors
Unzipped Apparel, LLC
We have audited the accompanying balance sheet of Unzipped Apparel, LLC as of
January 31, 1999, and the related statements of operations, members' equity and
cash flows for the period from September 17, 1998 (inception) through January
31, 1999. These financial statements are the responsibility of the management of
Unzipped Apparel, LLC. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 Unzipped Apparel, LLC as of
January 31, 1999, and the results of its operations and its cash flows for the
period from September 17, 1998 (inception) through January 31, 1999, in
conformity with generally accepted accounting principles.
/s/BDO Seidman, LLP
New York, NY
April 19, 2000
3
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Unzipped Apparel, LLC
Balance Sheet
January 31, 1999
<TABLE>
<S> <C>
Assets (Note 4)
Current assets:
Cash $ 9,028
Due from related party (Note 6) 96,024
Due from factor, net of $130,000 allowance for customer credits (Note 2) 1,714,457
Inventory 1,644,472
-----------
Total current assets 3,463,991
Property and equipment, net of accumulated depreciation of $2,170 (Note 3) 86,518
Other assets 18,318
-----------
Total assets $ 3,568,827
===========
Liabilities and members' equity
Current liabilities:
Accounts payable $ 53,748
Accrued expenses 77,877
Revolving credit agreement (Note 4) 1,939,291
Due to related parties (Note 6) 1,395,427
-----------
Total current liabilities 3,466,343
Commitments and contingencies (Notes 5 and 7)
Members' equity:
Contributions 1,192,048
Accumulated deficit (1,089,564)
-----------
Total members' equity 102,484
-----------
$ 3,568,827
===========
</TABLE>
See accompanying notes.
4
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Unzipped Apparel, LLC
Statement of Operations
Period From September 17, 1998 (Inception) Through January 31, 1999
Net sales $ 2,590,185
Cost of goods sold 2,469,821
-----------
Gross profit 120,364
Operating expenses 1,203,423
-----------
Loss from operations (1,083,059)
Interest expense, net (6,505)
-----------
Net loss $(1,089,564)
===========
See accompanying notes.
5
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Unzipped Apparel, LLC
Statement of Members' Equity
<TABLE>
<CAPTION>
Michael
Sweet Caruso and
Sportswear, Company, Total
LLC Incorporated Members'
(50%) (50%) Equity
-----------------------------------------
<S> <C> <C> <C>
Balance at September 17, 1998 (inception) $ -- $ -- $ --
Contributions at formation 500,000 500,000 1,000,000
Capital contributions 96,024 96,024 192,048
Allocation of net loss (544,782) (544,782) (1,089,564)
-----------------------------------------
Balance at January 31, 1999 $ 51,242 $ 51,242 $ 102,484
=========================================
</TABLE>
See accompanying notes.
6
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Unzipped Apparel, LLC
Statement of Cash Flows
Period From September 17, 1998 (Inception) Through January 31, 1999
Cash flows from operating activities
Net loss $(1,089,564)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 2,170
Allowance for customer credits 130,000
Changes in operating assets and liabilities:
Accounts receivable (1,844,467)
Inventory (1,548,448)
Due to related parties 1,395,427
Account payable 53,748
Accrued expenses 77,877
-----------
Net cash used in operating activities (2,823,257)
-----------
Cash flows from investing activities
Acquisition of property and equipment (88,688)
Deposits (18,318)
-----------
Net cash used in investing activities (107,006)
-----------
Cash flows from financing activities
Borrowings under revolving credit agreement 1,939,291
Contributed capital 1,000,000
-----------
Net cash provided by financing activities 2,939,291
-----------
Net increase in cash 9,028
Cash at beginning of period --
-----------
Cash at end of period $ 9,028
===========
Schedule of noncash investing and financing activities
Noncash equity contributions $ 192,048
===========
Supplemental disclosures of cash flow information
Cash paid for interest $ 9,596
===========
See accompanying notes.
