-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VewdSY1gQhH6gawypw6zn3xn/2lOtCA/Lsa1s+Aut4foeVaHgT6LszX7VQAvIwzY R6Dm0ei/ZqF898kxhNuajw== 0000912057-01-509120.txt : 20010418 0000912057-01-509120.hdr.sgml : 20010418 ACCESSION NUMBER: 0000912057-01-509120 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RETROSPETTIVA INC CENTRAL INDEX KEY: 0001015383 STANDARD INDUSTRIAL CLASSIFICATION: WOMEN'S, MISSES', AND JUNIORS OUTERWEAR [2330] IRS NUMBER: 954298051 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 001-13101 FILM NUMBER: 1604152 BUSINESS ADDRESS: STREET 1: 8825 WEST OLYMPIC BLVD CITY: BEVERLY HILLS STATE: CA ZIP: 90211 10KSB40 1 a2045563z10ksb40.txt FORM 10KSB40 UNITED STATES OF AMERICA SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the Fiscal year ended December 31, 2000. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT the transition period from __________ to ___________ Commission file number: 333-29295 RETROSPETTIVA, INC. (Name of small business issuer in its charter) California 95-4298051 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8825 West Olympic Boulevard Beverly Hills, CA 90211 (Address of principal executive offices) (310) 657-1745 (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: NO PAR VALUE COMMON STOCK REDEEMABLE COMMON STOCK PURCHASE WARRANTS ------------------------- ----------------------------------------- Title of Class Title of Class Check whether the issue (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $17,438,305. State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. As of April 11, 2001, 3,479,916 shares of the Registrant's no par value common stock were outstanding and the aggregate market value of the shares held by non-affiliates based on that days market close of $0.10 was approximately $347,992. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS) Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by court. Yes [ ] No [ ] Transitional Small Business Disclosure Format: Yes [ ] No [X] 1 TABLE OF CONTENTS
PART I PAGE ---- Item 1 Description of Business 3 Item 2 Description of Property 7 Item 3 Legal Proceedings 8 Item 4 Submission of Matters to a Vote of Security Holders 8 PART II Item 5 Market for Common Equity and Related Stockholder Matters 8 Item 6 Management's Discussion and Analysis or Plan of Operation 9 Item 7 Financial Statements 13 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 9 Directors, Executive Officers, Promoters and Control Persons; 13 Compliance with section 16(a) of the exchange act Item 10 Executive Compensation 14 Item 11 Security Ownership of Certain Beneficial Owners and Management 16 Item 12 Certain Relationships 17 PART IV Item 13 Exhibits and Reports on Form 8-K 18 SIGNATURES 19
2 ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION The Company was organized in November 1990 initially to manufacture and import textile products from Italy including finished garments and fabrics. By 1993, the Company was purchasing fabrics from firms and factories around the world and contracting for the manufacture of finished garments in Macedonia for importation into the United States. The Company contracts for the manufacture of a variety of garments, primarily basic women's sportswear which includes suits, skirts, blouses, blazers, pants, shorts, vests and dresses, using assorted fabrics including rayons, linens, cotton and wool. The Company arranges for the manufacture of garments for customers under private labels selected by its customers. It markets its products exclusively in the United States directly to large wholesalers, national retailers and buying organizations, and directly to women's chain clothing stores, boutiques and catalogues. Much of the Company's garments are sold on a "package" basis pursuant to which the Company markets at fixed prices finished garments to the customer's specifications and quantity requirements, arranges for production of the garments and delivers the garments directly to the customer at the port of entry. In its marketing, the Company emphasizes these package arrangements and what it believes to be the better quality and lower prices of garments produced by skilled Macedonian workers as compared to lower paid workers in certain other regions. As a package provider, the Company sources and purchases fabrics and trims, arranges for cutting and sewing, and coordinates any other services required to provide a completed garment. The Company manufactures its finished products only upon receipt of purchase orders from its wholesale and retail customers, which the Company believes minimizes the marketing and fashion risk generally associated with the apparel industry. Fabrics and trims are purchased from suppliers in China, India, Russia, Romania, Italy and the United States. After dying the fabric, if necessary, the fabric and trim are shipped to factories selected by the Company (primarily located in Macedonia) where they are manufactured into completed garments under the Company's management and quality control guidance. The finished products are then shipped directly to New York City where the Company's customers claim the goods either at the port in New York City or at a consolidating warehouse in Astoria, New York. Since early 2001, when hostilities commenced in Macedonia, the Company has experienced a significant reduction in new purchase orders for its products. This reduction in new purchase orders, together with a substantial loss incurred by the Company for the year ended December 31, 2000, has required the Company to reduce its operations and overhead expenses. Such overhead reductions have included the layoff of nine employees and the reduction of general and administrative expenses in the amount of approximately $500,000 on an annualized basis. The Company is in default on its credit facility with the Imperial Bank. The current amount outstanding on the credit facility is $1,200,000 and the authorized maximum amount of the credit facility is $3,300,000. The Company anticipates repaying the remaining amount due under the credit facility from its existing cash flow, during the second quarter of 2001. Should hostilities in Macedonia continue, with a corresponding decrease in new purchase orders, the Company expects that it will be required to further reduce or even discontinue its operations. 3 STRATEGY The Company will continue to offer better quality, popular priced women's apparel in a wide variety of styles, patterns, colors and fabrics. The Company's business strategy is as follows: MAINTAIN FOCUS ON THE COMPANY'S CORE BUSINESS. The Company plans to continue to contract for the manufacture and market basic women's sportswear. This strategy emphasizes concentrating on the `cut-to-order' business where the customer provides the specifications and design of the garments which have historically been less fashion oriented. The Company believes that by avoiding the production of trendier fashion apparel ordered by customers it will be able to reduce costs commonly associated in the industry with discounts, returns and allowances. Consistent with this strategy, the Company will focus on the sale of private label apparel using the brand names ordered by its customers. The Company, however, will continue to evaluate the marketplace in an effort to assess its current market strategies and manage those strategies to remain responsive to market demand. INCREASE PENETRATION OF CURRENT MARKETS. The Company seeks to further penetrate its current markets by offering lower product prices while maintaining a high degree of quality control. Lower transportation costs compared to other parts of the world (e.g.; the Pacific Rim) offer a competitive advantage. Many countries have quotas that can apply to different types of manufactured fabrics, trim and finished goods. These quotas are imposed on goods and components imported to and exported from those countries and contribute to the overall cost of the apparel imported to and exported from those countries. In comparison, Macedonia has a quota imposed on only one category of finished goods which the Company is currently not subject to and contributes to the Company's ability to offer competitive prices In the event that Macedonia or the United States enacts quota restrictions and charges to export or import apparel, then the costs associated with that quota could increase the unit cost of the goods exported from Macedonia and imported into the United States. EXPAND DISTRIBUTION CHANNELS AND PRODUCT LINES. The Company will seek to expand to new geographic markets within the United States for its existing products while expanding its existing product lines within the basic women's sportswear market and exploring possibilities to enter new markets. PRODUCTS The Company offers to its customers a variety of men's and women's sportswear. Its apparel includes many styles manufactured in rayon and linen mixes, linen and cotton mixes, all cotton, wool and other materials. The Company's garments are moderately priced ranging at retail from $12.99 to $49.99 and are marketed primarily to working women. MARKETING The Company arranges for the manufacture of garments for customers under private labels selected by its customers. It markets its products exclusively in the United States directly to large wholesalers, directly and indirectly to national retailers and buying organizations, directly to women's chain clothing stores and catalogues and to retail stores. 