UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
----------
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Earliest Event Reported September 5, 2000
-----------------
Date of Report November 9, 2000
----------------
Commission File No. 000-20201
---------
HAMPSHIRE GROUP, LIMITED
------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 06-0967107
---------------------- -----------------
(State of Incorporation) (I.R.S. EIN Number)
215 COMMERCE BOULEVARD
ANDERSON, SOUTH CAROLINA 29625
(864) 225-6232
------------------------------
(Address and Telephone Number of
Registrant's Principal Executive Offices)
<PAGE>
Introductory Note
-----------------
This Form 8-K/A is being filed to amend the Current Report on Form 8-K (the
"Form 8-K") of Hampshire Group, Limited filed on September 15, 2000, to include
certain financial information.
Item 2 of the Form 8-K is hereby amended and restated in its entirety as
follows:
Item 2. Acquisition of Assets
---------------------
On September 5, 2000, Hampshire Group, Limited ("Hampshire Group"), through
its wholly owned subsidiary Vintage III, Inc. ("Vintage" or the "Company"),
concluded the acquisition of substantially all the assets and business of
Item-Eyes, Inc. ("Item-Eyes"), a privately held sportswear company.
The acquired assets include all the machinery and equipment, furniture and
fixtures and leasehold improvements used in the operation of the business (other
than the New York corporate condominium owned by Item-Eyes); all current assets;
and all intangible assets of Item-Eyes (the "Assets"). Hampshire Group does not
intend to change the use of the acquired Assets. The Acquisition Date Balance
Sheet is filed herein as Schedule 1.
The Assets were acquired from Item-Eyes, Inc. and the purchase price was
paid to its stockholders (the "Stockholders"). The Stockholders are set forth
below along with their addresses and respective percentage ownership of
Item-Eyes:
Mr. Martin Axman 870 Fifth Avenue, New York, NY 67.00%
Mr. Marc Abramson 3 Heaton Court, Closter, NJ 16.86%
Ms. Ellen Becker 110 Oak Drive, Rosyln, NY 16.14%
Mr. Ralph Martinez 79 Beach Road, Massapequa, NY (*)
(*) The ownership interest of Mr. Martinez was purchased by Item-Eyes under
an agreement entered into on September 7, 1999, and at the acquisition
date, the shares were held as treasury stock securing a thirty-six month
note payable to the former stockholder. At closing, the balance of the note
was paid with $2 million of the cash purchase price plus 30,362
unregistered shares of Hampshire Group, Limited common stock.
There were no relationships between any of the Stockholders and Hampshire
Group, or any of its subsidiaries, including Vintage, or any of their directors,
officers or affiliates.
-----------------------------------------------------------------------------
This Current Report on Form 8-K/A contains forward-looking information and
statements that involve risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding the results of operation.
Hampshire Group, Limited's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements which are made only as of the date hereof.
Page 2
<PAGE>
(Acquisition of Assets Continued)
Item-Eyes, a privately held sportswear company founded in 1978 by its
former owners, is a manufacturer and marketer of moderate-price, "missy" related
separates under its label, Requirements, and private labels of prestige
retailers such as Federated, JC Penney and May Department Stores. Item-Eyes will
continue operating in an operational center and sales offices/ showroom in New
York City and an administrative office in Hauppauge, New York. Under separate
five-year employment agreements, the three principals will remain with the
Company in similar capacities as they previously served: Mr. Axman, President
and Chief Executive Officer; Mr. Abramson, Vice President Sales; and Ms. Becker,
Vice President Design.
As disclosed in Hampshire Group's Current Report on Form 8-K filed on July
10, 2000, Vintage, Hampshire Group, Item-Eyes and the Stockholders entered into
an Asset Purchase Agreement on June 26, 2000 (the "Purchase Agreement").
Simultaneously with the execution of the Purchase Agreement, the Company made a
good faith deposit of $5 million (the "Deposit"). Under the terms of the
Purchase Agreement, after July 20, 2000, interest accrued on the unpaid cash
portion of the purchase price at 10% per annum. Further, the Purchase Agreement
provided for the forfeiture of the Deposit if Vintage failed to close on or
before September 5, 2000, as a result of reasons other than the Company's
failure to obtain bank financing or the death of one of the principals. In the
event the transaction did not close on or before September 5, 2000, as a result
of the Company's failure to obtain bank financing, the Purchase Agreement
provided for the forfeiture of the Deposit in the amount equal to $1 million
plus the legal expenses of Item-Eyes.
The purchase price to be paid was dependent upon the net assets delivered;
therefore, the books and records of Item-Eyes were closed as of August 20, 2000,
to permit the compilation of the assets to be acquired for closing of the
transaction on August 31, 2000. Based on the compilation prepared for the
closing and mutual agreement among the parties, the purchase price was reduced
by $250,000 and consequently, the subordinated notes delivered were reduced in a
like amount. Due to legal matters among the participants in the bank consortium
financing the transaction, the funding of the balance of the purchase price and
the indemnification for the outstanding letters of credit assumed was not
finalized until September 5, 2000.
The Company has accounted for the Item-Eyes acquisition as a purchase,
applying the provisions of Accounting Principles Board Opinion No. 16, Business
Combinations. The purchase price was allocated to the net assets acquired
including the liabilities assumed as of August 20, 2000, based upon their
estimated fair values as of that date with the remainder being recorded as
goodwill. An appraisal of the fair values of the assets acquired was not deemed
necessary considering that 96.6% of the tangible assets acquired were current
assets, primarily accounts receivable and inventories in trade. Additionally,
1.5% of the assets acquired were represented by cash surrender value of officers
life insurance policies. Of the $862,000 remaining tangible assets acquired,
more than 50% represented leasehold improvements which will be amortized over
the remaining life of the respective leases.
Page 3
<PAGE>
(Acquisition of Assets Continued)
The assets were acquired for a total of $57,288,000 which was paid as follows:
Cash $13,000,000
Assumed liabilities - revolving credit line 31,069,000 (1)
Assumed liabilities - trade accounts payable, etc. 8,397,000
Issuance of Subordinated Notes payable 2,100,000 (2)
Issuance of Hampshire Group, Limited common stock 2,722,000 (3)
(1) The balance outstanding under the line of credit on the acquisition
date had been reduced by the pay-down against the line of credit of
the $5 million purchase price deposit; therefore, the assumed
liability of the line of credit has been restated accordingly.
(2) The Subordinated Notes issued by Vintage are subordinated in all
respects to all indebtedness incurred under Hampshire Group's Credit
Agreement (hereinafter defined) and Hampshire Group's outstanding
Insurance Notes (hereinafter defined), bear interest at 9.5% to 11.5%
per annum and are due in 2.5 to 4 years. Hampshire Group and its
Chairman have guaranteed Vintage's obligation pursuant to the
Subordinated Notes.
(3) Hampshire Group Limited issued 395,382 unregistered shares of its
common stock, par value $0.10 per share, which has been recorded at an
assumed fair market value of $6.885 per share. The assumed fair market
value was determined by averaging the closing price of the stock, as
reported by the NASDAQ market, for five trading days prior to and five
trading days subsequent to August 20, 2000. Further, the average
closing price was discounted 15% due to lack of marketability of the
unregistered shares.
The Company also assumed the purchase commitments of Item-Eyes, which
included open orders for the purchase of inventory of approximately $5.8 million
secured by open letters of credit.
The allocation of the purchase price is subject to final determination
based on changes in certain estimates of the asset valuations and determination
of liabilities assumed that may occur within the first year of operations.
Management believes that there will not be material changes to the allocation of
the purchase price.
A portion of the consideration paid by the Company was obtained through
loans under Hampshire Group's senior secured revolving credit facility pursuant
to the Amended and Restated Credit Agreement and Guaranty, dated September 5,
2000 (the "Credit Agreement"), among Hampshire Group Limited, Hampshire Group's
subsidiaries including Vintage, The Chase Manhattan Bank ("Chase"), HSBC Bank
USA, The CIT Group/Commercial Services, Inc., Fleet National Bank, Israel
Discount Bank of New York and Bank of America, N.A. (collectively the "Banks"),
and Chase as agent for the Banks. The three-year Credit Agreement provides a
secured credit facility up to $97,937,500 in revolving line of credit and
letters of credit. The credit facility is limited by the amount of assets
securing the facility, but includes a provision for over-advance during the
Hampshire Group's peak borrowing periods.
Page 4
<PAGE>
(Acquisition of Assets Continued)
Hampshire Group and its subsidiaries, including Vintage, also entered into
Amendment No. 1, dated September 5, 2000 (the "Amendment"), to the Note Purchase
Agreements, dated as of May 15, 1998, among Hampshire Group Limited, Hampshire
Group's subsidiaries, Phoenix Home Life Mutual Insurance Company and the Ohio
National Life Insurance Company, with respect to the $15,000,000 aggregate
principal amount, Senior Secured Notes due January 2, 2008 (the "Insurance
Notes"). The Amendment provides for, among other things, changes in i) the
applicable interest rate from 7.05% to an adjustable rate, 8% effective
September 5, 2000, and ii) the principal amortization schedule from seven annual
installments of $2,142,857 commencing January 2, 2002, to a payment of $937,500
upon closing and 15 semi-annual installments of $937,500 each, commencing
January 2, 2001. In consideration of the above, the Senior Secured Note Holders
waived receipt of any portion of the proceeds from Hampshire Group's prior sale
of its manufacturing facilities which occurred on April 28, 2000, and is
described further in a Current Report on Form 8-K filed by Hampshire Group on
July 10, 2000.
Based on a term sheet approved on June 2, 2000, Hampshire Group closed on a
five-year term loan with Merchants National Bank, Winona, Minnesota for $3
million on September 20, 2000. The $3 million loan was part of the long-term
financing of the acquisition. The note bears interest at the bank's prime rate
plus 0.25% per annum, adjustable annually on the anniversary of the loan. The
agreement provides for repayment of the loan in nine semi-annual installments of
$301,941 each, commencing March 20, 2001 but may be prepaid without penalty.
On September 11, 2000, Vintage changed its name to Item-Eyes, Inc.
A copy of the press release issued by Hampshire Group on September 6, 2000,
in respect of the acquisition is attached hereto as Exhibit 99.1 and
incorporated hereto by reference.
Page 5
<PAGE>
Schedule 1
VINTAGE III, INC.
(A wholly owned subsidiary of Hampshire Group, Limited)
ACQUISITION DATE BALANCE SHEET
(unaudited, in thousands)
August 20, 2000
ASSETS Note (A)
---------------------------------------------------------------------------
Current assets:
Cash and cash equivalents ............................. $ 103
Accounts receivable trade - net ....................... 16,688
Other accounts receivable ............................. 378
Inventories ........................................... 29,738
Other current assets .................................. 93
-------
Total current assets ................................ 47,000
Property, plant and equipment - net ..................... 862
Other assets ............................................ 775
-------
Net tangible assets purchased ....................... 48,637
Goodwill ................................................ 8,651 (B)
-------
Total assets ........................................ $57,288
=======
LIABILITIES
---------------------------------------------------------------------------
Current liabilities:
Borrowings under line of credit ....................... $31,069 (C)
Accounts payable ...................................... 6,278
Accrued expenses and other liabilities ................ 2,119
Loan payable to parent company ........................ 13,000
-------
Total current liabilities ........................... 52,466
Subordinated notes payable .............................. 2,100 (D)
-------
Total liabilities ................................... 54,566
-------
COMMITMENTS AND CONTINGENCIES ........................... (E)
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
Common stock
Additional paid-in-capital .............................. 2,722 (F)
-------
Total stockholder's equity .......................... 2,722
-------
Total liabilities and stockholder's equity .......... $57,288
=======
The accompanying notes are an integral part of this
Acquisition Date Balance Sheet.