7
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Unzipped Apparel, LLC
Notes to Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization of Basis of Presentation
Unzipped Apparel LLC, a Delaware limited liability company (the "Company"), was
formed on September 17, 1998, between Sweet Sportswear, LLC (Sweet) and Michael
Caruso & Co., Inc. (Caruso), a subsidiary of Candie's, Inc. (Candie's), to
contract, produce, distribute and market products with the Candie's and Bongo
trademarks. The Company entered into an agreement (the Operating Agreement) with
Sweet and Caruso, and obtained an exclusive license to use the trademarks
effective September 17, 1998. The Company uses Azteca Production International
(Azteca), a related party, to produce substantially all of its goods. The
Company's LLC agreement specifies that the Company will terminate on December
31, 2020, unless terminated earlier based on provisions in the Operating
Agreement. The Company has provided for a mandatory sale of Sweet's interest in
the Company to Candie's on January 31, 2003. Under the Company's LLC agreement,
profits and losses are allocated and cash is distributed equally according to
each member's ownership interest in the Company.
Revenue Recognition
Revenues are recorded, net of anticipated returns, allowances and discounts, at
the time of shipment of merchandise.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Advertising Costs
The Company expenses advertising costs as incurred. The amount charged to
advertising expense during the period ended January 31, 1999 was approximately
$118,000.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market
and consist exclusively of finished goods.
Property and Equipment
Property and equipment is recorded at cost. Depreciation of property and
equipment is being provided by use of the straight-line method over the
estimated useful lives of the assets which range from three to seven years.
Leasehold improvements are amortized using the straight-line method over the
lesser of their estimated useful lives or the term of the lease. Property and
equipment includes capital lease obligations which are by their terms equivalent
to purchase agreement.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original
maturity of three months or less when purchased.
8
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Unzipped Apparel, LLC
Notes to Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
No provision has been made in the accompanying financial statements for Federal,
state or local taxes of the members. Each member is individually responsible for
reporting their share of each item of income, gain, loss, deduction, or credit.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentration of
credit risk consist primarily of cash and cash equivalents, and amounts due from
the factor. In order to minimize the risk of loss, the Company assigned accounts
receivable to a factor who assumes all credit risk with respect to collections
on nonrecourse receivables. The Company generally does not require collateral
from its customers.
Significant Customers
Individual customers aggregating in excess of 10% of net sales for the period
ended January 31, 1999, are summarized as follows:
Customer A 31%
Customer B 19%
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" (SFAS 121), which requires impairment losses to be recorded
on long-lived assets used in operations when indications of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. In such cases, the amount of
the impairment is to be determined based on the relative fair value of the
impaired assets. Statement 121 also addresses the accounting for long-lived
assets to be disposed of. The adoption of SFAS 121 did not have a material
effect on the Company.
NOTE 2--DUE FROM FACTOR
The Company entered into a factoring agreement with Congress Talcott Corporation
and a credit agreement with Congress Financial (Western) (collectively,
Congress), effective October 9, 1998 and December 1, 1998, respectively. The
Company assigns to Congress Talcott Corporation, without recourse for the
financial inability of the customer to pay at maturity, all trade receivables of
the Company acceptable to Congress at the net invoice price less a commission of
0.4% of the gross amount of each receivable for the first 60-day term. Extended
terms approved by Congress beyond 60 days require an additional 25% increase on
the factor commission for each additional 30 days or portion thereof of extended
terms or additional dating. The Company bears the entire risk of nonapproved
receivables and accounts receivable returned by the factor to the Company for
disputed items. The factor agreement has an initial term of two years.
9
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Unzipped Apparel, LLC
Notes to Financial Statements
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment as of January 31, 1999, consists of the following:
Amount
-------
Machinery and equipment $ 1,104
Computer equipment 2,912
Furniture and fixtures 82,241
Leasehold improvements 2,431
-------
88,688
Less accumulated depreciation 2,170
-------
$86,518
=======
Included in property and equipment are assets acquired from Commerce Clothing
Company, LLC (CCC), a related party, and Candie's aggregating $85,775.
NOTE 4--REVOLVING CREDIT AGREEMENT
On December 1, 1998, the Company entered into a credit facility with Congress
Financial (Western) with an initial term of two years, under which the Company
may borrow up to $15,000,000 under revolving loans. Borrowings are limited by
advance rates against eligible accounts receivable and inventory balances, as
defined. Under the facility, the Company may also arrange for letters of credit.
The borrowings bear interest at the lender's prime rate or at a rate of 2.25%
per annum in excess of the Eurodollar rate.
Borrowings under the facility are secured by substantially all of the assets of
the Company, are guaranteed by the Vice-chairman/manager of the Company and his
family trust, with such guarantee being limited to $500,000. Borrowings are also
guaranteed by Candie's.