4 Marketing is conducted through in-house salespersons that call directly upon customers, as well as outside sales associates, through customer referrals and through the efforts of the Company's executive officers. The Company also maintains a sales office in New York. The Company's customers include United States retailers and wholesalers as described above. The Company's customers for the year ended December 31, 2000 included three that accounted for more than 10% of sales (Customer A at 11%, Customer C 24% and Customer D at 10% or a total of 45%). A loss of any of these customers would have a material adverse effect on the Company's results of operations. MANUFACTURING AND SUPPLIERS The Company arranges for the manufacture of garments based on the fabric, design, styling and quality specifications of individual customer orders. The Company does not own or operate any manufacturing facilities. It obtains its products from manufacturers in Macedonia who contract with the Company to manufacture specific items of apparel in predetermined amounts and for agreed upon unit prices. The Company contracts for the purchase of fabric and the manufacture and sewing of its products with Yucan Trade International ("Yucan") a manufacturing agent. The Company believes that outsourcing allows it to enhance production flexibility and capacity while reducing capital expenditures and avoiding the costs of managing a large production work force. In addition, the Company believes that outsourcing allows the Company to utilize the expertise of its suppliers and manufacturers in fabric selection and manufacturing processes. The Company is currently assessing the viability of expanding and geographically diversifying its manufacturing resources in regions other than Macedonia, especially in light of the hostilities in Macedonia, which has significantly adversely affected the Company. The Company arranges for the production of its products based on orders received. The Company obtains all of its customers' orders prior to placement of its contract manufacturing orders. The Company's customer orders may change with respect to colors, sizes, allotments or assortments prior to commencement of production of the garments, and any costs associated with such a change will be borne by the Company. Accordingly, there is some risk associated with the Company's practice of allowing change orders after fabric is purchased. However, costs associated with change orders have not been material in the past and the Company does not believe that they will be material in the future. The Company purchases fabric and trim from the manufacturers of these garment components. These manufacturers ship their products directly to the Company's manufacturing agent or to fabric dyers who in turn ship the fabric per the instructions of the agent. The Company does not have written contracts with any of its fabric or trim suppliers or contractors, however, the Company believes that its relationships with its suppliers and contractors are good. The Company has retained Yucan as its manufacturing agent in Macedonia. Yucan is responsible for selecting the factories that will manufacture the Company's finished goods, to oversee this production and to warehouse and arrange for shipping the finished goods to the Company in the United States. Yucan is paid a fee that ranges from $0.15 to $0.50 per garment manufactured. Although Yucan is currently responsible for the manufacture, warehousing and shipping of all of the Company's finished goods, the Company believes that there are other manufacturing agents in Macedonia which the Company could retain for the same purpose on substantially similar terms. The Company does not have written contracts with Yucan or any of its suppliers or contractors. Although the loss of certain suppliers or contractors (including Yucan) could have a significant material adverse effect on the Company's operating results, the Company believes it would be able to replace such suppliers and contractors within a reasonable amount of time if required to do so. 5 The Company delivers finished goods directly from its manufacturing agent to its customers at the port of entry in New York City or at the Company's consolidating warehouse in Astoria, New York or ships from the warehouse to the customers' warehouses. Since the Company assumes the risk of loss when the finished goods leave its manufacturer, the goods are insured until delivery is made to the customer. For the year ended December 31, 2000, Newbel Inc. ("Newbel") and Yucan accounted for 23%, 34% respectively, of the Company's total fabric and finished goods purchases. QUALITY CONTROL The Company's quality control program is designed to provide that all of the Company's products meet the Company's and its customer's standards. The Company maintains a staff of three quality control employees in the United States and four such employees in Macedonia. The Company develops and inspects samples of each product prior to production, establishes fittings based on the sample and inspects sample fabric prior to cutting and several times during the production process. The Company, Yucan and (in the case of private label products) representatives of the Company's customers inspect final products prior to shipment. COMPETITION The apparel industry is highly competitive and consists of numerous manufacturers, importers and distributors. Many of the Company's competitors are significantly larger, more diversified and have significantly greater financial, distribution, marketing, name recognition and other resources than the Company. The Company believes it has certain competitive advantages resulting from its contractual relationships with Macedonian manufacturers. These advantages include the availability in Macedonian factories of highly skilled workers at relatively lower costs than in more economically developed regions. They also include a lack of quotas and lower tariffs in the importation into the United States of finished goods from Macedonia. Finally they also include lower shipping costs as a result of the closer geographical proximity to the United States of the Company's Macedonian contract manufacturers compared to manufacturers in the Pacific Rim nations. TRADE NAMES The Company has developed two apparel trade names, "Magellan" and "Retrospettiva" in connection with the marketing of its apparel. The Company regards its trade names as assets although no trade name registrations have been filed in the United States or in foreign countries. While the use of a trade name may provide certain common law rights of further usage, there can be no assurance the Company could prohibit the use of its trade names by others. The Company currently does not actively use either trade name since its current business is private label utilizing the trade names ordered by its customers. CREDIT POLICY AND CREDIT CONTROL Prior to accepting a purchase order and purchasing fabric and components, the Company investigates the customer's credit history through traditional credit reporting services, through asset-based lenders of the customer and through other contract partners of the customer. The Company sometimes obtains a deposit or advance payment before purchasing fabric or commencing garment production for the customer. The Company accepts commercial letters of credit for the purchase of raw materials. This is similar to a progress payment from the customer whereby they pay for the cost of the materials used in the manufacture of their order. The Company also accepts arrangements whereby a customer will purchase directly the raw materials and or trim used in the production of their order. 6 The Company also accepts commercial letters of credits from customers covering existing orders. When the order is shipped and all of the requirements of the letter of credit are met, the Company presents the letter of credit for payment by the customer's authorized bank. The Company also utilizes its own line of credit facility to request commercial documentary letters of credit naming suppliers as beneficiaries in an effort to obtain more favorable credit terms. The line of credit facility enables the Company to receive extended credit terms while not drawing on its line of credit until the supplier presents the letter of credit for payment to the Company's bank. The Company has a factoring agreement with a New York based Factoring Company to factor its accounts receivable. The Company receives up to 80% of the receivables at the time of factoring. This is a non-recourse factoring agreement and the Company assigns the responsibility of the factored receivables to the Factor, except in cases of charge backs due to quality and shipping. GOVERNMENT REGULATION The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries. These agreements, which have been negotiated bilaterally either under the framework established by the Arrangement Regarding International Trade in Textiles, known as the Multifiber Agreement, or other applicable statutes, impose quotas on the amounts and types of merchandise which may be imported into the United States from these countries. However, apparel imported from Macedonia is not subject to such quotas. These agreements also allow the signatories to adjust the quantity of imports for categories of merchandise that, under the terms of the agreements, are not currently subject to specific limits. The Company's imported products are also subject to United States customs' duties that may comprise a material portion of the cost of the merchandise. Apparel products are subject to regulation by the Federal Trade Commission in the United States. Regulations relate principally to the labeling of the Company's products. The Company believes that it is in substantial compliance with such regulations, as well as applicable federal, state, local and foreign rules and regulations governing the discharge of materials hazardous to the environment. There are no significant capital expenditures for environmental control matters either estimated in the current year or expected in the near future. EMPLOYEES As of December 31, 2000, the Company employed 17 individuals in Los Angeles, California, New York, New York and Macedonia including but not limited to its four executive officers, three inventory management and order control personnel, three administrative personnel and four quality control workers. ITEM 2. DESCRIPTION OF PROPERTY The Company leases approximately 2,200 square feet for its executive and administrative offices at 8825 West Olympic Boulevard, Beverly Hills, California 90211 at $2,750 per month pursuant to a lease expiring April 30, 2005. At the present time, the Company's current facility provides adequate space to conduct its operations. The Company subleases 2,000 square feet of office and showroom facilities at 1359 Broadway, Suite 2102, New York, New York 10018, on a month to month basis at $2,575 per month. The Company subleases a New York apartment from the majority stockholder on a month to month basis for use by its employees traveling from Los Angeles, California and Macedonia to New York City. 7 The Company leases approximately 16,500 square feet for its New York warehouse at 4-05 26th Avenue, Astoria, New York at $8,250 per month. ITEM 3. LEGAL PROCEEDINGS The Company is subject to litigation and claims that arise in the normal course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position, capital resources, liquidity or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS AND USE OF PROCEEDS SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the calendar year ended December 31, 2000. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKKHOLDER MATTERS MARKET INFORMATION The Company's common stock has been traded on the OTC BB under the symbol "RTRO.OB" since January 24, 2001. On April 10, 2001, the closing bid price for the Company's common stock was $.098 per share. The following table sets forth for the quarters indicated, the range of high and low bid prices of the Company's common stock as reported by NASDAQ.