Page 6
<PAGE>
NOTES TO
ACQUISITION DATE BALANCE SHEET
August 20, 2000
(A) Basis of Presentation.
---------------------
The unaudited Acquisition Date Balance Sheet reflects the purchase of
substantially all of the assets and business of Item-Eyes, Inc.
("Item-Eyes") and the liabilities assumed as partial payment of the
purchase price. The acquired assets include all the machinery and
equipment, furniture and fixtures and leasehold improvements used in
the operation of the business (other than the New York corporate
condominium); all current assets; and all intangibles assets of
Item-Eyes.
Management believes that the assumptions used in preparing this
Acquisition Date Balance Sheet provides a reasonable basis for
presenting all of the significant effects of the acquisition.
(B) Acquisition Goodwill.
--------------------
The excess of purchase price over net assets purchased, plus $172,550
of acquisition- related costs, have been recorded as goodwill and will
be amortized on the straight-line method over 15 years.
(C) Liabilities Assumed Under Line of Credit.
----------------------------------------
The balance outstanding under the line of credit on the acquisition
date had been reduced by the pay-down against the line of credit of
the $5 million purchase price deposit made June 26, 2000; therefore,
the assumed liability of the line of credit has been restated to
recognize the pay-down of the line with the deposit.
(D) Subordinated Notes Payable.
--------------------------
The Subordinated Notes issued by Vintage as partial payment of the
purchase price, are subordinated in all respects to indebtedness
incurred under Hampshire Group's Credit Agreement and outstanding
Insurance Notes, bear interest at 9.5% to 11.5% per annum and are due
in full in 2.5 to 4 years. Hampshire Group and its Chairman have
guaranteed Vintage's obligations pursuant to the Subordinated Notes.
(E) Commitments and Contingencies.
-----------------------------
In conjunction with the acquisition, Vintage assumed the purchase
commitments of Item-Eyes which were guaranteed by approximately $5.8
million of open letters of credit.
(F) Common Stock.
------------
As partial payment of the purchase price, Hampshire Group, Limited
issued 395,382 unregistered shares of its common stock, par value
$0.10 per share, which has been recorded at an assumed fair market
value of $6.885 per share. The assumed fair market value was
determined by averaging the closing price of the stock, as reported by
the NASDAQ market, for five trading days prior to and five trading
days subsequent to August 20, 2000. Further, the average closing price
was discounted 15% due to lack of marketability of the unregistered
shares.
Page 7
<PAGE>
Item 7 of the Form 8-K is hereby amended and restated in its entirety
as follows:
Item 7. Financial Statements and Exhibits
---------------------------------
The information required to be presented in this Item 7 is as follows.
A. Financial Statements of Business Acquired.
-----------------------------------------
Annex 1 Item-Eyes, Inc. Interim Unaudited Financial Statements
for the Six Months Ended June 30, 2000
Annex 2 Item-Eyes, Inc. Financial Statements for the Year Ended
December 31, 1999
Annex 3 Item-Eyes, Inc. Financial Statements for the Year Ended
December 31, 1998
Annex 4 Item-Eyes, Inc. Financial Statements for the Year Ended
December 31, 1997
B. Pro Forma Financial Information.
-------------------------------
Page
Unaudited Pro Forma financial information of
Hampshire Group, Limited.
Annex 5 a. Introductory Note 1
` b. Unaudited Pro Forma Consolidated Balance
Sheet as of July 1, 2000 2
c. Unaudited Pro Forma Consolidated Statement
of Operations for the Six Months Ended
July 1, 2000 4
d. Unaudited Pro Forma Consolidated Statement
of Income for the Year Ended
December 31, 1999 6
Page 8
<PAGE>
C. Exhibits:
--------
Exhibits Incorporated by Reference:
----------------------------------
4.1 Amendment No. 1, dated September 5, 2000, to the Note Purchase
Agreement, dated as of May 15,1998, among the Company, the
Guarantors named therein, Phoenix Home Life Mutual Insurance
Company and the Ohio National Life Insurance Company. *
10.1 Asset Purchase Agreement among Vintage III, Inc., Hampshire
Group, Limited, Item-Eyes, Inc. and certain other parties,
dated June 26, 2000. *
10.2 Amended and Restated Credit Agreement and Guaranty among
Hampshire Group, Limited, the Guarantors named therein, the
Banks named therein and The Chase Manhattan Bank as agent for
the Banks, dated September 5, 2000. *
99.1 Hampshire Group, Limited's press release announcing the
completion of the acquisition of the assets and business of
Item-Eyes, Inc., dated September 6, 2000. *
(*) Incorporated by reference to Hampshire Group, Limited's
Current Report on Form 8-K filed on September 15, 2000.
Exhibits filed herewith:
-----------------------
10.3 Term Loan Agreement between Merchants National Bank and Hampshire
Group, Limited dated as of September 20, 2000.
Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HAMPSHIRE GROUP, LIMITED
(Registrant)
Date: November 9, 2000 /s/ Ludwig Kuttner
---------------- -------------------------------
Ludwig Kuttner
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2000 /s/ Charles W. Clayton
---------------- -------------------------------
Charles W. Clayton
Vice President, Secretary, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
Page 10
<PAGE>
ANNEX 1
ITEM-EYES, INC.
FINANCIAL STATEMENTS
JUNE 30, 2000
<PAGE>
ITEM-EYES, INC.
TABLE OF CONTENTS
SIX MONTHS ENDED JUNE 30, 2000 (COMPILED)
AND 1999 (REVIEWED)
Page
Accountants' Report 1
Balance Sheets 2
Statements of Income 3
Statements of Changes in Stockholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-13
<PAGE>
ACCOUNTANTS' REPORT
Stockholders
Item-Eyes, Inc.
New York, NY
We have compiled the accompanying balance sheet of Item-Eyes, Inc. as of June
30, 2000, and the related statements of income, changes in stockholders' equity,
and cash flows for the six months then ended, and the accompanying supplementary
information on pages 15 through 16, inclusive, which is presented for
supplementary analysis purposes, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements and
supplementary schedules information that is the representation of management. We
have not audited or reviewed the 2000 financial statements and supplementary
schedules and, accordingly, we do not express an opinion or any other form of
assurance on them.
The accompanying 1999 financial statements of Item-Eyes, Inc. were previously
reviewed by us, and our report dated August 2, 1999, stated that we were not
aware of any material modifications that should be made to those statements in
order for them to be in conformity with generally accepted accounting
principles. In addition, the 1999 supplementary information on pages 15 through
16, inclusive, was not subjected to the inquiry and analytical procedures
applied in the review of the basic financial statements, but was compiled from
information that was the representation of management, without audit or review
and we did not express an opinion or any other form of assurance on such
information.
/s/ Berenson & Company LLP
-------------------------------
New York, NY
July 27, 2000
<PAGE>
Page 2
ITEM-EYES, INC.
BALANCE SHEETS
June 30
----------------
2000 1999*
------ ------
ASSETS (Compiled) (Reviewed)
Current assets:
Cash............................................. $ 57,388 $ 385,220
Accounts receivable, less allowances for
doubtful accounts, sales discounts and returns
of $2,673,000; $2,562,000-1999 (notes 5 and 14) 12,593,223 10,913,322
Inventories (notes 3 and 5)...................... 26,856,259 20,061,887
Due from stockholders (note 9)................... 20,000 -
Due from related parties (notes 9 and 13)........ - 59,690
Prepaid expenses and other current assets ....... 340,549 624,608
----------- -----------
Total current assets......................... 39,867,419 32,044,727
Property and equipment (note 4 and 8) 2,362,886 945,735
Other assets 595,850 450,532
----------- -----------
$42,826,155 $33,440,994
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (note 5) ........................... $16,117,181 $14,645,729
Note payable, former stockholder (note 6) ....... 1,029,009 --
Mortgage payable, current portion (note 8) ...... 66,667 --
Accounts payable ................................ 9,204,772 5,824,012
Advance payment - sale of net assets (note 10) .. 5,000,000 --
Due to related party (note 9) ................... 98,506 158,988
Accrued expenses and other current liabilities .. 447,989 1,914,585
----------- -----------
Total current liabilities ................... 31,964,124 22,543,314
Note payable, former stockholder, net of current
portion (note 6).................................. 1,439,083 --
Mortgage payable, net of current portion (note 8) .. 900,000 --
Loans payable, stockholders (note 7) ............... -- 750,000
----------- -----------
34,303,207 23,293,314
----------- -----------
Commitments and contingency (notes 12 and 13)
Stockholders' equity:
Common stock, no par value; authorized 200 shares;
issued 100 shares .............................. 200 200
Additional paid-in capital ....................... 269,800 269,800
Retained earnings ................................ 12,174,177 10,057,055
----------- -----------
12,444,177 10,327,055
Less: treasury stock, at cost (note 15) .......... 3,921,229 179,375
----------- -----------
8,522,948 10,147,680
----------- -----------
$42,826,155 $33,440,994
=========== ===========
*Certain items have been reclassified to conform to 2000 presentation.
See accountants' report.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3
ITEM-EYES, INC.
STATEMENTS OF INCOME
Six months ended June 30,
------------------------
2000 1999*
------ -------
(Compiled) (Reviewed)
Net sales (note 14) ....................... $42,286,390 $44,322,536
----------- -----------
Cost of goods sold (note 9) ............... 33,682,295 35,262,901
----------- -----------
Operating expenses:
Salaries and employee benefits ......... 4,301,263 4,165,743
Design ................................. 372,969 291,488
Production ............................. 233,275 248,126
Selling ................................ 671,946 463,750
Shipping ............................... 661,332 417,010
General and administrative ............. 883,427 975,856
----------- -----------
7,124,212 6,561,973
----------- -----------
Income from operations .................... 1,479,883 2,497,662
----------- -----------
Other (income) expense:
Interest expense, net of interest income
of $990; $413-1999 ................... 1,021,615 813,457
Rental income, net (note 13) ........... (46,304) --
----------- -----------
975,311 813,457
----------- -----------
Income before provision for income taxes .. 504,572 1,684,205
Provision for income taxes (note 11) ...... 28,000 40,755
----------- -----------
Net income ................................ $ 476,572 $ 1,643,450
=========== ===========
*Certain items have been reclassified to conform to 2000 presentation.
See accountants' report.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4
ITEM-EYES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 (COMPILED)
AND 1999 (REVIEWED)
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
------- --------- ---------- ----------- ----------
Balances, January 1, 1999 $200 $269,800 $ 8,413,605 ($179,375) $8,504,230
Net income - - 1,643,450 - 1,643,450
---- -------- ----------- --------- -----------
Balances, June 30, 1999 $200 $269,800 $10,057,055 ($179,375) $10,147,680
==== ======== =========== ========= ===========
Balances, January 1, 2000 $200 $269,800 $11,697,605($3,921,229) $8,046,376
Net income - - 476,572 - 476,572
---- -------- ----------- --------- -----------
Balances, June 30, 2000 $200 $269,800 $12,174,177($3,921,229) $8,522,948
==== ======== =========== ========= ===========
See accountants' report.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 5
ITEM-EYES, INC.
