-----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, Wxo4kJ74/FC3XlXSS6kWPws3oEXJm40s90uVqZ1XlY3MMiEjlu0lvXNJ55EZkXKT MWxeCrOfHZazSUXmN67Bug== 0001047469-98-011290.txt : 19980326 0001047469-98-011290.hdr.sgml : 19980326 ACCESSION NUMBER: 0001047469-98-011290 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD 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: 10KSB SEC ACT: SEC FILE NUMBER: 001-13101 FILM NUMBER: 98572411 BUSINESS ADDRESS: STREET 1: 8825 WEST OLYMPIC BLVD CITY: BEVERLY HILLS STATE: CA ZIP: 90211 10KSB 1 FORM 10KSB 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 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] For the calendar year ended December 31, 1997. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT [NO FEE REQUIRED] For the transition period from __________ to _________ Commission file number: 333-29295 RETROSPETTIVA, INC. (Exact name of small business issuer as specified 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 Check whether the registrant (1) has 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 is not 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. [ ] State issuer's revenues for its most recent fiscal year. $19,724,751. 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 February 27, 1998, 1,831,412 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 $7.813 was approximately $14,308,822. (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 8 Item 3 Legal proceedings 8 Item 4 Submission of matters to a vote of security holders Use of Proceeds 8 PART II Item 5 Market for common equity and related stockholder matters 10 Item 6 Selected financial data 11 Item 7 Management's discussion and analysis or plan of operation 11 Item 8 Financial statements 19 Item 9 Changes in and disagreements with accountants on accounting and financial disclosure 19 PART III Item 10 Directors, executive officers, promoters and control persons; Compliance with section 16(a) of the exchange act 19 Item 11 Executive compensation 21 Item 12 Security ownership of certain beneficial owners and management 23 Item 13 Certain relationships Related transactions 23 PART IV Item 14 Exhibits Financial statement schedules Reports on form 8-K 26 SIGNATURES 27
2 ITEM 1. DESCRIPTION OF BUSINESS INTRODUCTION The Company was organized in November 1990 initially to manufacture and import textile products from Europe including finished garments and fabrics. By 1993, the Company was purchasing fabrics from firms and factories around the world and contracting for the manufacture of 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 (e.g.; V.S. Sports, David N., Synari, Koret of California, Inc., Arenzano Trading Co. aka Oleg Cassini, Nash International Group aka Herman Geist and Prime Time International aka Focus 2000), directly and indirectly to national retailers and buying organizations (e.g.; J.C. Penney, Belk, Casual Corner, Steinmart, Dillards, Seiferts, Parisian, Atkins et al, Mercantile) and directly to women's chain clothing stores and catalogues (e.g.; Chadwicks, Marshalls, TJ Maxx, Dunlaps Co. et al (MMCohn, Paul Steketee, Clarks, Heironimus, Porteous, Schreiners, The White House), Hollidays, Syms, Winners). Substantially all of the Company's garments are sold on a "package" basis pursuant to which the Company markets at fixed prices finished garments to the customer's specifications and quantity requirements, arranges for production of the garments and delivers the garments directly to the customer at the port of entry. In its marketing, the Company emphasizes these package arrangements and what it believes to be the better quality and lower prices of garments produced by skilled Macedonian workers as compared to lower paid workers in certain other regions. See Item 1. 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 does not maintain an inventory of finished products. The Company believes that 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. In September 1997, the Company completed an initial public offering ("IPO") of its securities pursuant to which the Company sold 575,000 units for $12.00 per unit, each unit consisting of two shares of no par value common stock and one warrant exercisable at $7.50 expiring five years from the date of the IPO. Net proceeds paid to the Company were $6,003,000. STRATEGY The Company intends to continue to offer better quality, popular priced women's apparel in a wide variety of styles, patterns, colors and fabrics. The Company's business strategy is as follows: MAINTAIN FOCUS ON THE COMPANY'S CORE BUSINESS. The Company plans to continue to contract for the manufacture and market basic women's sportswear on a package basis. This strategy emphasizes concentrating on 'cut-to-order' business where the 3 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. The Company's relationships with its Macedonian manufacturers are good. Lower transportation costs compared to other parts of the world (e.g.; the Pacific Rim) offer