By Quarter Ended: Common Stock High Low -------- -------- Calendar 1999 March 31, 1999 ............. $ 4.88 $ 3.06 June 30, 1999 .............. $ 1.63 $ 1.38 September 30, 1999 ......... $ 1.94 $ 1.50 December 31, 1999 .......... $ 1.38 $ 1.13 Calendar 2000 March 31, 2000 ............. $ 1.56 $ 1.50 June 30, 2000 .............. $ 1.50 $ 0.69 September 2000 ............. $ 1.22 $ 0.63 December 2000 .............. $ 0.81 $ 0.13 Calendar 2001 March 2001 ................. $ 0.31 $ 0.09
The above quotations were reported by NASDAQ and OTC BB and reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. HOLDERS The approximate number of the Company's record and beneficial stockholders as of March 31, 2001 was 850. 8 DIVIDENDS The Company has not paid any dividends on its common stock since inception and does not plan to pay dividends in the foreseeable future. The Company anticipates that any future earnings will be retained to finance growth. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is incorporating this statement into this report in order to do so. This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended which represent the Company's expectations of beliefs concerning future events that involve risks and uncertainties. All statements (other than statements of historical facts) included in the Company's SEC filings, including its Proxy Statements and this Report may include forward-looking statements that are subject to risks and uncertainty that may cause actual results to differ materially. Such forward-looking statements that may be contained in this Report could include in particular statements concerning business back-logs, operating efficiencies and capacities, capital spending, and other expenses. Other factors that could also cause actual results to differ materially include dependence upon unaffiliated manufacturers and fabric suppliers, dependence on certain customers, foreign operations, competition, risks associated with significant growth, uncertainties in the apparel industry, general economic conditions, seasonality, political instability, inflation and monetary fluctuations, import and other charges or taxes, changes in laws and regulations, other activities of governments, agencies and similar organizations, trade restrictions or prohibitions, concentration of accounts receivable, possible fluctuations in operating results, effects of changes within the Company's organization or in compensation and benefit plans, the amount, type and cost of the Company's financing and any changes to that financing, the amount, and rate of growth in, the Company's selling, general and administrative expenses, changes in accounting policies and practices and the application of such policies and practices and nationalizations and unstable governments and legal systems and intergovernmental disputes. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations are disclosed in this Report to the extent that the Company is currently aware of them. There may be additional factors that could arise that are not listed above that could also result in having a material adverse impact on the Company's liquidity, capital resources and results of operations. OVERVIEW The Company contracts for the manufacture of a variety of garments, primarily basic women's sportswear which includes skirts, blouses, blazers, pants, shorts, vests and dresses, using assorted fabrics including rayon, linens, cotton and wool. The Company arranges for the manufacture of garments for customers under private labels selected by its customers. It markets its products exclusively in the United States directly to large wholesalers, directly and indirectly to national retailers and buying organizations, and directly to women's chain clothing stores and catalogues. 9 Most of the Company's garments are sold on a "package" basis pursuant to which the Company markets at fixed prices finished garments to the customer's specifications and quantity requirements, arranges for production of the garments and delivers the garments directly to the customer. In its marketing, the Company emphasizes these package arrangements and what it believes to be the better quality and lower prices of garments produced by skilled Macedonian workers as compared to lower paid workers in certain other regions. See Item 1. As a package provider, the Company sources and purchases fabrics and trims, arranges for cutting and sewing, and coordinates any other services required to provide a completed garment. Since the Company manufactures its finished products only upon receipt of purchase orders from its wholesale and retail customers, it therefore does not maintain an inventory of finished products. The Company believes that in this way it minimizes the marketing and fashion risk generally associated with the apparel industry. Fabrics and trims are purchased from suppliers in China, India, Russia, Romania, Italy and the United States. After dying the fabric, if necessary, the fabric and trim are shipped to factories selected by the Company (primarily located in Macedonia) where they are manufactured into completed garments under the Company's management and quality control guidance. The finished products are then shipped directly to New York City where the Company's customers claim the goods either at the port in New York City or at a consolidating warehouse in Astoria, New York or the Company arranges for direct shipping of goods to retailers. The following is a discussion of the financial condition and results of operations of the Company for the years ended December 31, 2000, 1999 and 1998. This discussion should be read in conjunction with the Company's financial statements, the notes related thereto, and the other financial data included elsewhere in this filing. RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, NOTE: ALL FIGURES IN PERCENTAGES EXCEPT EARNINGS PER SHARE 2000 1999 1998 ---- ---- ---- Net sales 100% 100% 100.0% Cost of goods sold 96.87 86.7 87.1 Gross profit 3.13 13.3 12.9 Selling, general and admin. Exp 21.23 12.1 7.6 Interest expense 2.38 1.1 0.39 Net income (Loss) (17.66) 0.5 3.0 Earnings (loss) per share $ (0.95) $ 0.03 $ 0.28
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, AND 1999 (THE "2000 YEAR" AND "1999 YEAR", RESPECTIVELY.) 10 SALES Sales for the 2000 Year were $17,438,305 which represented a decrease of $2,769,155 or 13.71% over the 1999 Year net sales of $20,207,460. The decrease in sales was primarily attributable to the decrease in the volume of business ordered by existing customers and new customers. GROSS PROFIT Gross profit was $546,807 for the 2000 Year, a decrease of $2,138,556 from $2,685,363 for the 1999 Year. The gross profit percentage was 3.13% in the 2000 Year, a decrease from 13.3% in the 1999 Year. The decrease in gross profit was primarily attributable to writing off of obsolete and slow moving inventory. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $3,701,688 or 21.23% of sales for the 2000 Year, an increase of $1,256,847 from $2,444,841 or 6.2% of sales for the 1999 Year. The increase in expenses was attributable to the increase in write offs of vendor credits of approximately $403,000, bad debt expenses of approximately $859,000, trade show expenses, promotion, utilities, professional fees, outside help, insurance and factor charges. INTEREST EXPENSE Interest expense for the 2000 Year $413,542 an increase of $176,824 compared to $236,718 for the 1999 Year. Interest expense was primarily attributable to the Company's utilization of its line of credit and factoring arrangement. PROVISION (BENEFIT) FOR INCOME TAXES The Company anticipates a tax (benefit) of $836,000 for the 2000 year verses $46,000 provision for taxes in year 1999. The marginal tax rate experience of the Company has been approximately 40%. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, AND 1998 (THE "1999 YEAR" AND "1998 YEAR", RESPECTIVELY.) SALES Sales for the 1999 Year were $20,207,460 which represented a decrease of $7,327,076 or 26.6% over the 1998 Year net sales of $27,534,536. The decrease in sales was primarily attributable to the decrease in the volume of business ordered by existing customers and new customers. This was in part attributed to the out break of the conflict in the Balkans which had an adverse effect on the Company's second quarter sales. GROSS PROFIT Gross profit was $2,685,363 for the 1999 Year, a decrease of $857,267 from $3,542,630 for the 1998 Year. The gross profit percentage was 13.3% in the 1999 Year, an increase from 12.9% in the 1998 Year. The decrease in gross profit was primarily attributable to decrease in gross sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $2,444,841 or 12.1% of sales for the 1999 Year, an increase of $344,957 from $2,099,884 or 7.6% of sales for the 1998 Year. The 11 increase in expenses was attributable to the increase in commission expenses, trade show expenses, printing, license fees, office salaries, officer salaries, bank charges and factor charges. INTEREST EXPENSE Interest expense for the 1999 Year was $236,718 an increase of $131,278 compared to $105,440 for the 1998 Year. Interest expense was primarily attributable to the Company's utilization of its line of credit and factoring arrangement. PROVISION FOR INCOME TAXES The provision for income taxes was $46,000 and $629,363 for the 1999 and 1998 Years, respectively. The marginal tax rate experience of the Company has been approximately 40%. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company has 575,000 warrants outstanding with an exercise price of $7.50 per warrant expiring September 23, 2002. The Company has 50,000 underwriter warrants outstanding with an exercise price of $14.40 per unit. Each unit consists of two shares of the Company's common stock and one warrant as described above. The Company does not know whether the warrants will be exercised in 2000. Without exercise of those warrants, the Company may need to limit its growth in order to more efficiently manage its available funds and funds generated by operations. The Company is utilizing a $3.3 million line of credit and its credit facility arrangement with a New York factoring company. At April 11, 2001 the Company was not in compliance with the covenants of the loan and expects to pay off the loan during the second quarter of 2001. CASH FLOWS PROVIDED BY OPERATING ACTIVITIES Operating activities provided net cash of $23,023. Cash flows provided by operating activities were primarily attributable to decreased purchases of raw materials, trim and finished goods required to support the Company's corresponding decrease in customer orders, decreases in accounts payable and increases in income taxes receivable for net operating loss carrybacks. CASH FLOWS USED FOR INVESTING ACTIVITIES The Company's cash flow used by investing activities totaled $246,370. Cash flows used by investing activities were primarily attributable to the purchase of equipment and investment in a certificate of deposit as collateral for the Company's line of credit. CASH FLOWS FROM FINANCING ACTIVITIES Cash flows from financing activities totaled $163,559. Cash flows from financing activities were primarily attributable to the Company's use of its line of credit. 12 CAPITAL RESOURCES Since its formation, the Company has financed its operations and met its capital requirements primarily through its public offering, cash flows from operations, customer advances, exercise of Stock Options and credit facilities. The initial use of IPO funds was to repay certain debt and to purchase raw materials for working capital and the eventual purchase of wool manufacturing equipment. The Company's primary need for cash is for working capital purposes. As a result of the Macedonian hostilities, Company's revenue has been significantly reduced, causing it to significantly cut all operations in order to reduce overheads. If revenues does not improve the Company will be required to further reduce or even discontinue its operations. INFLATION AND CURRENCY VOLATILITY The Company does not anticipate a significant increase in inflation in the United States over the short-term. All of the Company's transactions worldwide are conducted on a dollar-denominated basis which is intended to mitigate the possible impact of volatile currencies that may arise as a result of global corporations crowding emerging markets in search of growth. SEASONALITY The Company's revenues and operating results have exhibited some degree of seasonality in past periods. Typically, the Company experiences its highest sales in the first and fourth quarters and its lowest sales in the second and third quarters. In 2000 the Company experienced its highest sales in the first and third quarters. ITEM 7. FINANCIAL STATEMENTS ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, KEY EMPLOYEES AND CONTROL PERSONS
OFFICER OR DIRECTOR NAME AGE POSITION SINCE Borivoje Vukadinovic 42 Chief Executive Officer, President, Chairman of the Board (1) 1991 Hamid Vaghar 36 Chief Financial Officer, Director 1998 Ivan Zogovic 42 Chief Operations Officer, Director 1996 Mojgan Keywanfar 37 Controller, Director, Corporate Secretary 1996 Sol Schalman 76 Director (1). (2) 1999
13 DIRECTORS AND EXECUTIVE OFFICERS BORIVOJE VUKADINOVIC has been a director and executive officer of the Company since January 1991, and its Chief Executive Officer since January 1993. From June 1990 to August 1993, he was Vice President and a principal stockholder of Celtex ENT, a Los Angeles, California based company that established and administered production of yarns and raw textiles in Yugoslavia, Turkey and Macedonia. From May 1988 to June 1990, he was founder, owner and President of DUTY OFF, Inc., a Los Angeles, California based company that produced young men's apparel. He earned a Bachelor of Arts degree in Business from the University of Banja Luka in Yugoslavia and a Bachelor of Arts degree in Art from Bern University in Switzerland. HAMID VAGHAR has served as Controller of Retrospettiva since the Company's inception and was promoted to Chief Financial Officer in October 1998. From March 1990 to January 1993, he was an accountant with EB Accounting a California based accounting firm which conducted various accounting services for companies in the garment district of Los Angeles. In January 1993 he became a partner in Mid-West Consultants and continued his accounting career in that capacity until 1998. He earned a Bachelor degree in Natural Sciences and an MBA from University of Poona, India. IVAN B. ZOGOVIC has been employed by the Company as its Manager-Export/Import since January 1994 and was appointed a director in May 1996. Mr. Zogovic is responsible for the export and import of raw materials and finished goods including customs clearing, scheduling and freight forwarding, between the United States and the Company's contract manufacturers in Eastern Europe. He earned a law degree from the University of Belgrade Law School and practiced law in Yugoslavia from 1984 until 1992. MOJGAN KEYWANFAR has been employed by the Company as its accounting manager since February 1991 and was appointed a director in December 1996. Ms. Keywanfar manages the Company's bookkeeping and management information systems. She holds a B.A. degree in Economics from the California State University, Northridge. SOL SCHALMAN became a director of the Company in September 1999. He received a Bachelors degree in Business Administration with a major in accounting from UCLA in 1940. He served in the US Army from 1941 to 1946 and was discharged in 1964 with rank of Captain in the Finance Dept. He was licensed as a Certified Public Accountant in California in June 1948 and practiced as a sole practitioner ever since. He was involved in Real Estate development from 1955 to 1962, owned and operated the Beverly Comstock Hotel in LA from 1962 to 1976 and also is licensed as a Certified Public Accountant in Nevada. ITEM 10. EXECUTIVE COMPENSATION The following table discloses all compensation awarded to, received by, and paid to the Chief Executive Officer of the Company for the year ended December 31, 2000. No other executive officer's annual compensation exceeded $100,000 in 2000. 14
LONG TERM COMPENSATION ---------------------------------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (j) RESTRICTED NAME AND PRINCIPAL OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARD(S)($) SARS(#) PAYOUTS($) COMPENSATION($) - ---------------------------------------------------------------------------------------------------------------------------------- Borivoje Vukadinovic 2000 150,000 -0- -0- -0- -0- -0- -0- Chief executive officer 1999 150,000 12,500 -0- -0- -0- -0- -0- 1998 95,000 7,917 -0- -0- 100,000 -0- -0-
1996 STOCK OPTION PLAN In May 1996, the Company adopted a stock option plan for officers, directors, employees and consultants (the "Plan") which provides for the grant of options intended to qualify as "incentive stock options" and "nonqualified stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock options are issuable only to eligible officers and key employees of the Company, and nonqualified options may be granted to officers, employees, directors and consultants. The Plan is administered by at least three members of the Board, at least two of whom are not executive officers or salaried employees of the Company. As of May 1996, the Company had reserved 1,786,930 shares of Common Stock for issuance under the Plan. Under the Plan, the Board of Directors determines which individuals shall receive options, the time period during which the options may be partially or fully exercised, the number of shares of Common Stock that may be purchased under each option and the option price. Each option granted under the Plan shall be evidenced by a stock option agreement. The per share exercise price of options granted under the Plan may not be less than the fair market value of the Common Stock on the date the options are granted. No person who owns, directly or indirectly, at the time of the granting of an incentive stock option, more than 10% of the total combined voting power of all classes of stock of the Company is eligible to receive incentive stock options under the Plan unless the option price is at least 100% of the fair market value of the Common Stock subject to the option on the date of grant. No options may be transferred by an optionee other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option may only be exercisable by the optionee. Options under the Plan must be granted within 10 years from the effective date of the Plan and the exercise date of an option cannot be later than 10 years from the date of grant. Any options that expire unexercised or that terminate upon an optionee's ceasing to be employed by the Company become available once again for issuance. Shares issued upon exercise of an option will rank equally with other shares then outstanding. As of the date of this filing, 2,736,635 options have been granted under the Plan to officers, directors, employees and consultants including 1,458,067 options granted to Mr. Vukadinovic, an aggregated 23,826 options granted to the Company's one non-employee director and 1,087,962 options to other employees and consultants. The per share exercise prices range from $0.63 to $6.00, which prices represent at least the fair market value of Company's Common Stock on the respective dates the options were granted, based on prior sales of the Company's Common Stock. The table below sets forth the total number of options issued to each executive officer and director of the Company and the exercise price. Mr. Vukadinovic's options are exercisable until April 2006. The remaining options expire at various times in 2006 and 2008. There was an amendment filed to the 1996 Stock Option Plan which provided for an additional 1,000,000 options. 15 In June 1997, the exercise prices of 1,191,290 of Mr. Vukadinovic's options were re-priced from $2.83 per share to $6.75 per share. In December 1998, the Board granted 600,000 options to Frank Trible. 85,000 options were vested immediately and the remaining 515,000 will vest in twelve monthly installments of 42,916 options per month starting March 1999. Upon termination of Mr. Trible's employment on February 15, 2000, 322,084 of the unexercised options of his was cancelled. The Board also approved incentive option grants to various officers, employees and consultants. The following table sets forth all stock options granted to the Company's executive officers and directors through December 31, 2000.