STATEMENTS OF CASH FLOWS
Six months ended June 30,
------------------------
2000 1999*
------ -------
(Compiled) (Reviewed)
Cash flows from operating activities:
Net income ................................... $ 476,572 $ 1,643,450
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Depreciation .............................. 150,000 126,000
Bad debt expense .......................... 7,705 90,000
Changes in assets (increase) decrease:
Accounts receivable ..................... 3,882,206 7,055,722
Inventories ............................. (10,209,311) 1,392,408
Due from related parties ................ 59,690 3,203
Prepaid expenses and other current assets (303,637) (444,862)
Other assets ............................. 50,672 (8,600)
Changes in liabilities increase (decrease):
Due to related party ..................... (32,777) 20,243
Accounts payable ......................... 3,586,468 (2,477,699)
Accrued expenses and other current
liabilities ............................ (263,884) 1,683,753
---------- -----------
Net cash provided (used) by operating
activities (2,596,296) 9,083,618
---------- -----------
Cash flows used by investing activities:
Acquisition of property and equipment ....... (128,695) (16,018)
---------- -----------
Cash flows from financing activities:
Note payable, repayments, net ............... (1,946,783) (8,832,505)
Note payable, former stockholder ............ (477,329) --
Due from stockholders ....................... 115,000 --
Advance payment - sale of net assets ........ 5,000,000 --
Mortgage payable ............................ (33,333) --
---------- -----------
Net cash provided (used) by financing
activities .............................. 2,657,555 (8,832,505)
---------- -----------
Net increase (decrease) in cash ................ (67,436) 235,095
Cash, beginning of period ...................... 124,824 150,125
---------- -----------
Cash, end of period ............................ $ 57,388 $ 385,220
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................. $ 1,026,253 $ 813,870
Income taxes .............................. 62,395 9,577
*Certain items have been reclassified to conform to 2000 presentation.
See accountants' report.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 6
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
1. Nature of business:
The Company, located in New York, is a manufacturer providing branded and
private label women's apparel both domestically and internationally.
2. Significant accounting policies:
a. Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or
market.
b. Property and equipment:
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are
amortized on the straight-line basis over the shorter of the term of
the related lease or the estimated useful lives of the assets.
Depreciation is computed using straight-line and accelerated methods.
c. Income taxes:
The Company, with the consent of its stockholders, has elected to be
taxed as an S corporation under the Internal Revenue Code, which
provides that, in lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the Company's taxable income.
Therefore, no provision or liability for federal income taxes is
reflected in these financial statements. A provision has been made for
any state and local taxes.
d. Cash concentration:
The Company maintains its cash accounts primarily in two commercial
banks located in New York. The total cash balances are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000.
<PAGE>
Page 7
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
2. Significant accounting policies: (Continued)
e. 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 of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the year. The Company's most significant financial
statement estimate is the allowance for customer allowances and
doubtful accounts. Management determines the estimate of the allowance
for customer allowances and doubtful accounts considering a number of
factors, including historical experience, aging of the accounts,
provision for allowances based on specific agreements with customers
and the current credit worthiness of its customers. Management
believes that its estimates provided in the financial statements,
including those for the previously described item are reasonable.
However, actual results could differ from those estimates.
f. Advertising costs:
Advertising costs are expensed as incurred. Advertising expense for
the six months ended June 30, 2000 and 1999 was approximately $25,000
and $36,000, respectively.
g. Credit risk:
The Company routinely extends credit to domestic and international
retailers for the sale of its women's apparel. This credit risk may be
affected by changes in economic or other conditions and may,
accordingly, impact the Company's overall credit risk. Management
believes that the credit risk is mitigated by the diversity of its
customer base. Reserves for potential credit losses are maintained and
such losses have been immaterial to the Company's financial position
and within management's expectations.
<PAGE>
Page 8
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
3. Inventories:
2000 1999
----------- -----------
Raw materials $ 5,184,285 $ 5,947,073
Work-in-process 5,804,513 4,245,932
Finished goods 15,867,461 9,868,882
----------- -----------
$26,856,259 $20,061,887
=========== ===========
4. Property and equipment:
2000 1999
----------- -----------
Condominium (note 8) $1,585,071 $ -
Automobile 19,779 19,779
Machinery and equipment 203,406 176,119
Furniture and fixtures 286,653 245,562
Computer equipment 941,512 1,173,635
Leasehold improvements 826,435 785,681
---------- ----------
3,862,856 2,400,776
Less: accumulated
depreciation and amortization 1,499,970 1,455,041
---------- ----------
$2,362,886 $ 945,735
========== ==========
5. Note payable:
The Company has a credit facility with a finance company expiring December
31, 2000. The Company currently has available a $40,000,000 line of credit,
collateralized by accounts receivable, inventory, and limited personal
guarantees. The note, which bears interest at prime, had an interest rate
of 9.50% and 7.75% at June 30, 2000 and 1999, respectively.
Borrowing availability is based on 85% of "Eligible Accounts Receivable"
and 50% of "Eligible Inventory." In addition, the credit facility agreement
allows for an overadvance facility up to an amount of $4,700,000 and
$8,750,000 at June 30, 2000 and 1999, respectively. The Company had a
borrowing availability of approximately $2,766,000 at June 30, 2000 and an
overadvance of approximately $5,561,000 at June 30, 1999.
<PAGE>
Page 9
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
5. Note payable: (Continued)
The credit facility contains a covenant which requires certain financial
performance by the Company. The Company was in compliance with this
covenant as of June 30, 2000 and 1999.
6. Note payable, former stockholder:
2 0 0 0
-----------
Pursuant to the stock redemption (note 14),
payable in 36 monthly installments of $102,459
including interest at 10% per annum maturing
September 1, 2002. $2,468,092
Less: current maturities 1,029,009
-----------
$1,439,083
===========
The approximate maturities of the debt are as follows:
Twelve months ending June 30, 2001 $1,029,000
2002 1,137,000
2003 302,000
7. Loans payable, stockholders:
Loans payable to stockholders in the amount of $750,000 bore interest at 7%
per annum. The stockholders subordinated the loans to the debt due to the
finance company and trade creditors. As of December 31, 1999, the
subordination was released by the finance company and loans payable were
repaid to both the stockholders and the former stockholder (note 14).
<PAGE>
Page 10
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
8. Mortgage payable:
2 0 0 0
---------
Mortgage payable in monthly installments of $5,556
plus interest maturing December 2002. The mortgage
payable is collateralized by a condominium. The
mortgage bears interest at one half of one percent
(.50%) above the prime rate. The interest rate as of
June 30, 2000 was 10%. $966,667
Less: current maturities 66,667
--------
$900,000
========
The maturities of the debt are as follows:
Twelve months ending June 30, 2001 $ 66,667
2002 66,667
2003 833,333
9. Related party transactions:
a. Due from/to related party:
The Company uses a company affiliated through common ownership to
warehouse, package and ship its merchandise. Included in cost of goods sold
are fees of $1,299,992 and $1,149,764 for the six months ended June 30,
2000 and 1999, respectively. Included in cost of goods sold were $350,000
and $225,000 of management fee income charged to this affiliated company
for the six months ended June 30, 2000 and 1999, respectively. As of June
30, 2000 and 1999, amounts due to this affiliated company were $98,506 and
$158,988, respectively.
b. Due from stockholders:
Amounts due from stockholders were $20,000 and $-0- as of June 30, 2000 and
1999, respectively. Repayment of the amount due to the Company is expected
within the next year.
<PAGE>
Page 11
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
10. Advance payment - sale of net assets:
The Company is currently in negotiations with another entity for the sale
of substantially all of the Company's assets, and the assumption of
substantially all of the Company's liabilities. The Company received a
$5,000,000 advance payment in June 2000 upon the signing of a contract for
the proposed sale. Depending on the facts and circumstances, the Company
may be able to retain a portion of the advance payment if the proposed sale
is not completed.
11. Income taxes:
2 0 0 0 1 9 9 9
--------- ---------
Current provision:
State and local $28,000 $40,755
======= =======
12. Pension plans:
The Company makes contributions to a multi-employer union sponsored pension
plan. The plan provides defined benefits to substantially all union
employees. The plan is not administered by the Company and contributions
are determined in accordance with provisions of negotiated labor contracts.
Information relating to accumulated benefit obligations and plan assets is
not determinable. Under ERISA, an employer, upon withdrawal from a
multi-employer plan, is required to fund its proportionate share of the
plan's unfunded vested benefits at the point of withdrawal. The Company has
no intention of withdrawing from the plan. Contributions made to the plan
for the six months ended June 30, 2000 and 1999 were $-0- and $90,000,
respectively.
The Company sponsors a defined contribution pension plan that covers all
nonunion employees. Contributions are based on an employee's salary subject
to a maximum. Matching contributions are at the discretion of management.
The Company sponsors a retirement savings plan for its salaried and hourly
employees, which allows participants to make contributions under Section
401(k) of the Internal Revenue Code. Employees vest immediately in their
contributions. Matching contributions are at the discretion of management.
<PAGE>
Page 12
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
12. Pension plans: (Continued)
There were no contributions made by the Company to either plan for the six
months ended June 30, 2000 and 1999.
13. Commitments and contingency:
a. The Company leases office and showroom facilities under noncancelable
operating leases. Additionally, the Company leased an office and
warehouse facility on a month-to-month basis from a partnership which
is owned by some of the stockholders. The amounts due from this
partnership, included in due from related parties, as of June 30, 2000
and 1999 were $-0- and $59,690, respectively. The minimum annual
rental commitments on leased real property under noncancelable
operating leases at June 30, 2000 are approximately $2,171,000 payable
as follows:
Twelve months ending June 30, 2001 $494,000
2002 501,000
2003 468,000
2004 443,000
2005 265,000
The leases require payment of real estate taxes and other operating
expenses. Rent expense for the six months ended June 30, 2000 and 1999
was approximately $479,000 and $435,000, respectively.
b. The Company was contingently liable for approximately $7,304,000 of
open letters of credit as of June 30, 2000.
c. On January 14, 2000, the Company signed a one-year lease beginning
February 1, 2000 for the rental of the condominium in the amount of
$144,000 per year. Rental income, net of common charges and real
estate taxes, for the six months ended June 30, 2000 was $46,304.
<PAGE>
Page 13
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2000 (COMPILED) AND 1999 (REVIEWED)
14. Major customers:
Approximately 13% and 12% of the Company's sales for the six months ended
June 30, 2000 and 1999, respectively, were to one customer. The amounts due
from this customer included in accounts receivable was approximately
$1,665,000 and $1,026,000 at June 30, 2000 and 1999, respectively.
15. Treasury stock:
On September 7, 1999, the Company purchased stock held by one of its
stockholders. The stockholder held a 24.48% interest in the Company. The
purchase price of the individual interest was $3,741,854, payable with a
15% down payment, with the remaining balance payable in 36 monthly
installments, commencing October 1, 1999. The stock is being held as
collateral for the note (note 6).
16. Buy-sell agreement:
The Company and its stockholders have an agreement regarding the
disposition of the stockholders' shares of the Company's common stock. In
certain instances, defined in the agreement, a stockholder may dispose of
his stock by offering it for sale to the Company and the other
stockholders. The Company has the first option to buy, and, after a period
of time, the option reverts to the remaining stockholders. The methodology
for determining the purchase price is set forth in the agreement.
As part of the same agreement, upon the death of a stockholder, the Company
or its other stockholders shall have the irrevocable and exclusive option,
but not the obligation, to purchase the Company's common stock from the
estate of the deceased stockholder. The acquisition price is determined in
the same manner as for a disposition of stock.
At June 30, 2000, the agreement was partially funded by insurance.
<PAGE>
ANNEX 2
ITEM-EYES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1999
AND
DECEMBER 1998
<PAGE>
ITEM-EYES, INC.