a competitive advantage. Limited quota importation rules for garments imported from Macedonia also contribute to the Company's ability to offer competitive prices. Many countries have quotas that can apply to different types of manufactured fabrics, trim and finished goods. These quotas are imposed on goods and components imported to and exported from those countries and contribute to the overall cost of the apparel imported to and exported from those countries. In comparison, Macedonia has a quota imposed on only one category of finished goods which the Company is currently not subject to. In the event that Macedonia or the United States enacts quota restrictions and charges to export or import apparel, then the costs associated with that quota could increase the unit cost of the goods exported from Macedonia and imported into the United States. VERTICAL INTEGRATION. The Company has invested in wool manufacturing equipment that was placed in one nonaffiliated manufacturing facility in Macedonia that the Company currently maintains a manufacturing relationship with. The Company believes that the new equipment in this facility will provide reduced costs and increased production. With increased production, the Company further believes that it will be able to consolidate its current wool production (that currently requires four or more factories) into this one factory. The Company believes that having production in one facility will enable it to better control the uniformity and quality of the apparel manufactured. VIRTUAL INTEGRATION. The Company intends to pursue options that will enable it to create a 'collateral bond' or alliance with its customers in an effort to enhance the stability of its customer portfolio. Virtual integration differs from vertical integration in that a virtual 'alliance' arises from some shared benefit through mutual business interaction not necessarily arising from a direct or indirect financially structured business combination. With this strategy in mind, the Company, in December 1997, unilaterally entered into a licensing agreement allowing the Company the exclusive rights to use of a brand name in the manufacture of specific garments as set forth in that agreement. One of the Company's customers intends to sell goods with that brand name on the label. The Company, therefore, by securing the rights to that brand name has created a bond between the customer and itself which the Company believes will create a more stable and lasting relationship with the customer. EXPAND DISTRIBUTION CHANNELS AND PRODUCT LINES. The Company plans to explore new geographic markets within the United States for its existing products while expanding its existing product lines within the basic women's sportsware market. MERGERS AND ACQUISITIONS. In its efforts to continue to focus on enhancing shareholder value, the Company will continue to consider acquisitions and mergers with other companies that may compliment the Company's business from a vertical or horizontal integration perspective. 4 PRODUCTS The Company offers to its customers a variety of women's sportswear. Its apparel includes 26 women's garment styles manufactured in rayon, 33 styles manufactured in rayon and linen mixes, 30 styles manufactured in linen and cotton mixes, 25 styles manufactured in all cotton, 23 styles manufactured in wool and two styles manufactured in rayon faille. The Company's garments are moderately priced ranging at retail from $12.99 to $49.99 and are marketed by the Company's customers and the Company to working women. MARKETING The apparel industry in general and the women's apparel industry in particular are mature markets. According to the United States Department of Commerce, United States apparel sales increased from approximately $75 billion in 1986 to approximately $113 billion in 1996, however, sales increased only approximately $3 billion between 1995 and 1996. Similarly, women's apparel sales increased from approximately $28 billion in1986 to approximately $33 billion in 1996 but decreased approximately $2 billion from 1995 to 1996. Accordingly, a substantial portion of any growth by individual apparel companies such as the Company must come at the expense of competitors. 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 (e.g.; V.S. Sports, David N., Synari, Koret of California, Inc., Arenzano Trading Co. aka Oleg Cassini, Nash International Group aka Herman Geist and Prime Time International aka Focus 2000), directly and indirectly to national retailers and buying organizations (e.g.; J.C. Penney, Belk, Casual Corner, Steinmart, Dillards, Seiferts, Parisian, Atkins et al, Mercantile) and directly to women's chain clothing stores and catalogues (e.g.; Chadwicks, Marshalls, TJ Maxx, Dunlaps Co. et al MMCohn, Paul Steketee, Clarks, Heironimus, Porteous, Schreiners, The White House), Hollidays, Syms, Winners). Marketing is conducted through three in-house salespersons that call directly upon customers, through