PERCENT OF TOTAL OPTIONS TOTAL NUMBER OF GRANTED TO EXERCISE EXPIRATION NAME OF EXECUTIVE OFFICER OR DIRECTOR OPTIONS ISSUED EMPLOYEES PRICE DATE - ------------------------------------- ---------------- ------------- -------- ---------- Borivoje Vukadinovic 1,458,067 (1) 53.3 (1) (1) Ivan Zogovic 81,712 3.0 (2) (3) Mojgan Keywanfar 81,712 3.0 (2) (3) Hamid Vaghar 50,000 1.8 $ 1.25 2008 Sol Schalman 23,826 0.9 $ 2.25 2004 ------------ ------ Totals 1,695,317 62.0
(1) Consists of 166,777 options exercisable at $.63 per share, 1,191,290 options exercisable at $6.00 per share and 100,000 options exercisable at $1.25 per share. (2) Number of options and exercise prices; consists of 35,739 options exercisable at $2.94 per share and 30,973 options exercisable at $1.68 per share and 15,000 options exercisable at $1.25 per share as to each individual. (3) Represents stock options to purchase up to 11,913 shares exercisable until May 2006, 30,973 shares exercisable until April 2006, 23,826 shares exercisable until April 2006 and 15,000 shares exercisable until December 16, 2008. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the ownership of the Company's common stock as of December 31, 2000, by (i) each person who is known by the Company to own of record of beneficially more than 5% of the Company's common stock, (ii) the Company's Chief Executive Officer and each of the Company's directors and (iii) all directors and officers of the Company as a group. The persons listed in the table have sole voting and investment powers with respect to the shares of common stock and the address of each person is in care of the Company at 8825 West Olympic Boulevard, Beverly Hills, California 90211. 16
AMOUNT OF PERCENT OF NAME OWNERSHIP CLASS ---- --------- ---------- Borivoje Vukadinovic(1) 2,404,054 46.3% Hamid Vaghar(2) 50,000 1.0% Ivan Zogovic(3) 81,712 1.6% Mojgan Keywanfar(3) 81,712 1.6% S. William Yost(4) 23,826 0.4% Donald E. Tormey(4) 23,826 0.4% Sol Schalman(5) 23,826 0.4% --------- All officers and directors as a group (8 persons) 2,688,956
(1) Includes stock options to purchase up to 1,191,290 shares of common stock at $6.00 per share, 166,777 shares at $.63 per share exercisable until April 2006 and 100,000 shares at $1.25 until December 2008. (2) Includes stock options to purchase up to 50,000 shares of common stock at $1.25 until December 2008 (3) Represents stock options to purchase up to 30,973 shares at $1.68 per share exercisable until April 2006, 11,913 shares at $2.94 per share exercisable until May 2006, 23,826 shares at $2.94 per share exercisable until April 2006 and 15,000 share at $1.25 exercisable until December 2008 . (4) Represents stock options to purchase up to 23,826 shares of common stock at $2.94 per share exercisable until May 2006. (5) Represents stock options to purchase up to 23,826 shares of common stock at $2.25 per share exercisable until September 2004. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS At December 31, 2000, Mr. Vukadinovic was indebted to the Company in the amount of $156,997 advanced by the Company under a credit facility granted to Mr. Vukadinovic in the maximum amount of $350,000 and evidenced by a promissory note. The promissory note is unsecured, bears no interest and is due on demand. The sums advanced to Mr. Vukadinovic were primarily used by him to pay certain medical and related expenses of a family member. The Company used a portion of a consolidating warehouse in Astoria, New York for short term storage and for consolidating services in connection with finished goods imported from Macedonia pending pick up by the Company's customer Positive Influence, Inc. ("PII"), the owner of the warehouse and the provider of the consolidating services, is a non-affiliated former customer of the Company which was indebted to the Company in the amount of $86,851 at December 31, 1999 for goods previously purchased from the Company. The Company was charged an average of approximately $10,000 per month for use of the warehouse and for consolidating services provided by PII which amount is deducted from the amount owed by PII to the Company. Consolidating services involved accepting finished goods shipments, combining the goods into larger quantities for pickup by, or delivery to, customers and storage of the goods prior to customer acceptance. In December 2000, the Company deemed the remaining balance uncollectible and wrote off approximately $75,000. In July 1997, Mr. Vukadinovic personally guaranteed the Company's line of credit with Merrill Lynch Business Financial Services Inc. in the amount of up to $500,000. In November 1997, the line of credit was increased to a maximum of $1,500,000 based on a formula. In July 1998 this line of credit was paid off and Mr. Vukadinovic guaranteed the Company's line of credit with Imperial Bank in the maximum amount of $3,500,000 based on a formula. In December 1998 the Company executed a one year employment agreement with Mr. Trible as its Vice President of Investor Relations providing for an annual salary of $54,000 and the issuance of 600,000 stock options. See "1996 Stock Option Plan". As of February 15, 2000, Mr. 17 Trible is no longer an employee of the Company and all 322,084 sock otions not exercised by him have been forfeited. In addition Mr. Trible is indebted to the Company in amount of $164,790 which is past due and is in litigation to collect. The Company believes that the transactions described above were fair, reasonable and consistent with the terms of transactions that the Company could have entered into with non-affiliated third parties. All future transactions with affiliates will be approved by a majority of the Company's disinterested directors. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the year ended December 31, 2000. (c) Exhibit Listing
EXHIBIT NO. TITLE - ----------- ----- 1.01 Form of Underwriting Agreement(1) 1.02 Form of Agreement Among Underwriters(1) 1.03 Form of Selected Dealer Agreement(1) 1.04 Form of Representatives' Warrant(1) 1.05 Form of Amended Underwriting Agreement(1) 3.01 Restated Articles of Incorporation of the Registrant(1) 3.02 Bylaws of the Registrant(1) 4.01 Form of Warrant(1) 4.02 Form of Common Stock Certificate(1) 5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes Consent)(1) 10.01 1996 Employee Stock Option Plan(1) 10.02 Office Lease and Amendments thereto (Beverly Hills, California)(1) 10.03 Employment Agreement with Mr. Vukadinovic, as amended(1) 10.04 Employment Agreement with Mr. Silberman, as amended(1) 10.05 Promissory Note issued by Mr. Vukadinovic(1) 10.06 License Agreement with J.G. Hook, Inc(1) 10.07 Consulting Agreement with Kevin Dieball(1) 10.08 Factoring Agreement with Commodore Factors, Inc.(1) 10.09 Agreement with David N(1) 10.10 Agreement with Frank Trible(1) 11.01 Computation of Earnings Per Share(1) 11.02 Computation of Earnings Per Share(1) 23.02 Consent of Gary A. Agron (See 5.01, above)(1) 23.03 Consent of AJ. Robbins, P.C.(1) 27.01 Financial Data Schedule(1) 27.02 Financial Data Schedule(1)
(1) Previously filed SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report be signed on behalf by the undersigned, thereunto duly authorized on April 11, 2001. 18 RETROSPETTIVA, INC. By: /s/ Borivoje Vukadinovic --------------------------- Borivoje Vukadinovic President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 17, 2001. SIGNATURE CAPACITY /s/ Borivoje Vukadinovic - ----------------------------- Chairman of the Board of Directors, Borivoje Vukadinovic President, Chief Executive Officer /s/ Hamid Vaghar - ----------------------------- Chief Financial Officer (Principal Financial Hamid Vaghar Officer) and Director /s/ Ivan Zogovic - ----------------------------- Chief Operations Officer and Director Ivan Zogovic /s/ Mojgan Keywanfar - ----------------------------- Controller and Director Mojgan Keywanfar /s/ Sol Schalman - ----------------------------- Director Sol Schalman 19 INDEX TO FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheet F-3 Consolidated Statements of Operations F-5 Consolidated Statements of Changes in Stockholders' Equity F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8
F-1 AJ. ROBBINS, PC CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS 3033 EAST 1ST AVENUE SUITE 201 DENVER, COLORADO 80206 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS RETROSPETTIVA, INC. BEVERLY HILLS, CALIFORNIA We have audited the accompanying consolidated balance sheet of Retrospettiva, Inc. and subsidiary as of December 31, 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the two year period 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Retrospettiva, Inc. and subsidiary as of December 31, 2000 and the results of its operations and its cash flows for each of the years in the two year period then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred a significant operating loss in the current year which resulted in an accumulated deficit. The geographic area where the Company manufactures its products has experienced significant political unrest. The Company is also in default of certain loan covenants. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. AJ. ROBBINS, P.C. CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS DENVER, COLORADO FEBRUARY 2, 2001 F-2 RETROSPETTIVA, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 ASSETS CURRENT ASSETS: Cash $ 26,069 Accounts receivable, net, pledged 247,084 Due from factor 164,471 Note receivable, stockholder, pledged 156,997 Inventories, pledged 8,368,237 Income taxes receivable 955,714 Other current assets 112,537 ---------------- Total Current Assets 10,031,109 ---------------- PROPERTY AND EQUIPMENT, at cost, net, pledged 1,030,565 RESTRICTED INVESTMENT, pledged 300,000 OTHER ASSETS 18,845 ---------------- $ 11,380,519 ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-3 RETROSPETTIVA, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (CONTINUED) DECEMBER 31, 2000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade $ 2,530,447 Line of credit 2,274,376 Accrued expenses 101,859 ---------------- Total Current Liabilities 4,906,682 ---------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - authorized 1,000,000 shares - none issued or outstanding - Common stock - authorized 15,000,000 shares, no par value; 3,479,916 shares issued and outstanding 6,892,820 Subscription receivable (164,790) Additional paid-in capital 230,000 Accumulated (deficit) (484,193) ---------------- Total Stockholders' Equity 6,473,837 ---------------- $ 11,380,519 ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-4 RETROSPETTIVA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------------ ------------------ SALES $ 17,438,305 $ 20,207,460 COST OF SALES 16,891,498 17,522,097 ------------------ ------------------ GROSS PROFIT 546,807 2,685,363 ------------------ ------------------ OPERATING EXPENSES: Selling expenses 794,954 729,189 General and administrative 2,906,734 1,715,652 Loss on product development costs 357,235 - ------------------ ------------------ Total Operating Expenses 4,058,923 2,444,841 ------------------ ------------------ INCOME (LOSS) FROM OPERATIONS (3,512,116) 240,522 ------------------ ------------------ OTHER INCOME (EXPENSE): Interest income - related party - 15,788 Interest expense (413,542) (236,718) Other income 9,786 122,354 ------------------ ------------------ Net Other Income (Expense) (403,756) (98,576) ------------------ ------------------ INCOME (LOSS) BEFORE INCOME TAXES (3,915,872) 141,946 INCOME TAX PROVISION (BENEFIT) (836,000) 46,000 ------------------ ------------------ NET INCOME (LOSS) $ (3,079,872) $ 95,946 ================== ================== BASIC EARNINGS (LOSS) PER COMMON SHARE $ (.95) $ .03 ================== ================== AVERAGE NUMBER OF BASIC COMMON SHARES OUTSTANDING 3,241,438 3,103,198 ================== ================== DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (.95) $ .03 ================== ================== AVERAGE NUMBER OF DILUTED COMMON SHARES OUTSTANDING 3,241,438 3,648,157 ================== ==================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-5 RETROSPETTIVA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