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Page
Independent Auditors' Report 1
Balance Sheets 2
Statements of Income and Retained Earnings 3
Statements of Changes in Stockholder's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Item-Eyes, Inc.
New York, NY
We have audited the accompanying balance sheets of Item-Eyes, Inc. as of
December 31, 1999 and 1998, and the related statements of income, changes in
stockholder's equity, and cash flows for the years then ended. 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 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 Item-Eyes, Inc. as of December
31, 1999 and 1998, and the results of its operations, changes in stockholder's
equity and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Berenson & Company LLC
------------------------------------
New York, NY
February 5, 2000, except for note 5
as to which the date is May 18, 2000
<PAGE>
Page 2
ITEM-EYES, INC.
BALANCE SHEETS
Years ended December 31,
------------------------
1 9 9 9 1 9 9 8
------- -------
A S S E T S
Current assets:
Cash ........................................... $ 124,824 $ 150,125
Accounts receivable, less allowances for customer
allowances and doubtful accounts of $1,938,000;
$1,076,802-1998(notes 5, 9 and 13) ........... 16,483,134 18,059,044
Inventories (notes 3 and 5) .................... 16,646,948 21,454,295
Due from stockholders (note 9) ................. 135,000 --
Due from related parties (notes 9 and 12a) ..... 59,690 62,893
Prepaid expenses and other current assets ...... 36,912 179,746
----------- -----------
Total current assets ................. 33,486,508 39,906,103
Property and equipment (notes 4 and 8) ........... 2,384,191 1,055,717
Other assets ..................................... 646,522 441,932
----------- -----------
$36,517,221 $41,403,752
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (note 5) .......................... $18,063,964 $23,478,234
Note payable, former stockholder (note 6) ...... 979,027 --
Mortgage payable, current portion (note 8) ..... 66,667 --
Accounts payable ............................... 5,618,304 8,301,711
Due to related party (note 9) .................. 131,283 138,745
Accrued expenses and other current liabilities . 711,873 230,832
----------- -----------
Total current liabilities ............ 25,571,118 32,149,522
Note payable, former stockholder, net of current
portion (note 6)................................ 1,966,394 --
Mortgage payable, net of current portion (note 8). 933,333 --
Loans payable, stockholders (note 7) ............. -- 750,000
----------- -----------
28,470,845 32,899,522
----------- -----------
Commitments and contingency (notes 11 and 12)
Stockholders' equity:
Common stock, no par value; authorized 200
shares; issued 100 shares; outstanding
75.52 shares; 100 shares-1998 ............... 200 200
Additional paid-in capital .................... 269,800 269,800
Retained earnings ............................. 11,697,605 8,413,605
----------- -----------
11,967,605 8,683,605
Less: treasury stock, at cost 24.48 shares
(note 13) .................................. 3,921,229 179,375
----------- -----------
8,046,376 8,504,230
----------- -----------
$36,517,221 $41,403,752
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3
ITEM-EYES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended December 31,
------------------------
1 9 9 9 1 9 9 8
------- -------
Net sales (note 13) ............................ $103,758,693 $ 98,953,507
Cost of goods sold (note 9) .................... 82,992,378 78,495,516
------------ ------------
Operating expenses:
Salaries and employee benefits .............. 10,946,076 11,115,806
Design ...................................... 636,761 506,787
Production .................................. 476,149 484,497
Selling ..................................... 1,059,748 1,097,040
Shipping .................................... 1,055,067 862,207
General and administrative .................. 1,407,215 1,545,505
------------ ------------
15,581,016 15,611,842
------------ ------------
Income from operations ......................... 5,185,299 4,846,149
Interest expense, net of interest
income of $13,420; $1,337-1998 ............... 1,802,023 2,000,625
------------ ------------
Income before provision for income taxes ....... 3,383,276 2,845,524
Provision for income taxes (note 10) ........... 99,276 86,579
------------ ------------
Net income ..................................... $ 3,284,000 $ 2,758,945
============ ============
Proforma (note 17):
Historical income before provision for
income taxes ............................... $ 3,383,276 $ 2,845,524
Proforma provision for income taxes ......... 1,167,126 1,021,346
------------ ------------
Proforma net income ............................ $ 2,216,150 $ 1,824,178
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4
ITEM EYES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
------- --------- ---------- ----------- ----------
Balances, January 1, 1998 $200 $269,800 $10,271,704 ($179,375)$10,362,329
Net income - - 2,758,945 - 2,758,945
Distributions to
stockholders - - (4,617,044) - (4,617,044)
---- -------- ----------- ---------- ----------
Balances, December 31, 1998 200 269,800 8,413,605 (179,375) 8,504,230
Net income - - 3,284,000 - 3,284,000
Purchase of treasury stock
(note 14) - - - (3,741,854) (3,741,854)
---- -------- ----------- ---------- ----------
Balances, December 31, 1999 $200 $269,800 $11,697,605($3,921,229) $8,046,376
==== ======== =========== ========== ==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 5
ITEM-EYES, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31,
------------------------
1 9 9 9 1 9 9 8
------- -------
Cash flows from operating activities:
Net income ....................................... $ 3,284,000 $2,758,945
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation .................................. 252,000 252,000
Bad debt (recoveries) expense ................. 56,682 (46)
Changes in assets (increase) decrease:
Accounts receivable ......................... 1,519,228 (5,687,312)
Inventories ................................. 4,807,347 (420,006)
Due from related parties .................... 3,203 33,222
Due to related party ........................ (7,462) 138,745
Prepaid expenses and other current assets ... 142,834 196,994
Other assets ................................ (204,590) (15,677)
Changes in liabilities increase (decrease):
Accounts payable ............................ (2,683,407) (1,856,626)
Accrued expenses and other current liabilities 481,041 (39,008)
----------- ----------
Net cash provided (used) by operating
activities 7,650,876 (4,638,769)
----------- ----------
Cash flows used by investing activities:
Acquisition of property and equipment ............ (580,474) (622,077)
----------- ----------
Cash flows from financing activities:
Note payable, borrowings (repayments), net ........ (5,414,270) 9,986,029
Loan payable, stockholders ........................ (750,000) --
Note payable, former stockholder .................. (235,155) --
Due from stockholders ............................. (135,000) --
Distributions to stockholders ..................... -- (4,617,044)
Purchase of treasury stock ........................ (561,278) --
----------- ----------
Net cash provided (used) by financing activities (7,095,703) 5,368,985
----------- ----------
Net increase (decrease) in cash ..................... (25,301) 108,139
Cash, beginning of year ............................. 150,125 41,986
----------- ----------
Cash, end of year ................................... $ 124,824 $ 150,125
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ...................................... $ 1,815,443 $2,001,962
Income taxes .................................. 24,297 184,820
Supplemental disclosure of noncash investing
and financing activities:
Purchase of treasury stock .................... $ 3,180,576 $ --
Mortgage payable incurred for the
purchase of a condominium ................... 1,000,000 --
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 6
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. Nature of business:
The Company, located in New York, is a manufacturer providing branded and
private label women's apparel both domestically and internationally.
2. Significant accounting policies:
a. Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventory costs include raw material, contractor labor,
freight, duty and importing costs.
b. Property and equipment:
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are
amortized on the straight-line basis over the shorter of the term of
the related lease or the estimated useful lives of the assets.
Depreciation is computed using straight-line and accelerated methods.
Expenditures for maintenance, repairs and improvements which do not
materially extend the useful lives of the assets are charged to
expense.
c. Income taxes:
The Company, with the consent of its stockholders, has elected to be
taxed as an S corporation under the Internal Revenue Code, which
provides that, in lieu of corporate income taxes, the stockholders are
taxed on their proportionate share of the Company's taxable income.
Therefore, no provision or liability for federal income taxes is
reflected in these statements. A provision has been made for any state
and local taxes based on statutory rates.
d. Cash concentration:
The Company maintains its cash accounts primarily in two commercial
banks located in New York. The total cash balances are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000.
<PAGE>
Page 7
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
2. Significant accounting policies: (Continued)
e. 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 of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of financial statements and the reported amounts of revenues and
expenses during the year. The Company's most significant financial
statement estimate is the allowance for customer allowances and
doubtful accounts. Management determines the estimate of the allowance
for customer allowances and doubtful accounts considering a number of
factors, including historical experience, aging of the accounts,
provision for allowances based on specific agreements with customers
and the current credit worthiness of its customers. Management
believes that its estimates provided in the financial statements,
including those for the previously described item, are reasonable.
However, actual results could differ from those estimates.
f. Advertising costs:
Advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1999 and 1998 was approximately $83,000
and $63,000, respectively.
g. Credit risk:
The Company routinely extends credit to domestic and international
retailers for the sale of its women's apparel. This credit risk may be
affected by changes in economic or other conditions and may,
accordingly, impact the Company's overall credit risk. Management
believes that the credit risk is mitigated by the diversity of its
customer base. Reserves for potential credit losses are maintained and
such losses have been immaterial to the Company's financial position
and within management's expectations.
3. Inventories:
1 9 9 9 1 9 9 8
------------ ------------
Raw materials $ 4,377,366 $ 4,033,944
Work-in-process 1,625,127 3,070,867
Finished goods 10,644,455 14,349,484
----------- -----------
$16,646,948 $21,454,295
=========== ===========
<PAGE>
Page 8
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
4. Property and equipment:
1 9 9 9 1 9 9 8
------------ ------------
Condominium (see note 8) $1,557,569 $ -
Automobile 19,779 19,779
Machinery and equipment 183,006 176,119
Furniture and fixtures 245,562 245,562
Computer equipment 1,173,634 1,165,166
Leasehold improvements 785,682 778,132
---------- ----------
3,965,232 2,384,758
Less: accumulated depreciation
and amortization 1,581,041 1,329,041
---------- ----------
$2,384,191 $1,055,717
========== ==========
5. Note payable:
The Company has a credit facility with a finance company expiring May 2000.
The Company currently has available a $40,000,000 line of credit,
collateralized by accounts receivable, inventory, and limited personal
guarantees. The note, which bears interest at prime, had an interest rate
of 8.50% and 7.75% at December 31, 1999 and 1998, respectively.
Borrowing availability is based on 85% of "Eligible Accounts Receivable"
and 50% of "Eligible Inventory". In addition, the credit facility agreement
allows for an overadvance facility up to an amount of $3,250,000 and $-0-
at December 31, 1999 and 1998, respectively. The Company had an overadvance
of approximately $102,000 and $479,000 at December 31, 1999 and 1998,
respectively.
The credit facility contains a covenant which requires certain financial
performance by the Company. The Company was in compliance with this
covenant as of December 31, 1999 and 1998.
On May 18, 2000 the credit facility was extended until December 31, 2000.
<PAGE>
Page 9
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
6. Note payable, former stockholder:
1 9 9 9
---------
Pursuant to the stock redemption (note 13),
payable in 36 monthly installments of $102,459
including interest at 10% per annum maturing
September 1, 2002. $2,945,421
Less: current maturities 979,027
----------
$1,966,394
==========
The approximate maturities of the debt are as follows:
Years ending December 31, 2000 $ 979,000
2001 1,082,000
2002 884,000
7. Loans payable, stockholders:
Loans payable to stockholders in the amount of $750,000 bore interest at 7%
per annum. The stockholders subordinated the loans to the debt due to the
finance company and trade creditors. As of December 31, 1999, the
subordination was released by the finance company and loans payable were
repaid to both the stockholders and the former stockholder (note 14).