customer referrals and through the efforts of the Company's executive officers. The Company maintains a sales office in New York. The Company's customers include large United States retailers and wholesalers as described above. The Company's customers for the year ended December 31, 1997 include two that accounted for more than 10% of sales (David N at 62.7% and V.S. Sports at 28.5% for 91.2% in the aggregate). A loss of either 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 a manufacturing agent (Yucan). The Company believes that outsourcing allows it to enhance production flexibility and capacity while reducing capital expenditures and avoiding the costs of managing a large production work force. In addition, the Company believes that outsourcing allows the Company to utilize the expertise of its suppliers and manufacturers in fabric selection and manufacturing processes. The Company is currently assessing the viability of expanding and geographically diversifying its manufacturing resources in regions other than Macedonia. The Company arranges for the production of its products based on orders received. The Company obtains all of its customers' orders prior to placement of its contract manufacturing orders. The Company's customer orders may change with respect to colors, sizes, allotments or 5 assortments prior to commencement of production of the garments, and any costs associated with such a change will be borne by the Company. Accordingly, there is some risk associated with the Company's practice of allowing change orders after fabric is purchased. However, costs associated with change orders have not been material in the past and the Company does not believe that they will be material in the future. The Company purchases fabric and trim from the manufacturers of these garment components. These manufacturers ship their products directly to the Company's manufacturing agent or to fabric dyers (currently in Slovenia) who in turn ship the fabric per the instructions of the agent. The Company does not have written contracts with any of its fabric or trim suppliers or contractors, however, the Company believes that its relationships with its suppliers and contractors are good. For the year ended December 31, 1997, Newbel and Yucan accounted for 33% and 28% respectively, of the Company's total fabric and finished goods purchases. The Company has retained Yucan Trade International ("Yucan") as its manufacturing agent in Macedonia. Yucan is responsible for selecting the factories that will manufacture the Company's finished goods, to oversee this production and to warehouse and arrange for shipping the finished goods to the Company in the United States. Yucan is paid a fee that ranges from $0.15 to $0.50 per garment manufactured. Although Yucan is currently responsible for the manufacture, warehousing and shipping of all of the Company's finished goods, the Company believes that there are other manufacturing agents in Macedonia which the Company could retain for the same purpose on substantially similar terms. The Company does not have written contracts with Yucan or any of its suppliers or contractors. Although the loss of certain suppliers or contractors (including Yucan) could have a significant material adverse effect on the Company's operating results, the Company believes it would be able to replace such suppliers and contractors within a reasonable amount of time if required to do so. The Company delivers finished goods directly from its manufacturing agent to its customers at the port of entry in New York City or at the Company's consolidating warehouse in Astoria, New York. 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. QUALITY CONTROL The Company's quality control program is designed to provide that all of the Company's products meet the Company's and its customer's standards. The Company maintains a staff of four quality control employees in the United States and seven such employees in Macedonia. The Company develops and inspects samples of each product prior to production, establishes fittings based on the sample and inspects sample fabric prior to cutting and several times during the production process. The Company, Yucan and (in the case of private label products) representatives of the Company's customers inspect final products prior to shipment. COMPETITION The apparel industry is highly competitive and consists of numerous manufacturers, importers and distributors. Many of the Company's competitors are significantly larger, more diversified and have significantly greater financial, distribution, marketing, name recognition and other resources than the Company. The Company believes it has certain competitive advantages resulting from its contractual relationships with Macedonian manufacturers. These advantages include the availability in Macedonian factories of highly skilled workers at relatively lower costs than in more economically developed regions. They also include a lack of