RETAINED ADDITIONAL EARNINGS COMMON STOCK SUBSCRIPTION PAID-IN ACCUMULATED SHARES AMOUNT RECEIVABLE CAPITAL (DEFICIT) TOTAL ------------ ----------------- ----------------- ----------------- ----------------- ---------------- BALANCES, DECEMBER 31, 1998 2,900,000 $ 6,258,190 $ - $ 230,000 $ 2,499,733 $ 8,987,923 Stock options exercised 277,916 507,290 (164,790) - - 342,500 Net income for the year - - - - 95,946 95,946 ------------ ----------------- ----------------- ----------------- ----------------- ---------------- BALANCES, DECEMBER 31, 1999 3,177,916 6,765,480 (164,790) 230,000 2,595,679 9,426,369 Stock issued for services 302,000 127,340 - - - 127,340 Net (loss) for the year - - - - (3,079,872) (3,079,872) ------------ ----------------- ----------------- ----------------- ----------------- ---------------- 3,479,916 $ 6,892,820 $ (164,790) $ 230,000 $ (484,193) $ 6,473,837 ============ ================= ================= ================= ================= ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 RETROSPETTIVA, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999 ------------------ ------------------ CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income (loss) $ (3,079,872) $ 95,946 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Bad debt expense 960,834 79,481 Depreciation and amortization 143,535 136,907 Deferred income taxes 47,000 (6,000) Services and rent provided to reduce note receivable 11,395 13,482 Stock based compensation 127,340 - Changes in: Accounts receivable (43,651) 548,405 Product development costs 179,721 (179,721) Due from joint venturer 20,000 (20,000) Due from factor 578,479 (409,897) Inventories 1,885,711 (1,783,247) Accrued interest - related party 78,551 (23,181) Due from vendors 580,882 (134,362) Other current assets (44,725) 6,708 Prepaid income taxes 72,949 9,067 Income taxes receivable (955,714) - Accounts payable and accrued expenses (539,412) 1,049,416 Customer advances - (267,454) ------------------ ------------------ Cash flows provided (used) by operating activities 23,023 (884,450) ------------------ ------------------ CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Purchase of property and equipment (88,983) (57,497) Investment in certificate of deposit (300,000) - Loans to stockholder (91,612) (112,892) Collections on note receivable, stockholder 234,775 104,470 Other assets (550) 815 ------------------ ------------------ Cash flows (used) by investing activities (246,370) (65,104) ------------------ ------------------ CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Payments on note payable - (26,580) Proceeds from line of credit 7,519,739 5,841,382 Payments on line of credit (7,356,180) (5,237,781) Proceeds from issuance of common stock - 342,500 ------------------ ------------------ Cash flows provided by financing activities 163,559 919,521 ------------------ ------------------ NET (DECREASE) IN CASH (59,788) (30,033) CASH AND CASH EQUIVALENTS, beginning of year 85,857 115,890 ------------------ ------------------ CASH AND CASH EQUIVALENTS, end of year $ 26,069 $ 85,857 ================== ==================
SEE NOTE 17 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS ACTIVITY Retrospettiva, Inc. (the Company) located in Beverly Hills, California was organized in November 1990 to manufacture and import textile products from Europe including finished garments and fabrics. The Company designs, contracts for manufacture and markets a variety of garments. Fabrics are purchased from suppliers worldwide including firms in China, India, Russia, Romania, Italy and the United States. The fabrics are shipped to contractor factories primarily in Macedonia to be manufactured into finished garments for shipment to the Company's customers in the United States. During 1999 the Company formed a subsidiary, Hamilton Toys, LLC (Hamilton), for the manufacture of toys related to "The Adventures of Rocky and Bullwinkle" film. A New York manufacturing firm failed to produce goods as required by the Company's purchase order. The Company is seeking legal remedies for its loss. NOTE 2 - GOING CONCERN AND MANAGEMENTS' PLANS The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred a significant operating loss during the year ended December 31, 2000, which resulted in an accumulated deficit. The Company is in default of certain loan covenants including maintenance of specified levels of tangible net worth, current ratio and working capital. The geographic area where the Company manufactures its products has experienced significant political unrest. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow from operations to meet its obligations on a timely basis, and/or obtain financing as may be required. In addition, the Company may be required to locate alternative manufacturing facilities if the political unrest is not resolved soon. The Company may not be able to find suitable alternative manufacturing facilities without increased costs, if at all. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management intends to reduce operations and overhead expenses by laying off nine employees and cutting costs of approximately $500,000. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND MINORITY INTEREST The Company and its subsidiary Hamilton, in which it exercises control through majority ownership are consolidated and all inter-company accounts and transactions are eliminated. The Company's percentage of ownership for the year ended December 31, 2000 was 100%. The consolidated financial statements of the Company include 100% of the assets, liabilities, equity and operations of the subsidiary. The remaining ownership interests of the other venturer will be recorded as minority interests when the venturer acquires an equity interest. F-8 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers all short term, interest bearing deposits with original maturities of three months or less to be cash equivalents. RESTRICTED CASH The restricted cash was invested in a certificate of deposit which was used as collateral for a line of credit increase. This security is reported as a restricted investment. The classification is determined based on the expected term of the collateral requirement and not necessarily the maturity date of the underlying security. ACCOUNTS RECEIVABLE The Company provides an allowance for doubtful accounts, as needed, for accounts deemed uncollectible. Allowance for uncollectible accounts was $25,991 at December 31, 2000. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization expense is generally provided on a straight-line basis using estimated useful lives of 5-10 years for equipment. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation and amortization expense of property and equipment was $143,535 and $136,907 for the years ended December 31, 2000 and 1999, respectively. PRODUCT DEVELOPMENT COSTS At December 31, 2000 the Company had $357,235 of unamortized product development costs related to specific products of Hamilton. These costs were to be capitalized until sales were generated, at which time they would be amortized over one year, the expected sale period. The Company is uncertain of the recoupment of these costs and has elected to record an allowance of $357,235 against the costs, until it is assured of realization. REVENUE RECOGNITION Revenue is recognized when sold merchandise has cleared customs in the United States and is available to be shipped to customers from a port of entry or when the goods are consolidated and shipped from the Company's warehouse in New York. ADVERTISING EXPENSES The Company expenses advertising costs as incurred. During the years ended December 31, 2000 and 1999, the Company did not have significant advertising costs. F-9 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable for the current period and the change during the period in deferred tax assets and liabilities. Deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. (See Note 15) The Company has a net operating loss carryforward of approximately $2,100,000, expiring in 2020. Since it is more likely than not that the Company will not utilize the net operating loss in the near term, a valuation allowance equal to the deferred tax asset, which consisted primarily of the net operating loss carryforwards, has been provided. EARNINGS PER COMMON SHARE Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128) was issued in February 1997 (effective for financial statements issued for periods ending after December 15, 1997). This Statement simplifies the standards for computing earnings per share (EPS) previously found in Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes them more comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, the Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1999 the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption by the Company of Statement 133 did not impact the Company's financial statements. The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The SAB summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The Company does not believe that adoption of this SAB will have a material impact on its financial statements. RECLASSIFICATION Certain amounts reported in the Company's financial statements for the year ended December 31, 1999 have been reclassified to conform to the current year presentation. F-10 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates its long-lived assets by measuring the carrying amounts of assets against the estimated undiscounted future cash flows associated with them. At the time the carrying value of such assets exceeds the fair value of such assets, impairment is recognized. To date, no adjustments to the carrying value of the assets has been made. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments, which principally include cash, trade receivables, note receivable, accounts payable and accrued expenses, approximates fair value due to the relatively short maturity of such instruments. The fair value of the Company's debt instruments are based on the current borrowing rates available for financings with similar interest rates. At December 31, 2000 the carrying value of all financial instruments was not materially different from fair value. GEOGRAPHIC RISK The Company manufacturers substantially all of its goods in the Balkan region of Europe (primarily Madedonia). Historically, there has been political unrest in the Balkan region, but not in Macedonia. During 2001, there has been political unrest in Macedonia. Media coverage of this unrest has caused some of the Company's customers to reduce or cancel orders for the manufacturing of goods. Management believes that it may be required to locate alternative manufacturing facilities. CREDIT RISK The Company sells its merchandise principally to customers throughout the United States. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. (See Note 4) Two customers accounted for 73% of the non-factored accounts receivable balance at December 31, 2000. The Company maintains all cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. F-11 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SIGNIFICANT CUSTOMERS Individual customers aggregating in excess of 10% of net sales are as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 ------------------ ------------------ SALES Customer A $ 2,000,661 $ 2,333,366 Customer B $ - $ 4,297,956 Customer C $ 4,173,156 $ 5,898,082 Customer D $ 1,763,880 $ -
NOTE 4 - BAD DEBT EXPENSE During the fourth quarter of 1999 "David N", which had previously been a major customer of the Company, suspended its operations. The Company continued to make sales on behalf of the customer to third parties. The Company entered into negotiations and had an agreement with the management of the customer and its informal Committee of Unsecured Creditors to acquire the trade name of the customer in exchange for the outstanding account receivable of $889,428 and $20,000 cash. The Company believed the trade name had value in excess of those amounts. As a result, the Company believed that the account receivable was realizable and that at December 31, 1999 it had not sustained a bad debt loss. In September of 2000, the Company became aware that the former management of the customer had acquired the trade name for their own account and refused to transfer the trade name to the Company for its future use. In October 2000, the Company received notice that the customer would be unable to make any additional payments other than a 5% payment on the outstanding balance of approximately $43,000. The Company wrote off the remaining balance of approximately $859,000 as of September 30, 2000 to bad debt expense. The Company was able to recover nearly all of the sales lost from this customer by selling directly to the large department store chains previously serviced by the customer. NOTE 5 - FOURTH QUARTER ADJUSTMENT Due from vendors consisted of chargebacks to vendors for merchandise claims and defects and the amounts were anticipated to be recouped within one year in the form of vendor credits. During the fourth quarter of the year ended December 31, 2000, management determined that the Company would not realize any benefits from the chargebacks and has expensed the remaining balance of $402,670. F-12 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - INVENTORIES Inventories consist of the following:
DECEMBER 31, 2000 ------------------ Finished goods $ 1,963,065 Work-in-process 4,415,970 Raw materials 1,989,202 ------------------ $ 8,368,237 ==================
During the year ended December 31, 2000, the Company produced small quantity orders under an informal agreement with a company that sold such orders to individual retailers. The orders were produced from leftover raw materials from the Company's larger orders. The Company paid commissions on these sales. The Company determined at December 31, 2000 that these sales did not produce enough revenues to be profitable and elected to take an allowance against certain raw materials and finished goods totaling approximately $836,000 and suspended sales under the agreement. The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries. These agreements impose quotas on the amount and type of goods which can be imported into the United States from these countries and can limit or prohibit importation of products on very short notice. The Company's imported products are also subject to United States customs duties which are a material portion of the Company's cost of imported goods. A substantial increase in customs duties or a substantial reduction in quota limits applicable to the Company's imports could have a material adverse effect on the Company's financial condition and results of operations. NOTE 7 - LOSS ON PRODUCT DEVELOPMENT COSTS During 1999, the Company's subsidiary, Hamilton Toys, LLC, entered into a license agreement to produce dolls based upon the movie, "The Adventures of Rocky and Bullwinkle". The Company incurred development costs of $357,235 during 1999 and 2000. The Company received purchase orders for the dolls from national discount retail stores during 2000. The Company placed orders for the production based upon these purchase orders with a production company in New York. The production company did not produce the dolls as required by its agreement. The Company had all financing and distribution channels in place for the production and sale of the dolls and intends to seek financial recovery of its costs from the production company by legal means. Management believes that it will prevail and recover at a minimum its costs incurred to date. However, due to the uncertainty of collection, the Company has elected to reduce the carrying amount of the costs, until it is assured of collection. F-13 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------ PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------------- ----------------- ---------------- BASIC EPS Income available to common stockholders $ 95,946 3,103,198 $ .03 EFFECT OF DILUTIVE SECURITIES Options and warrants - 544,959 * ----------------- ----------------- ---------------- DILUTED EPS Income available to common stockholders including assumed conversions $ 95,946 3,648,157 $ .03 ================= ================= ================
*Less than $.01 For the year ended December 31, 2000, the affect of outstanding options and warrants was anti-dilutive, and therefore not considered. NOTE 9 - PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, 2000 ----------------- Automobile $ 20,568 Furniture and fixtures 115,784 Factory equipment 1,147,271 Leasehold improvements 62,881 Software 37,152 ----------------- Total $ 1,383,656 Less accumulated depreciation and amortization (353,091) ----------------- $ 1,030,565 =================
F-14 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - NOTE RECEIVABLE In 1996, a $196,000 account receivable was converted to a note receivable, bearing interest at 10%, and requiring 24 monthly payments of $10,000 in consolidation services. Services are valued at the market value of comparative consolidation services in the area. The Company did not realize any services during 1999 and 2000. The Company signed a 24 month lease agreement for its New York warehouse, owned and operated by the payor of the note receivable, commencing on September 1, 1998. The monthly lease payment was $6,875 and increased to $8,250 in December 1999. The Company is realizing $3,000 a month in rent to reduce the above note. The Company realized $11,395 in rent during 2000. At December 31, 2000, management determined that the note receivable was impaired and has elected to write-off the remaining balance of $75,456 to bad debt expense. NOTE 11 - NOTE RECEIVABLE FROM STOCKHOLDER The Company's note receivable ($350,000 maximum) due from an officer/stockholder is unsecured, due on demand and bore interest at 10% per annum. Accrued interest of $78,551 was added to the note. The balance at December 31, 2000 is $156,997. Interest was accrued through September 1999 when the note was amended to be non-interest bearing. NOTE 12 -LINE OF CREDIT The Company had a line of credit with Imperial Bank for up to $3,500,000. $300,000 was placed in a short term certificate of deposit as collateral for the available funds and is shown as a restricted investment at December 31, 2000. In June 2000 the line was renegotiated to $3,300,000. The debt is collateralized by accounts receivable, inventories, property and equipment, notes receivable and the personal guarantee of an officer/stockholder. Interest is payable at the banks announced prime rate which ranged from 8.75% to 9.50% during 2000. The line of credit contains various restrictive covenants among which include maintaining a certain level of tangible net worth, current ratio and working capital. The Company is currently in default of the loan covenants. The Company has not obtained waivers of the default and is attempting to reduce outstanding balances and will attempt to work with the lender to reach a mutually agreeable resolution with respect to the loan. F-15 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - STOCK OPTION PLAN STOCK OPTION PLAN On May 1, 1996 the Company adopted the Stock Option Plan (the Plan) which provides for the granting of options to officers, directors, employees and consultants. The plan was amended in 1998 to increase the number of shares reserved for options. 2,786,930 shares of common stock are reserved under the plan for the granting of options. The Plan is in effect until April 30, 2006, unless extended by the Company's stockholders. The options are exercisable to purchase stock for a period of ten years from the date of grant. Incentive Stock Options granted pursuant to this Plan may not have an option price that is less than the fair market value of the stock on the date the option is granted. Incentive stock options granted to significant stockholders shall have an option price of not less than 110% of the fair market value of the stock on the date of the grant. On September 23, 1999 the Company granted options to purchase 23,826 shares of the Company's common stock at a price of $2.25 per share expiring on September 23, 2004 to a new director. In April and August 1999, certain options were repriced to $1.25 to reflect the current market price of the Company's common stock.