8. Mortgage payable:
The Company has a mortgage payable of $1,000,000 collateralized by a
condominium payable in monthly installments of $5,556 plus interest
maturing December 2002. The mortgage, which bears interest at one half of
one percent (.50)% above the prime rate, had an interest rate of 9.00% as
of December 31, 1999.
The approximate maturities of the debt are as follows:
Years ending December 31, 2000 $ 66,667
2001 66,667
2002 866,666
<PAGE>
Page 10
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
9. Related party transactions:
a. Due from/to related party:
The Company uses a company affiliated through common ownership to
warehouse, package and ship its merchandise. Included in cost of goods
sold are fees of $2,417,625 and $2,174,984 for the years ended
December 31, 1999 and 1998, respectively. Included in cost of goods
sold were $530,000 and $420,000 of management fee income charged to
this affiliated company for the years ended December 31, 1999 and
1998, respectively. As of December 31, 1999 and 1998, amounts due to
this affiliated company were $131,283 and $138,745, respectively.
b. Due from stockholders:
Amounts due from stockholders were $135,000 and $-0- as of December
31, 1999 and 1998, respectively. The amounts due from the stockholders
as of December 31, 1999 were repaid in January 2000.
10. Income taxes:
1 9 9 9 1 9 9 8
------------ -----------
Current provision:
State and local $99,276 $86,579
11. Pension plans:
The Company makes contributions to a multi-employer union sponsored pension
plan. The plan provides defined benefits to substantially all union
employees. The plan is not administered by the Company and contributions
are determined in accordance with provisions of negotiated labor contracts.
Information relating to accumulated benefit obligations and plan assets is
not determinable. Under ERISA, an employer, upon withdrawal from a
multi-employer plan, is required to fund its proportionate share of the
plan's unfunded vested benefits at the point of withdrawal. The Company has
no intention of withdrawing from the plan. Contributions made to the plan
for the years ended December 31, 1999 and 1998 were approximately $109,000
and $113,000, respectively.
<PAGE>
Page 11
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
11. Pension plans: (Continued)
The Company sponsors a defined contribution pension plan that covers all
nonunion employees. Contributions are based on an employee's salary subject
to a maximum. Matching contributions are at the discretion of management.
The Company sponsors a retirement savings plan for its salaried and hourly
employees, which allows participants to make contributions under Section
401(k) of the Internal Revenue Code. Employees vest immediately in their
contributions. Matching contributions are at the discretion of management.
There were no contributions made by the Company to either plan for the
years ended December 31, 1999 and 1998.
12. Commitments and contingency:
a. The Company leases office and showroom facilities under noncancelable
operating leases. Additionally, the Company leases an office and
warehouse facility on a month-to-month basis from a partnership which
is owned by some of the stockholders. The amounts due from this
partnership, included in due from related parties, as of December 31,
1999 and 1998 were $59,690 and $62,893, respectively. The minimum
annual rental commitments on leased real property under noncancelable
operating leases at December 31, 1999 are approximately $2,064,000
payable as follows:
Years ending December 31, 2000 $433,000
2001 441,000
2002 415,000
2003 406,000
2004 101,000
Thereafter 268,000
The leases require payment of real estate taxes and other operating
expenses. Rent expense for the years ended December 31, 1999 and 1998
was approximately $888,000 and $870,000, respectively.
b. The Company has guaranteed a loan from a bank to a related party in
the amount of $638,017. The loan is collateralized by a building that
is owned by the related party.
c. The Company was contingently liable for approximately $6,479,000 of
open letters of credit as of December 31, 1999.
<PAGE>
Page 12
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
13. Major customers:
Approximately 22% and 30% of the Company's sales for the year ended
December 31, 1999 and 1998, respectively, were to two customers. The
amounts due from these customers included in accounts receivable was
approximately $3,930,000 and $5,670,000 at December 31, 1999 and 1998,
respectively.
14. Treasury stock:
On September 7, 1999, the Company purchased stock held by one of its
stockholders. The stockholder held a 24.48% interest in the Company. The
purchase price of the individual interest was $3,741,854, payable with a
15% down payment, with the remaining balance payable in 36 monthly
installments, commencing October 1, 1999. The stock is being held as
collateral for the note (note 6).
15. Buy-sell agreement:
The Company and its stockholders have an agreement regarding the
disposition of the stockholders' shares of the Company's common stock. In
certain instances, defined in the agreement, a stockholder may dispose of
his stock by offering it for sale to the Company and the other
stockholders. The Company has the first option to buy, and, after a period
of time, the option reverts to the remaining stockholders. The methodology
for determining the purchase price is set forth in the agreement.
As part of the same agreement, upon the death of a stockholder, the Company
or its other stockholders shall have the irrevocable and exclusive option,
but not the obligation, to purchase the Company's common stock from the
estate of the deceased stockholder. The acquisition price is determined in
the same manner as for a disposition of stock.
At December 31, 1999, the agreement was partially funded by insurance.
16. Subsequent event:
On January 14, 2000, the Company signed a one-year lease beginning February
1, 2000 for the rental of the condominium in the amount of $144,000 per
year.
<PAGE>
Page 13
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
17. Pro forma income tax disclosure:
Pro forma income tax adjustments are presented to reflect a provision for
income taxes as if the Company had been taxed as a C corporation as of the
beginning of each year.
1 9 9 9 1 9 9 8
---------- ----------
Current tax provision:
Federal $1,070,175 $1,060,895
State and local 146,415 101,240
---------- ----------
1,216,590 1,162,135
---------- ----------
Deferred tax recovery:
Federal (39,094) (115,350)
State and local (10,370) (25,439)
---------- ----------
(49,464) (140,789)
---------- ----------
Income tax provision $1,167,126 $1,021,346
========== ==========
The differences between the statutory federal income tax rate and the
effective income tax rates for the two years presented is due to state and
local income taxes and temporary differences arising from depreciation and
inventory capitalization, between income tax deductions and book
deductions.
<PAGE>
ANNEX 3
ITEM-EYES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998
AND
DECEMBER 31, 1997
<PAGE>
ITEM-EYES, INC.
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Page
Independent Auditors' Report 1
Balance Sheets 2
Statements of Income and Retained Earnings 3
Statements of Cash Flows 4
Notes to Financial Statements 5-9
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Item-Eyes, Inc.
New York, NY
We have audited the accompanying balance sheets of Item-Eyes, Inc. as of
December 31, 1998 and 1997, and the related statements of income and retained
earnings, and cash flows for the years then ended. 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 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 Item-Eyes, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Berenson & Company LLP
-----------------------------
New York, NY
January 30, 1999
<PAGE>
Page 2
ITEM-EYES, INC.
BALANCE SHEETS
December 31,
-----------------
ASSETS
1 9 9 8 1 9 9 7
------- -------
Current assets:
Cash ............................................. $ 150,125 $ 41,986
Accounts receivable, less allowances for doubtful
accounts, sales discounts and returns of $1,076,802;
$727,000-1997 (notes 5 and 10) ................. 18,059,044 12,471,686
Inventories (notes 3 and 5) ...................... 21,454,295 21,034,289
Prepaid expenses and other current assets ......... 242,639 436,430
----------- -----------
Total current assets .................... 39,906,103 33,984,391
Property and equipment (note 4) ..................... 1,055,717 685,640
Other assets ........................................ 441,932 426,255
----------- -----------
$41,403,752 $35,096,286
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (note 5) ............................ $23,478,234 $13,492,205
Capitalized lease obligations, current portion
(notes 4 and 6) ................................ 1,814 48,367
Accounts payable ................................. 8,440,456 10,221,912
Accrued expenses and other current liabilities ... 229,018 220,21
----------- -----------
Total current liabilities ............... 32,149,522 23,982,703
Capitalized lease obligations, net of current portion
(notes 4 and 6) -- 1,254
Loans payable, stockholders (note 7) ............... 750,000 750,000
----------- ----------
32,899,522 24,733,957
=========== ==========
Commitments and contingency (notes 8 and 9)
Stockholders' equity:
Common stock, no par value; authorized 200 shares;
issued 100 shares .............................. 200 200
Additional paid-in capital ....................... 269,800 269,800
Retained earnings ................................ 8,413,605 10,271,704
----------- -----------
8,683,605 10,541,704
Less treasury stock, at cost ...................... 179,375 179,375
----------- -----------
8,504,230 10,362,329
----------- -----------
$41,403,752 $35,096,286
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3
ITEM-EYES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended
December 31,
----------------------------
1 9 9 8 1 9 9 7*
------- -------
Net sales (note 10) ........................... $ 98,953,507 $ 86,961,296
------------ ------------
Cost of goods sold ............................ 78,495,516 67,307,185
Operating expenses, including interest expense
of $2,001,962; $1,475,865-1997 (net of
interest income of $1,337; $51,966-1997) .... 12,258,893 10,401,891
------------ -----------
90,754,409 77,709,076
------------ -----------
Income before officers' salaries and other
expenses .................................... 8,199,098 9,252,220
Officers' salaries ............................ 5,353,574 5,121,530
------------ -----------
Income from operations ........................ 2,845,524 4,130,690
Loss on abandonment of fixed assets ........... -- 288,358
------------ -----------
Income before provision for income taxes ...... 2,845,524 3,842,332
Provision for income taxes .................... 86,579 124,000
------------ -----------
Net income .................................... 2,758,945 3,718,332
Retained earnings, beginning of year .......... 10,271,704 8,685,372
Less dividends ................................ (4,617,044) (2,132,000)
------------ -----------
Retained earnings, end of year ................ $ 8,413,605 $10,271,704
============ ===========
*Certain items have been reclassified to conform to 1998 presentation.
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4
ITEM-EYES, INC.
STATEMENTS OF CASH FLOWS
Years ended
December 31,
-------------------------
1 9 9 8 1 9 9 7*
------- -------
Cash flows from operating activities:
Net income ........................................ $ 2,758,945 $ 3,718,332
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................... 252,000 180,000
Bad debt recoveries ............................ (46) (15,583)
Loss on abandonment of fixed assets ............ -- 288,358
Changes in assets (increase) decrease:
Accounts receivable .......................... (5,587,312) 605,149
Inventories .................................. (420,006) (2,181,049)
Prepaid expenses and other current assets .... 193,791 (230,834)
Other assets ................................. (15,677) (66,041)
Changes in liabilities increase (decrease):
Accounts payable ............................. (1,781,456) (726,444)
Accrued expenses and other current liabilities 8,799 (36,841)
----------- ----------
Net cash provided (used) by operating
activities ............................... (4,590,962) 1,535,047
----------- ----------
Cash flows used by investing activities:
Acquisition of equipment .......................... (622,077) (117,519)
----------- ----------
Cash flows from financing activities:
Note payable, borrowings .......................... 9,986,029 564,313
Dividend distributions ............................ (4,617,044) (2,132,000)
Principal payments under capital lease obligations (47,807) (73,668)
----------- ----------
Net cash provided (used) by financing activities 5,321,178 (1,641,355)
----------- ----------
Net increase (decrease) in cash ..................... 108,139 (223,827)
Cash, beginning of year ............................. 41,986 265,813
----------- ----------
Cash, end of year ................................... $ 150,125 $ 41,986
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................ $2,001,962 $1,475,865
Income taxes .................................... 184,820 102,260
Supplemental disclosure of noncash activities:
Acquisition of computer equipment ............... $ -- $ 20,991
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 5
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. Nature of business:
The Company, located in New York, is a manufacturer providing branded and
private label women's apparel both domestically and internationally.
2. Significant accounting policies:
a. Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or
market.
b. Property and equipment:
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are
amortized on the straight-line basis over the shorter of the term of
the related lease or the estimated useful lives of the assets.