quotas and lower tariffs in the importation into the United States of finished goods from Macedonia. Finally they also include lower shipping costs as a result of the closer geographical proximity to the United 6 States of the Company's Macedonian contract manufacturers compared to manufacturers in the Pacific Rim nations. The Company also encounters competition from department stores and mass merchandisers, including some of the Company's own retail customers who sell apparel under their own private labels. Recently, department stores and mass merchandisers have increased the amount of sportswear and activewear manufactured specifically by them or their contract manufacturers (including the Company), and sold under their own labels. TRADENAMES The Company has developed two apparel trade names, "Magellan" and "Retrospettiva" in connection with the marketing of its apparel. The Company regards its trade names as assets although no trade name registrations have been filed in the United States or in foreign countries. While the use of a trade name may provide certain common law rights of further usage, there can be no assurance the Company could prohibit the use of its trade names by others. The Company currently does not actively use either trade name since its current business is private label utilizing the trade names ordered by its customers. CREDIT POLICY AND CREDIT CONTROL Prior to accepting a purchase order and purchasing fabric and components, the Company investigates the customer's credit history through traditional credit reporting services, through asset-based lenders of the customer and through other contract partners of the customer. The Company sometimes obtains a deposit or advance payment equal to approximately 10% of the total amount of the order before purchasing fabric or commencing garment production for the customer. The Company accepts commercial letters of credit for the purchase of raw materials. This is similar to a progress payment from the customer whereby they pay for the cost of the materials used in the manufacture of their order. The Company also accepts arrangements whereby a customer will purchase directly the raw materials and or trim used in the production of their order. The Company also accepts commercial letters of credits from customers covering existing orders. When the order is shipped and all of the requirements of the letter of credit are met, the Company presents the letter of credit for payment by the customer's authorized bank. The Company also utilizes its own line of credit facility to request commercial documentary letters of credit naming suppliers as beneficiaries in an effort to obtain more favorable credit terms. The line of credit facility enables the Company to receive extended credit terms while not drawing on its line of credit until the supplier presents the letter of credit for payment to the Company's bank. 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. 7 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, 1997, the Company employed 15 individuals in Los Angeles, California, New York, New York and Macedonia including its two 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 $2,300 per month pursuant to a lease expiring December 31, 2000. At the present time, the Company's current facility provides adequate space to conduct its operations. The Company subleases 2,000 square feet of office and showroom facilities at 1359 Broadway, Suite 2102, New York, New York 10018, on a month to month basis at $2,250 per month. The Company subleases two small New York apartments for use by its employees traveling from Los Angeles, California and Macedonia to New York City. ITEM 3. LEGAL PROCEEDINGS The Company is currently the subject of pending litigation, claims or investigations that arose 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, 1997. USE OF PROCEEDS The effective date of the SB-2 initial public offering registration statement filed with the Exchange Commission was September 23, 1997. The date the offering commenced was September 24, 1997. The commission file number assigned to the registration statement is 333-29295. The offering terminated in October 1997 after all of the securities and the over-allotment were sold. The names of the managing underwriters were Kensington Securities, Inc. and Gunn Allen Financial, Inc. Total amount of securities sold were 575,000 units made up of two shares of common stock and one warrant exercisable at $7.50 and expiring five years from the effective date of the offering. 8 USE OF PROCEEDS % of proceeds Sub-Totals Totals ------------- ---------- ------- Gross proceeds $6,900,000 - -------------- Less: Underwriters discounts, commissions 10.0% 690,000 Finders' fees - Underwriters expenses 3.0% 207,000 Payments to directors and officers 0.7% 49,376 Total expenses 946,376 ----- ---------- Net proceeds 13.7% 5,953,624(1) Use of proceeds (see note below) - -------------------------------- Construction of plan, building and facilities - Purchase and installation of machinery and equipment 0.9% 60,000(2) Purchases of real estate - Acquisition of other business(es) - Repayment of indebtedness 8.4% 578,532 Working capital 7.0% 483,104 Temporary investments - Purchases of raw materials 60.8% 4,191,988 --------------------- Total use of proceeds 86.3% 5,313,624 ---------- REMAINING PROCEEDS $ 640,000 ---------- ----------