OUTSTANDING OPTIONS ---------------------------------------- OPTIONS PRICE PER AVAILABLE NUMBER SHARE ------------------ ------------------ ------------------ Balance, December 31, 1998 50,295 2,736,635 $ .63-6.75 Expired during 1999 142,954 (142,954) 2.94-6.75 Exercised - (277,916) 1.25-2.50 Cancelled during 1999 322,084 (322,084) 1.25 Granted during 1999 (23,826) 23,826 2.25 ------------------ ------------------ ------------------ Balance, December 31, 1999 and 2000 491,507 2,017,507 $ .63-6.00 ================== ================== ==================
At December 31, 2000 and 1999 2,339,591 options granted under the plan were exercisable. NOTE 14 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company signed a 57 month lease agreement for its offices expiring on April 30, 2005. The annual minimum lease obligations created by this lease are: 2001 $33,000 2002 $33,000 2003 $33,000 2004 $33,000 2005 $11,000
F-16 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED) The Company rents an apartment in New York on a month to month basis from the majority stockholder. The Company rents office and showroom space from a major supplier in New York on a month to month basis. The Company subleases an apartment in New York on a month to month basis. Rent expense for the years ended December 31, 2000 and 1999 was $200,139 and $188,629, respectively. EMPLOYMENT AGREEMENTS The Company has an employment agreement with its President/Chief Executive Officer providing for a minimum annual salary of $155,000, which renews annually. LITIGATION The Company is a party to various claims, complaints, and other legal actions that have arisen in the ordinary course of business. The Company believes that the outcome of all pending legal proceedings, in the aggregate, will not have a material adverse effect on the Company's financial condition or the results of its operation or cash flows. TERMINATED ACQUISITIONS In October 1999 the Company entered into an agreement to purchase AAA Computer Solutions (AAA) for 25,000 shares of common stock. The stockholder of AAA provided website design services. The Company issued the shares in 2000 and recorded an expense for services of $17,188. LICENSING AGREEMENT In November of 2000, effective July 1, 2000, the Company entered into a product name licensing agreement for an initial term expiring on July 31, 2003, extendable at the option of the licensor. The Company is required to pay a royalty of 5-6% of specified net sales. During the year ended December 31, 2000, the Company had generated no sales under the licensing agreement and has not incurred any royalty fees. The Company is required to have net sales under the licensing agreement of $3,000,000 in the first year, $5,000,000 in the second year and $8,000,000 in the third year. INVESTOR RELATIONS AGREEMENT In December 2000, the Company entered into a 90 day agreement for investor relations. The Company issued 200,000 shares of restricted common stock in exchange for the services, valued at $50,000, which it has recorded as a prepaid expense at December 31, 2000. The Company will expense the cost of the services over the term of the agreement. F-17 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - INCOME TAXES - (BENEFIT) The components of the deferred tax assets and (liabilities) as of December 31, 2000 were as follows: Temporary differences: Allowance for doubtful accounts $ 9,000 Inventory valuation allowance 284,000 Effect of prior year carrybacks (127,000) Tax depreciation in excess of book depreciation 3,000 Net operating loss carryforward 715,000 Less valuation allowance (884,000) ------------------ Net long-term deferred tax asset $ - ==================
The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Current provision (benefit) $ (836,000) $ 52,000 Deferred (benefit) - (6,000) ------------------ ------------------ Provision (benefit) $ (836,000) $ 46,000 ================== ==================
Following is a reconciliation of the amount of income tax (benefit) expense that would result from applying the statutory federal income tax rates to pre-tax income and the reported amount of income tax expense (benefit) for the periods:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Computed expected income tax provision (benefit) $ (1,325,000) $ 38,000 State tax, net of federal benefit - 10,000 Inventory valuation allowance 284,000 - Net operating loss carryforward 715,000 - Net operating loss carryback (474,000) - Other (36,000) 4,000 ------------------ ------------------ $ (836,000) $ 52,000 ================== ==================
F-18 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - INCOME TAXES - (BENEFIT) (CONTINUED) The components of deferred income tax (benefit) expense are as follows:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Bad debts $ 68,000 $ (13,000) Depreciation (3,000) - Inventory valuation allowance (284,000) - Other 98,000 7,000 Net operating loss carryforward (715,000) - Valuation allowance 836,000 - ------------------ ------------------ $ - $ (6,000) ================== ==================
NOTE 16 - STOCK-BASED COMPENSATION The Company accounts for stock based compensation under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The standard requires the Company to present the "fair value" method with respect to stock-based compensation of consultants and other non-employees. The Company did not change its method of accounting with respect to stock options; the Company continues to account for these under the "intrinsic value" method. On September 23, 1999 the Company granted options to purchase 23,826 shares of the Company's common stock to a director exercisable at $2.25 per share and repriced certain employee options to $1.25 to reflect the current market price of the Company's common stock. Had the Company adopted the fair value method with respect to options issued to employees/directors an additional charge to income of $72,000 would have been required in 1999; proforma net income would have been $22,946 and earnings per share would have been $.01 on a basic and diluted basis. In estimating the above expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 5.8%, volatility was estimated at 41%, the expected life was less than two years. F-19 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH INVESTING AND FINANCING ACTIVITIES
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 ------------------ ------------------ Cash paid for interest $ 413,542 $ 236,718 ================== ================== Cash paid for income taxes $ - $ 42,933 ================= ==================
NOTE 18 - SUBSCRIPTION RECEIVABLE During 1999 a former employee exercised 277,916 stock options at prices ranging from $1.25 to $2.50 per share. The unpaid balance of the exercise price was $164,790 at December 31, 2000. The Company has initiated litigation to collect this amount. Management anticipates obtaining a default judgement against the former employee. NOTE 19 - FACTORING AGREEMENT The Company has a factoring agreement with Commodore Factors to factor its accounts receivable up to $2,000,000. The Company receives up to 80% of the receivables at the time of factoring. Interest on the factored receivables is at the prime rate plus 2%, but never less than 10% per annum. The Company assigns a portion of its accounts receivable to the factor without recourse. Under the terms of the agreement, the factor has a continuing security in the Company's receivables and inventories. Personal and cross-corporate guarantees have been given to the factor by certain stockholders. The agreement provides for a letter of credit facility and periodic overadvances based on negotiated lines of credit NOTE 20 - RELATED PARTY TRANSACTIONS An officer of the Company provided consulting services for $30,915 and $26,000 during 2000 and 1999. NOTE 21 - SEGMENT REPORTING The Company organized its business into two reportable segments: garment manufacturing and toy manufacturing during 1999. The Company only operated in the garment manufacturing segment prior to 1999. F-20 RETROSPETTIVA, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 - SEGMENT REPORTING (CONTINUED) The segment's accounting policies are the same as those described in the summary of significant accounting policies included in Note 1. No sales or revenues were recognized for the toy manufacturing segment during 1999 and 2000. All revenues, expenses and assets relate to the garment manufacturing segment with the exception of product development costs of $357,235. F-21 -----END PRIVACY-ENHANCED MESSAGE-----