Depreciation is computed using straight-line and accelerated methods.
c. Income taxes:
The Company, with the consent of its stockholders, elected to be taxed
as an S corporation under the Internal Revenue Code, which provides
that, in lieu of corporate income taxes, the stockholders are taxed on
their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal income taxes is reflected in
these statements. A provision has been made for any state and local
taxes.
d. Cash concentration:
The Company maintains its cash accounts primarily in two commercial
banks located in New York. The total cash balances are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000.
e. 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 of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those
estimates.
<PAGE>
Page 6
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
2. Significant accounting policies: (Continued)
f. Advertising costs:
Advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1998 and 1997 was approximately $63,000
and $50,000, respectively.
g. Credit risk:
The Company routinely extends credit to domestic and international
retailers for the sale of its women's apparel. This credit risk may be
affected by changes in economic or other conditions and may,
accordingly, impact the Company's overall credit risk. Management
believes that the credit risk is mitigated by the diversity of its
customer base. Reserves for potential credit losses are maintained and
such losses have been immaterial to the Company's financial position
and within management's expectations.
3. Inventories:
1 9 9 8 1 9 9 7
----------- -----------
Raw materials $ 4,033,944 $ 6,782,641
Work-in-process 3,070,867 3,385,671
Finished goods 14,349,484 10,865,977
----------- -----------
$21,454,295 $21,034,289
=========== ===========
4. Property and equipment:
1 9 9 8 1 9 9 7
----------- -----------
Auto $ 19,779 $ 19,779
Machinery and equipment 176,119 153,896
Furniture and fixtures 245,562 165,244
Computer equipment 1,165,166 1,034,959
Leasehold improvements 778,132 388,803
2,384,758 1,762,681
Less accumulated depreciation
and amortization 1,329,041 1,077,041
---------- ----------
$1,055,717 $ 685,640
========== ==========
<PAGE>
Page 7
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
4. Property and equipment (Continued):
Assets recorded under capitalized leases are included in the balance sheets
as follows:
1 9 9 8 1 9 9 7
----------- -----------
Computer equipment $311,112 $311,112
Less accumulated depreciation 277,432 254,978
-------- --------
Net property under capitalized leases $ 33,680 $ 56,134
======== ========
5. Note payable:
The Company has a credit facility with a finance company. The Company
currently has available a $38,000,000 line of credit, collateralized by
accounts receivable, inventory, and limited personal guarantees. The note
is renewed annually in May and bears interest at prime.
6. Capitalized lease obligations:
The Company leases certain computer equipment (see note 4) under long-term
noncancelable capital leases. The minimum annual payments due under these
leases are as follows:
Year ended December 31, 1999 $9,204
1 9 9 8 1 9 9 7
--------- ---------
Total minimum lease payments $9,204 $67,311
Less amounts representing imputed interest at
rates ranging from approximately 7% to 15% 7,390 17,690
------ -------
Present value of net minimum payments 1,814 49,621
Less current portion 1,814 48,367
------ -------
$ - $ 1,254
====== =======
7. Loans payable, stockholders:
Loans payable to stockholders in the amount of $750,000 bear interest at 7%
per annum. The stockholders subordinated the loans to the debt due to the
finance company and trade creditors.
<PAGE>
Page 8
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
8. Pension plans:
The Company makes contributions to a multi-employer union sponsored pension
plan. The plan provides defined benefits to substantially all union
employees. The plan is not administered by the Company and contributions
are determined in accordance with provisions of negotiated labor contracts.
Information relating to accumulated benefit obligations and plan assets is
not determinable. Under ERISA, an employer, upon withdrawal from a
multi-employer plan, is required to fund its proportionate share of the
plan's unfunded vested benefits at the point of withdrawal. The Company has
no intention of withdrawing from the plan. Contributions made to the plan
for the years ended December 31, 1998 and 1997 were approximately $113,000
and $127,000, respectively.
The Company sponsors a defined contribution pension plan that covers all
nonunion employees. Contributions are based on an employee's salary subject
to a maximum. Matching contributions are at the discretion of management.
The Company sponsors a retirement savings plan for its salaried and hourly
employees, which allows participants to make contributions under Section
401(k) of the Internal Revenue Code. Employees vest immediately in their
contributions. Matching contributions are at the discretion of management.
Pension expense for the years ended December 31, 1998 and 1997 was $(2,753)
and $90,000, respectively.
9. Commitments and contingency:
a. The Company leases office and showroom facilities under noncancelable
operating leases. Additionally, the Company leases an office and
warehouse facility at an annual rental of $211,000 from a partnership
which is owned by some of the stockholders. The minimum annual rental
commitments on leased real property under noncancelable operating
leases at December 31, 1998 are as follows:
Years ending December 31, 1999 $584,000
2000 592,000
2001 600,000
2002 608,000
2003 617,000
Thereafter 457,000
The leases require payment of real estate taxes and other operating
expenses. Rent expense for the years ended December 31, 1998 and 1997
was approximately $870,000 and $812,000, respectively.
<PAGE>
Page 9
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
9. Commitments and contingency: (Continued)
b. The Company has guaranteed a loan from a bank to a related party in
the amount of $663,153. The loan is collateralized by a building that
is owned by the related party.
c. The Company was contingently liable for approximately $5,625,000 of
open letters of credit as of December 31, 1998.
10. Major customer:
Approximately 30% of the Company's sales for the year ended December 31,
1998 were to two customers. The amounts due from these customers included
in accounts receivable was approximately $5,670,000 at December 31, 1998.
Approximately 28% of the Company's sales for the year ended December 31,
1997 were to one customer. The amount due from this customer included in
accounts receivable was approximately $1,722,000 at December 31, 1997.
11. Buy-sell agreement:
The Company and its stockholders have an agreement regarding the
disposition of the stockholders' shares of the Company's common stock. In
certain instances, defined in the agreement, a stockholder may dispose of
his stock by offering it for sale to the Company and the other
stockholders. The Company has the first option to buy, and, after a period
of time, the option reverts to the remaining stockholders. The methodology
for determining the purchase price is set forth in the agreement.
As part of the same agreement, upon the death of a stockholder, the Company
or its other stockholders shall have the irrevocable and exclusive option,
but not the obligation, to purchase the Company's common stock from the
estate of the deceased stockholder. The acquisition price is determined in
the same manner as for a disposition of stock.
At December 31, 1998, the agreement was partially funded by insurance.
<PAGE>
ANNEX 4
ITEM-EYES, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
ITEM-EYES, INC.
TABLE OF CONTENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Page
Independent Auditors' Report 1
Balance Sheets 2
Statements of Income and Retained Earnings 3
Statements of Cash Flows 4
Notes to Financial Statements 5-9
<PAGE>
BERENSON & COMPANY LLP
CERTIFIED PUBLIC ACCOUNTANTS
135 WEST 50th STREET
NEW YORK, NY 10020
(212) 977-6800
INDEPENDENT AUDITORS' REPORT
Stockholders
Item-Eyes, Inc.
New York, NY
We have audited the accompanying balance sheets of Item-Eyes, Inc. as of
December 31, 1997 and 1996, and the related statements of income and retained
earnings, and cash flows for the years then ended. 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 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 Item-Eyes, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Berenson & Company LLP
-----------------------------
New York, NY
January 31, 1998
<PAGE>
Page 2
ITEM-EYES, INC.
BALANCE SHEETS
December 31,
-------------------------
1 9 9 7 1 9 9 6
ASSETS --------- --------
Current assets:
Cash ................................................ $ 41,986 $ 265,813
Accounts receivable, less allowances for doubtful
accounts, sales discounts and returns of $727,000
(notes 5 and 10) .................................. 12,471,686 13,061,252
Inventories (notes 3 and 5) ......................... 21,034,289 18,853,240
Prepaid expenses and other current assets ........... 436,430 205,596
----------- -----------
Total current assets .............................. 33,984,391 32,385,901
Property and equipment (note 4) ..................... 685,640 1,015,488
Other assets ........................................ 426,255 360,214
----------- -----------
$35,096,286 $33,761,603
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable (note 5) ............................. $13,492,205 $12,927,892
Capitalized lease obligations, current portion
(notes 4 and 6) ................................. 48,367 68,180
Accounts payable .................................. 10,221,912 10,948,356
Accrued expenses and other current liabilities .... 220,219 257,060
----------- -----------
Total current liabilities ....................... 23,982,703 24,201,488
Capitalized lease obligations, net of current portion
(notes 4 and 6) ................................ 1,254 34,118
Loans payable, stockholders (note 7) .............. 750,000 750,000
----------- -----------
24,733,957 24,985,606
----------- -----------
Commitments and contingency (notes 8 and 9)
Stockholders' equity:
Common stock, no par value; authorized 200 shares;
issued 100 shares .............................. 200 200
Additional paid-in capital ........................ 269,800 269,800
Retained earnings ................................. 10,271,704 8,685,372
----------- -----------
10,541,704 8,955,372
Less treasury stock, at cost ...................... 179,375 179,375
----------- -----------
10,362,329 8,775,997
----------- -----------
$35,096,286 $33,761,603
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3
ITEM-EYES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
Years ended
December 31,
------------------------
1 9 9 7 1 9 9 6
ASSETS --------- --------
Net sales (note 10) ............................... $87,161,296 $86,836,431
----------- -----------
Cost of goods sold ................................ 67,507,185 69,375,554
Operating expenses, including interest expense
of $1,475,865; $1,394,995-1996 (net of
interest income of $51,966; $29,329-1996) ....... 10,401,891 10,299,764
----------- -----------
77,909,076 79,675,318
----------- -----------
Income before officers' salaries and other expenses 9,252,220 7,161,113
Officers' salaries ................................ 5,121,530 4,244,174
----------- -----------
Income from operations ............................ 4,130,690 2,916,939
Loss on abandonment of fixed assets ............... 288,358 --
----------- -----------
Income before provision for income taxes .......... 3,842,332 2,916,939
Provision for income taxes ........................ 124,000 110,000
----------- -----------
Net income ........................................ 3,718,332 2,806,939
Retained earnings, beginning of year .............. 8,685,372 7,186,906
Less dividends .................................... (2,132,000) (1,308,473)
----------- -----------
Retained earnings, end of year .................... $10,271,704 $ 8,685,372
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4.
ITEM-EYES, INC.
STATEMENTS OF CASH FLOWS
Years ended
December 31,
------------------------
1 9 9 7 1 9 9 6
ASSETS --------- --------
Cash flows from operating activities:
Net income ...................................... $3,718,332 $2,806,939
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation ................................ 180,000 180,000
Bad debt expense (recoveries) ............... (15,583) 41,364
Loss on abandonment of fixed assets ......... 288,358 --
Changes in assets (increase) decrease:
Accounts receivable ....................... 605,149 (1,319,467)
Inventories ............................... (2,181,049) (1,713,295)
Prepaid expenses and other current assets . (230,834) (19,822)
Other assets .............................. (66,041) 95,259
Changes in liabilities increase (decrease):
Accounts payable .......................... (726,444) (1,052,233)
Accrued expenses and other current
liabilities ............................. (36,841) 83,576
---------- ----------
Net cash provided (used) by operating
activities ............................. 1,535,047 (897,679)
---------- ----------
Cash flows used by investing activities:
Acquisition of equipment ........................ (117,519) (26,173)
---------- ----------
Cash flows from financing activities:
Note payable, borrowings ........................ 564,313 2,532,357
Dividend distributions .......................... (2,132,000) (1,308,473)
Principal payments under capital lease obligations (73,668) (77,856)
---------- ----------
Net cash provided (used) by financing activities (1,641,355) 1,146,028
---------- ----------
Net increase (decrease) in cash .................... (223,827) 222,176
Cash, beginning of year ............................ 265,813 43,637
---------- ----------
Cash, end of year .................................. $ 41,986 $ 265,813
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ....................................... $1,475,865 $1,394,995
Income taxes ................................... 102,260 70,000
Supplemental disclosure of noncash activities:
Acquisition of computer equipment ................ $ 20,991 $ 24,883
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 5
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. Nature of business:
The Company, located in New York, is a manufacturer providing branded and
private label women's apparel both domestically and internationally.