The facility requires the Company to be in compliance with certain financial and
nonfinancial covenants. The Company was in compliance with the financial
covenants at January 31, 1999, or had obtained appropriate waivers.
NOTE 5--COMMITMENTS AND CONTINGENCIES
Leases
The Company occupies its office and showroom facilities in New York City in a
location leased by Caruso. The Company pays monthly rent pursuant to the terms
of the Caruso lease and remits payments directly to the lessor. The lease
expires in July 2001.
In addition to the lease referred to above, in April 1999, the Company and an
affiliated company of Candie's entered into a noncancelable lease for additional
office and showroom space which expires March 2003.
Total rent expenses charged to operations for the period ended January 31, 1999,
aggregated $83,239.
10
<PAGE>
Unzipped Apparel, LLC
Notes to Financial Statements
NOTE 5--COMMITMENTS AND CONTINGENCIES LEASES (Continued)
Future minimum payments for noncancelable operating leases referred to above
consisted of the following:
Operating
Year ending January 31, Leases
----------------------- ----------
2000 $ 242,000
2001 318,000
2002 273,000
2003 228,000
2004 38,000
----------
Total minimum lease payments $1,099,000
==========
NOTE 6--RELATED PARTY TRANSACTIONS
The Company has a supply agreement with Azteca for the exclusive development,
manufacturing, and supply of certain products bearing the Candie's and Bongo
brand names. As consideration for the development of the products, the Company
pays Azteca pursuant to a pricing schedule. The Company purchases products from
Azteca at a price which represents Azteca's cost plus 7%. The supply agreement
was consummated upon the Company's formation and extends through January 31,
2003. Purchases for the period ended January 31, 1999, approximated $3,000,000.
Azteca also allocated expenses to the Company for the Company's use of a portion
of Azteca's office space, design and production team and support personnel. The
Company also receives executive management services from employees of Azteca and
Candie's. Such services, provided for the benefit of Sweet and Caruso, are
performed without a charge to the Company. Expenses allocated to the Company by
Azteca approximated $191,796 for the period ended January 31, 1999. Candie's and
Caruso also permitted the Company to use the Bongo and Candie's trademarks for
apparel products without charge to the Company.
Pursuant to the Operating Agreement, the Company recorded advertising expense of
approximately $91,779 equal to 3% of gross sales relating to advertising and
promotion of the Company's products by Candie's. The Company recorded $41,769 of
expenses allocated from Candie's related to formation costs of the Company and
also purchased approximately $1,126,000 of finished goods from Candie's at the
formation date.
The Company has a distribution agreement with Apparel Distribution Services
(ADS), a related party. The agreement provides for a $0.35 per unit fee for
warehousing functions as well as reimbursement for certain operating costs
incurred by ADS. The agreement also provides for a $0.15 per unit fee for
processing and invoicing orders. These rates can be adjusted annually by the
parties to reflect changes in economic factors. The distribution agreement was
consummated upon the Company's formation and extends through December 31, 2002.
For the period ended January 31, 1999, distribution expenses under the agreement
were approximately $135,000, the amount due to ADS below represents unpaid
distribution fees at January 31, 1999.
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Unzipped Apparel, LLC
Notes to Financial Statements
NOTE 6--RELATED PARTY TRANSACTIONS (Continued)
Amounts due from (to) related parties at January 31, 1999, consist of the
following:
Amount
-----------
Sweet Sportswear $ 96,024
===========
Azteca $(1,008,205)
Candie's (222,528)
ADS (115,333)
CCC (49,361)
-----------
$(1,395,427)
===========
NOTE 7--YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize the date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations, causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company utilizes the information technology systems maintained by Azteca for
substantially all of its operations. Azteca determined that it was required to
modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company, through Azteca, also initiated formal communications with the
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third-parties' failure to
remediate their own Year 2000 Issues. Azteca believes that with the
modifications to existing software and conversions to new software, the Year
2000 Issue has not posed significant operational problems for its computer
systems. Through January 31, 1999, the Company was allocated its portion of
Azteca's costs related to the Year 2000 Issue and was allocated additional costs
through the completion of the project. Azteca used both internal and external
resources to reprogram, or replace, and test the software for Year 2000
modifications. The Company has not experienced any significant problems related
to the Year 2000 issue. However, there can be no assurances that the Year 2000
issue will not have a significant impact on the Company's operations in the
future.
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