(1) Offering proceeds (net of underwriters discounts, commissions and expenses) of $5,220,000 were received by the Company on September 30, 1997 and the balance, $783,000 were received in October 1997 for a total of $6,003,000. (2) Relates to the purchase of pressing equipment. Additional purchases of wool manufacturing equipment, such strategy and potential use of proceeds having been disclosed in the Company's Prospectus dated September 23, 1997, are contemplated with a total remaining amount of net proceeds of $640,000 reserved specifically for that purpose. In the event, however, that the Company is not able to purchase equipment as originally anticipated, those proceeds will be used for working capital purposes. 9 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock has been traded on the NASDAQ National Market System ("NASDAQ NMS") under the symbol "RTRO" since September 24, 1997. On March 17, 1998, the closing bid price for the Company's common stock was $6.69 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 1997 September 30, 1997............................. $8.00 $6.13 December 31, 1997.............................. $6.50 $6.13 Calendar 1998 March 31, 1998 (through March 17, 1998)........ $7.81 $5.50
The above quotations were reported by NASDAQ and reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. HOLDERS The approximate number of record and beneficial stockholders as of March 17, 1998 was approximately 625. 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. 10 ITEM 6. SELECTED FINANCIAL DATA The following financial information is qualified by reference to, and should be read in conjunction with, the Company's Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this report. The selected financial information presented below is derived from the Company's audited Financial Statements for the years ended December 31, 1997, 1996, 1995 and 1994. YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 ---- ---- ---- ---- Income Statement Data Net sales $19,724,751 $12,902,195 $11,379,826 $5,521,802 Gross profit 14.2% 14.7% 12.3% 12.6% Selling, general and administrative expenses 4.6% 5.6% 4.8% 10.9% Provision / (Benefit) for income taxes 3.9% 3.6% 1.5% (3.3%) Net income $ 1,138,443 $ 656,056 $ 666,495 $ 269,110 Per Share Data Net income per share $ 0.55 $ 0.37 $ 0.38 $ 0.15 Dividends paid per share 0 0 0 0 YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 ---- ---- ---- ---- Balance Sheet Data Working capital $ 8,717,858 $ 735,108 $ 5,305 $ (746,502) Working capital ratio 3.3:1 1.2:1 1.0:1 N/A Total assets $11,645,221 $ 5,627,966 $ 3,584,091 $2,256,131 Long-term debt - - - -
Note: There was a significant increase in the Company's working capital position from 1996 to 1997. This was primarily attributable to the Company's private placement and initial public offering. The Company expects any further increases in working capital, if any, to arise from efficiencies and economies of scale related to operations and increases in sales. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, RELIANCE THEREON AND STATEMENT REGARDING FORWARD-LOOKING DISCLOSURES 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 it 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, Annual Report and Proxy Statements, "Management's Discussion and Analysis of Financial Condition and Results of Operations" may include forward-looking statements that are subject to risks and uncertainty that may cause actual results to differ materially. 11 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 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. INTRODUCTION The Company continues to evaluate issues arising from competitive imperatives within the apparel industry. These issues relate to companies engaging in vertical integration, consolidation and overall strategic shifts in the way they do business to accommodate the changing nature and extent of costs (e.g.; design manufacturers becoming marketing and merchandising organizations and outsourcing manufacturing operations - 'un'-integrating operations and de-consolidating). The Company believes that the apparel industry is undergoing a fundamental shift in how and where it does business in an effort to manage costs and improve margins, and in its opinion believes that it is well positioned in its niche to benefit from that overall market shift. Design manufacturers are becoming marketing and merchandising organizations and are outsourcing production processes to foreign suppliers. The Company believes that an increasing number of larger retailers are moving