2. Significant accounting policies:
a. Inventories:
Inventories are valued at the lower of cost (first-in, first-out) or
market.
b. Property and equipment:
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Leasehold improvements are
amortized on the straight-line basis over the shorter of the term of
the related lease or the estimated useful lives of the assets.
Depreciation is computed using straight-line and accelerated methods.
c. Income taxes:
The Company, with the consent of its stockholders, elected to be taxed
as an S corporation under the Internal Revenue Code, which provides
that, in lieu of corporate income taxes, the stockholders are taxed on
their proportionate share of the Company's taxable income. Therefore,
no provision or liability for federal income taxes is reflected in
these statements. A provision has been made for any state and local
taxes.
d. Cash concentration:
The Company maintains its cash accounts primarily in two commercial
banks located in New York. The total cash balances are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000.
e. 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 of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those
estimates.
<PAGE>
Page 6
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. Significant accounting policies: (Continued)
f. Advertising costs:
Advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1997 and 1996 was approximately $50,000
and $41,000, respectively.
3. Inventories:
1997 1996
----------- ------------
Raw materials $ 6,782,641 $ 6,966,032
Work-in-process 3,385,671 1,550,725
Finished goods 10,865,977 10,336,483
----------- -----------
$21,034,289 $18,853,240
=========== ===========
4. Property and equipment:
1997 1996
----------- -----------
Auto $ 19,779 $ 64,005
Machinery and equipment 153,896 293,736
Furniture and fixtures 165,244 427,944
Computer equipment 1,034,959 1,035,569
Leasehold improvements 388,803 982,318
---------- ----------
1,762,681 2,803,572
Less accumulated depreciation
and amortization 1,077,041 1,788,084
---------- ----------
$ 685,640 $1,015,488
========== ==========
Assets recorded under capitalized leases are included in the balance sheet
as follows:
1997 1996
----------- ----------
Computer equipment $311,112 $290,121
Less accumulated depreciation 254,978 224,550
-------- --------
Net property under capitalized leases $ 56,134 $ 65,571
======== ========
<PAGE>
Page 7
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
5. Note payable:
The Company has a credit facility with a finance company. The Company
currently has available a $24,000,000 line of credit, collateralized by
accounts receivable, inventory, and limited personal guarantees. The note
bears interest at prime.
6. Capitalized lease obligations:
The Company leases certain computer equipment (see note 4) under long-term
noncancelable capital leases. The minimum annual payments due under these
leases are as follows:
Years ended December 31, 1998 $58,107
1999 9,204
1997 1996
------ ------
Total minimum lease payments $ 67,311 $136,800
Less amounts representing imputed interest at
rates ranging from approximately 7 % to 15 % 17,690 34,502
-------- --------
Present value of net minimum payments 49,621 102,298
Less current portion 48,367 68,180
-------- --------
$1,254 $ 34,118
======== ========
7. Loans payable, stockholders:
Loans payable to stockholders in the amount of $750,000 bear interest at 7%
per annum. The stockholders subordinated the loans to the debt due to the
finance company and trade creditors.
<PAGE>
Page 8
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. Pension plans:
The Company makes contributions to a multi-employer union sponsored pension
plan. The plan provides defined benefits to substantially all union
employees. The plan is not administered by the Company and contributions
are determined in accordance with provisions of negotiated labor contracts.
Information relating to accumulated benefit obligations and plan assets is
not determinable. Under ERISA, an employer upon withdrawal from a
multi-employer plan is required to fund its proportionate share of the
plan's unfunded vested benefits at the point of withdrawal. The Company has
no intention of withdrawing from the plan. Contributions made to the plan
for the years ended December 31, 1997 and 1996 were approximately $127,000
and $118,000, respectively.
The Company sponsors a defined contribution pension plan that covers all
nonunion employees. Contributions are based on an employee's salary subject
to a maximum. Matching contributions are at the discretion of management.
The Company sponsors a retirement savings plan for its salaried and hourly
employees, which allows participants to make contributions under Section
401(k) of the Internal Revenue Code. Employees vest immediately in their
contributions. Matching contributions are at the discretion of management.
Pension expense for the years ended December 31, 1997 and 1996 was $90,000
and $175,000, respectively.
9. Commitments and contingency:
a. The Company leases office and showroom facilities under noncancelable
operating leases. Additionally, the Company leases an office and
warehouse facility at an annual rental of $21 1,000 from a partnership
which is owned by some of the stockholders. The minimum annual rental
commitments on leased real property under noncancelable operating
leases at December 31, 1997 are as follows:
Years ending December 31, 1998 $ 511,000
1999 584,000
2000 592,000
2001 600,000
2002 608,000
Thereafter 1,091,000
The leases require payment of real estate taxes and other operating
expenses. Rent expense for the years ended December 31, 1997 and 1996 was
approximately $812,000 and $753,000, respectively.
<PAGE>
Page 9
ITEM-EYES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
9. Commitments and contingency: (Continued)
b. The Company has guaranteed a loan from a bank to a related party in
the amount of $460,000. The loan is collateralized by a building that
is owned by the related party.
c. The Company was contingently liable for approximately $2,192,000 of
open letters of credit as of December 31, 1997.
10. Major customer:
Approximately 28 % and 33 % of the Company's sales for the years ended
December 31, 1997 and 1996 were to J.C. Penney, respectively. The amount
due from this customer included in accounts receivable was approximately
$1,722,000 and $3,972,000 at December 31, 1997 and 1996, respectively.
11. Buy-sell agreement:
The Company and its stockholders have an agreement regarding the
disposition of the stockholders' shares of the Company's common stock. In
certain instances, defined in the agreement, a stockholder may dispose of
his stock by offering it for sale to the Company and the other
stockholders. The Company has the first option to buy, and, after a period
of time, the option reverts to the remaining stockholders. The methodology
for determining the purchase price is set forth in the agreement.
As part of the same agreement, upon the death of a stockholder, the Company
or its other stockholders shall have the irrevocable and exclusive option,
but not the obligation, to purchase the Company's common stock from the
estate of the deceased stockholder. The acquisition price is determined in
the same manner as for a disposition of stock.
At December 31, 1997, the agreement was partially funded by insurance.
<PAGE>
Annex 5
Page 1 of 7
HAMPSHIRE GROUP, LIMITED
PRO FORMA FINANCIAL INFORMATION
Introductory Note
-----------------
The Hampshire Group, Limited Pro Forma Balance Sheet as of July 1, 2000,
gives effect to the Item-Eyes acquisition as if such event was consummated as of
that date. The Hampshire Group, Limited Pro Forma Statement of Operations for
the six months ended July 1, 2000, gives effect to the Item-Eyes, Inc.
acquisition as if such event was consummated on January 1, 2000. The Pro Forma
Statement of Income for the year ended December 31, 1999, gives effect to the
Item-Eyes, Inc. acquisition as if such event was consummated on January 1, 1999.
The pro forma adjustments are based on available information and certain
assumptions which the management of Hampshire Group believes provides a
reasonable basis for presenting all of the significant effects of the
acquisition.
The pro forma financial information does not purport to be indicative of
the results that would have been obtained had such transaction described
occurred as of the assumed dates. In addition, pro forma financial information
does not purport to project Hampshire Group's results of operations for any
future period.
The pro forma financial information should be read in conjunction with the
financial statements of Hampshire Group, Limited contained in its Form 10-K
filed on March 30, 2000 and the financial statements of Item-Eyes contained in
this Form 8-K/A.
<PAGE>
Annex 5
HAMPSHIRE GROUP, LIMITED Page 2 of 7
PRO FORMA CONSOLIDATED BALANCE SHEET
(unaudited, in thousands)
July 1, 2000 Pro Forma
Hampshire Item-Eyes,
ASSETS Group, Ltd.(1) Inc. (2)
---------------------------------------------------------------------------
Current assets:
Cash and cash equivalents ............ $ 9,671 $ 57
Accounts receivable trade - net ...... 7,730 12,593
Notes and other receivables .......... 4,029 20
Inventories .......................... 31,424 26,856
Deferred tax asset ................... 4,225 --
Other current assets ................. 685 341
-------- --------
Total current assets ............... 57,764 39,867
Property, plant and equipment - net .... 2,535 2,363
Notes receivable - long term - net ..... 4,065 --
Real property investments - net ........ 17,748 --
Long-term investments - net ............ 7,589 --
Deferred tax asset ..................... 1,969 --
Intangible assets - net ................ 1,497 --
Deposit on business acquisition ........ 5,000 --
Other assets ........................... 177 596
-------- --------
$ 98,344 $ 42,826
======== ========
LIABILITIES
---------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt .... $ 482
Borrowings under lines of credit ..... -- $16,117
Advance payment - sale of assets ..... -- 5,000
Accounts payable ..................... 2,633 9,205
Accrued expenses and other liabilities 4,273 546
-------- -------
Total current liabilities .......... 7,388 30,868
Long-term debt ......................... 24,168 --
Note payable to former stockholder ..... -- 2,468
Mortgage payable ....................... -- 967
Deferred compensation .................. 2,312 --
-------- -------
Total liabilities ................ 33,868 34,303
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------
Common stock .......................... 418 --
Additional paid-in capital ............ 27,762 --
-- 270
Retained earnings ..................... 37,386 12,174
Accumulated other comprehensive loss .. (452) --
Treasury stock ........................ (638) (3,921)
-------- -------
Total stockholders' equity ...... 64,476 8,523
-------- -------
$ 98,344 $42,826
======== =======
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET (continued)
Pro Forma
---------------------------
Adjustments Consolidated
ASSETS (3) Total
----------------------------------------------------------------------
Current assets:
Cash and cash equivalents ............ $ 9,728
Accounts receivable trade - net ...... ($1,286) (A) 19,037
Notes and other receivables .......... -- 4,049
Inventories .......................... -- 58,280
Deferred tax asset ................... -- 4,225
Other current assets ................. -- 1,026
-------- --------
Total current assets ............... (1,286) 96,345
Property, plant and equipment - net .... (1,501) (B) 3,397
Notes receivable - long term - net ..... -- 4,065
Real property investments - net ........ -- 17,748
Long-term investments - net ............ -- 7,589
Deferred tax asset ..................... -- 1,969
Intangible assets - net ................ 8,651 (C) 10,148
Deposit on business acquisition ........ (5,000) (D) --
Other assets ........................... -- 773
-------- --------
$ 864 $142,034
======== ========
LIABILITIES
-----------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt .... $ 482
Borrowings under lines of credit ..... $13,000 (E) 29,117
Advance payment - sale of assets ..... (5,000) (D) --
Accounts payable ..................... -- 11,838
Accrued expenses and other liabilities -- 4,819
-------- --------
Total current liabilities ........ 8,000 46,256
Long-term debt ......................... 2,100 (F) 26,268
Note payable to former stockholder ..... (2,468) (G) --
Mortgage payable ....................... (967) (B) --
Deferred compensation .................. -- 2,312
-------- --------
Total liabilities .................. 6,665 74,836
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------
Common stock ........................... 39 (H) 457
Additional paid-in capital ............. 2,683 (H) 30,445
(270) (I) --
Retained earnings ...................... (12,174) (I) 37,386
Accumulated other comprehensive loss ... -- (452)
Treasury stock ......................... 3,921 (I) (638)
-------- --------
Total stockholders' equity ........... (5,801) 67,198
-------- --------
$ 864 $142,034
======== ========
The accompanying notes are an integral part of this Pro Forma Consolidated
Balance Sheet.
<PAGE>
Annex 5
Page 3 of 7
Notes To
Pro Forma Consolidated Balance Sheet
As of July 1, 2000
(1) Derived from the unaudited historical Balance Sheet of Hampshire Group,
Limited as of July 1, 2000, as reported on Form 10-Q as of the same date.
(2) Derived from the compiled historical Balance Sheet of Item-Eyes, Inc.
("Item-Eyes") as of June 30 2000. Such compiled financial statements are
included herein as Annex 1.
(3) Pro forma adjustments are made to reflect the consolidated balance sheet
had the acquisition been made as of July 1, 2000:
(A) The recording of a change in estimate of allowances for customers'
returns and chargebacks based on current information available.
(B) The elimination of the net book value of the corporate condominium and
the balance of the mortgage related thereto, not purchased by Vintage
III, Inc. (the "Company").
(C) The recording of the excess of the acquisition cost over the net
assets purchased including $172,550 of legal and accounting cost.
(D) The elimination of the $5 million good faith deposit.
(E) The recording of the borrowing under the line of credit to pay the $13
million cash portion of the purchase price of which $3 million was
subsequently repaid from the proceeds of a $3 million term loan
provided by Merchants National Bank.
(F) The issuance of subordinated notes delivered to the Item-Eyes
stockholders as part of the purchase price.
(G) The elimination of the note payable to a former stockholder of
Item-Eyes not assumed by the Company but paid from the purchase price
proceeds including the issuance of 30,362 unregistered shares of
Hampshire Group, Limited common stock.
(H) The issuance of 395,382 unregistered shares of Hampshire Group,
Limited common stock as partial payment of the purchase price,
including 30,362 shares issued to a former stockholder.
(I) The elimination of the Item-Eyes' stockholder equity, including the
treasury stock.
<PAGE>
Annex 5
Page 4 of 7
HAMPSHIRE GROUP, LIMITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited, in thousands, except per share data)
Six Month Ended July 1, 2000
Hampshire Item-Eyes,
Group, Ltd.(1) Inc. (2)
---------------------------------------------------------------------------
Net sales ................................ $ 27,412 $ 42,286
Cost of goods sold ....................... 23,443 33,682
-------- --------
Gross profit ........................... 3,969 8,604
Rental revenue ........................... 1,168 46
Gain on sale of real estate investments .. 730 --
-------- --------
5,867 8,650
Selling, general and
administrative expenses .............. 10,180 7,124
Goodwill amortization .................... 237 --
Gain on sales of property and equipment .. 385 --
Gain on sale of manufacturing facilities,
net of impairment and exit costs........ 1,326 --
-------- --------
Income (loss) from operations ............ (2,839) 1,526
Other income (expense):
Interest expense ....................... (904) (1,022)
Interest income ........................ 763 1
Other .................................. 347 --
-------- --------
Income (loss) before income taxes ........ (2,633) 505
Provision for income taxes ............... (150) (28)
-------- --------
Net income (loss) .................... ($ 2,783) $ 477
======== ========
Net loss per share
basic and diluted ...................... ($0.68) --
===== ======
Weighted average number
of shares outstanding .................. 4,116 --
===== ======
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (continued)
Pro Forma
---------------------------
Adjustments Consolidated
(3) Total
---------------------------------------------------------------------------
Net sales ................................ $ 69,698
Cost of goods sold ....................... 57,125
Gross profit ......................... 12,573
Rental revenue ........................... ($46) (J) 1,168
Gain on sale of real estate investments .. -- 730
-------- --------
(46) 14,471
Selling, general and
administrative expenses .............. (33) (J) 17,271
Goodwill amortization .................... 288 (K) 525
Gain on sales of property and equipment .. -- 385
Gain on sale of manufacturing facilities,
net of impairment and exit costs -- 1,326
-------- --------
Income (loss) from operations ............ (301) (1,614)
Other income (expense):
Interest expense ..................... (570) (L) (2,450)
46 (J)
Interest income ...................... -- 764
Other ................................ -- 347
-------- --------
Income (loss) before income taxes ........ (825) (2,953)
Provision for income taxes ............... 28 (M) (150)
-------- --------
Net income (loss) .................... ($797) ($ 3,103)
======== ========
Net loss per share
basic and diluted....................... -- ($0.69)
====== =====
Weighted average number
of shares outstanding .................. 395 (N) 4,511
====== =====
The accompanying notes are an integral part of this Pro Forma Consolidated
Statement of Operations.
<PAGE>
Annex 5
Page 5 of 7
Notes To
Pro Forma Consolidated Statement of Operations
Six Months Ended July 1, 2000
(1) Derived from the interim unaudited historical Statement of Operations of
Hampshire Group, Limited for the Six Months Ended July 1, 2000, as reported
on Form 10-Q as of July 1, 2000.
(2) Derived from the compiled historical Statement of Income of Item-Eyes, Inc.
("Item-Eyes") for the Six Months ended June 30, 2000. Such compiled
financial statements are included herein as Annex 1.
(3) Pro forma adjustments are made to reflect the consolidated statement of
operations had the acquisition been made as of January 1, 1999:
(J) The elimination of the rental revenue from the corporate condominium
owned by Item-Eyes, but not purchased by Vintage and the related
interest and other expenses for the six months ended July 1, 2000.
(K) The recording of amortization of goodwill, the excess of the
acquisition cost over the net assets purchased, for the six months
ended July 1, 2000.
(L) The recording of the interest on the acquisition debt including the
$13 million cash portion of the purchase price at the average prime
rate for the six months (9% per annum); plus interest on the
subordinated notes at their stated rates, respectively; less interest
on the note payable to former stockholders.
(M) The recording of the adjustment to provision for income taxes on the
consolidated statements.
(N) The issuance of 395,382 unregistered shares of Hampshire Group,
Limited common stock as partial payment of the purchase price.
<PAGE>
Annex 5
Page 6 of 7
HAMPSHIRE GROUP, LIMITED
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(unaudited, in thousands, except per share data)
Year Ended December 31, 1999
Hampshire Item-Eyes,
Group, Ltd.(1) Inc. (2)
---------------------------------------------------------------------------
Net sales ................................ $151,317 $103,758
Cost of goods sold ....................... 121,617 82,992
-------- --------
Gross profit ........................... 29,700 20,766
Rental revenue ........................... 2,005 --
-------- --------
31,705 20,766
Selling, general and administrative
expenses ............................... 24,274 15,568
Goodwill amortization .................... 837 --
Asset impairment charge .................. 725 --
-------- --------
Income from operations ................... 5,869 5,198
Other income (expense):
Interest expense ....................... (1,967) (1,828)
Interest income ........................ 729 13
Other .................................. 1,465 --
-------- --------
Income before provision for income taxes 6,096 3,383
Provision for income taxes:
Current ................................ (563) (99)
Deferred ............................... (337) --
-------- --------
Net income ......................... $ 5,196 $ 3,284
======== ========
Net income per share: Basic .......... $1.27 --
===== =====
Diluted......... $1.22 --
===== =====
Weighted average number Basic........... 4,100 --
===== =====
of shares outstanding: Diluted......... 4,257 --
===== =====
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (continued)
Pro Forma
---------------------------
Adjustments Consolidated
(3) Total
---------------------------------------------------------------------------
Net sales ................................ ($1,286)(J) $253,789
Cost of goods sold ....................... -- 204,609
------- ---------
Gross profit ........................... (1,286) 49,180
Rental revenue ........................... -- 2,005
------- ---------
(1,286) 51,185
Selling, general and administrative
expenses ............................... (2,204)(K) 37,638
Goodwill amortization .................... 577 (L) 1,414
Asset impairment charge .................. -- 725
------- ---------
Income from operations ................... 341 11,408
Other income (expense):
Interest expense ....................... (1,181)(M) (4,976)
Interest income ........................ -- 742
Other .................................. -- 1,465
------- ---------
Income before provision for income taxes (840) 8,639
Provision for income taxes:
Current ................................ (816)(N) (1,478)
Deferred ............................... -- (337)
------- ---------
Net income ......................... ($ 1,656) $ 6,824
======= =========
Net income per share: Basic .......... -- $1.52
===== =====
Diluted......... -- $1.47
===== =====
Weighted average number Basic........... 395 (O) 4,495
===== =====
of shares outstanding: Diluted......... 395 (O) 4,652
===== =====
The accompanying notes are an integral part of this Pro Forma Consolidated
Statement of Income.
<PAGE>
Annex 5
Page 7 of 7
Notes To
Pro Forma Consolidated Statement of Income
Year Ended December 31, 1999
(1) Derived from the historical Statement of Income of Hampshire Group, Limited
for the Year Ended December 31, 1999, as reported on Form 10-K as of
December 31, 1999.
(2) Derived from the historical Statement of Income of Item-Eyes, Inc.
("Item-Eyes") for the Year Ended December 31, 1999. Such financial
statements are included herein as Annex 2.
(3) Pro forma adjustments are made to reflect the consolidated statement of
income had the acquisition been made as of January 1, 1999:
(J) The recording of a change in estimate of allowances for customers'
returns and chargebacks based on current information available.
(K) The elimination of the compensation paid by the "S Corporation" above
the respective employment agreement of the principals.
(L) The recording of amortization of goodwill, the excess of the
acquisition cost over the net assets purchased, for the year ended
December 31, 1999.
(M) The recording of the interest expense on the acquisition debt
including the $13 million cash portion of the purchase price at the
average prime rate (8% per annum) for the year; plus interest on the
subordinated notes at their note payable stated rate, respectively;
less interest on the debt to former stockholders.
(N) The recording of the adjustment to provision for income taxes on the
consolidated statements.
(O) The issuance of 395,382 unregistered shares of Hampshire Group,
Limited common stock as partial payment of the purchase price.
<PAGE>
EXHIBITS
Exhibit No. Description Footnote
---------- ---------------------------------------------------- --------
Exhibits Incorporated by Reference:
----------------------------------
4.1 Amendment No. 1, dated September 5, 2000, to the Note
Purchase Agreement, dated as of May 15,1998, among the
Company, the Guarantors named therein, Phoenix Home
Life Mutual Insurance Company and the Ohio National Life
Insurance Company. 1
10.1 Asset Purchase Agreement between Vintage III, Inc.,
Hampshire Group, Limited, Item-Eyes, Inc. and certain
other parties, dated June 26, 2000. 1
10.2 Amended and Restated Credit Agreement and Guaranty
among Hampshire Group, Limited, the Guarantors named
therein, the Banks named therein and The Chase Manhattan
Bank as agent for the Banks, dated September 5, 2000. 1
99.1 Hampshire Group, Limited's press release announcing the
completion of the acquisition of the assets and business
of Item-Eyes, Inc., dated September 6, 2000. 1
(1) Incorporated by reference to Hampshire Group, Limited's
Current Report on Form 8-K filed on September 15, 2000.
Exhibits filed herewith:
-----------------------
10.3 Term Loan Agreement between Merchants National Bank and
Hampshire Group, Limited dated as of September 20, 2000.