more toward private label instead of paying a premium for designer merchandise. The Company further believes that more and more retailers, large and small, will start to develop strategies to create their own premium private label brand merchandise in an effort to capture the margin that currently is spent bringing in-house designer label merchandise whose brand names are owned by unaffiliated businesses. The apparel industry in general and the women's apparel industry in particular are mature markets. According to the United States Department of Commerce, United States apparel sales increased from approximately $75 billion in 1986 to approximately $113 billion in 1996, however, sales increased only approximately $3 billion between 1995 and 1996. Similarly, women's apparel sales increased from approximately $28 billion in 1986 to approximately $33 billion in 1996 but decreased approximately $2 billion from 1995 to 1996. Accordingly, a substantial portion of any growth by individual apparel companies such as the Company is expected to come at the expense of competitors. The Company believes, however, that those statistics do not reflect the changes in the number of units being imported. The Company believes its growth in the private label segment is an example of the direction of the overall industry demonstrated by the its increases in units shipped. 12 The Company believes that the increases in its business will come not only from other competitors but also due to what the Company believes is an absolute unit increase in private label merchandise being produced for import into the United States. The Company believes that this is due to the lower overall cost of private label merchandise enabling distribution channels to accommodate more goods at the same or lower overall costs. If the Company's assessment of the absolute increase in unit production for apparel imported into the United States is not accurate, then any increase in its business would have to come principally from other competitors. In an effort to enhance the stability of its existing customer relationships and protect against portfolio attrition, the Company in December 1997, entered into a licensing agreement allowing the Company the exclusive rights the use of a brand name in the manufacture of specific garments as set forth in that agreement. One of the Company's customers intends to sell goods with that brand name on the label. The Company, therefore, by securing the rights to that brand name has created a bond between the customer and itself which the Company believes will enhance its existing relationship with the customer. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the years ended December 31, 1997, 1996, 1995 and 1994. 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 1997 1996 1995 1994 ------------------------------------------ NET SALES 100.0% 100.0% 100.0% 100.0% Cost of goods sold 85.8 85.3 87.7 87.4 Gross profit 14.2 14.7 12.3 12.6 Selling, general and admin. Exp. 4.6 5.6 4.8 10.9 Interest expense 0.02 0.5 0.2 0.0 Net income 5.8 5.1 5.9 4.9 Earnings per share $ 0.55 $ 0.37 $ 0.38 $ 0.15
OVERVIEW 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 (e.g.; V.S. Sports, David N., Synari, Koret of California, Inc., Arenzano Trading Co. aka Oleg Cassini, Nash International Group aka Herman Geist and Prime Time International aka Focus 2000), directly and indirectly to national retailers and buying organizations (e.g.; J.C. Penney, Belk, Casual Corner, Steinmart, Dillards, Seiferts, Parisian, Atkins et al, Mercantile) and directly to women's chain clothing stores and catalogues (e.g.; Chadwicks, Marshalls, TJ Maxx, Dunlaps Co. et al (MMCohn, Paul Steketee, Clarks, Heironimus, Porteous, Schreiners, The White House), Hollidays, Syms, Winners). Substantially all 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 13 customer at the port of entry. In its marketing, the Company emphasizes these package arrangements and what it believes to be the better quality and lower prices of garments produced by skilled Macedonian workers as compared to lower paid workers in certain other regions. See Item 1. 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. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (THE "1997 YEAR" AND "1996 YEAR", RESPECTIVELY.) SALES Sales for the 1997 Year were $19,724,751 which represented an increase of $6,822,556 or 52.9% over the 1996 Year net sales of $12,902,195. The increase in sales was primarily attributable to the increase in the volume of business ordered by existing customers and new customers. Sales of the Company's own labeled products and private label products were $306,774 and $19,417,977 respectively, in 1997 compared to $3,381,524 and $9,520,671, respectively, in 1996. Effective January 1, 1997 the Company adopted a strategy to focus exclusively on private label production and accordingly stopped production of its own labeled products as of that date forward. The Company intends to continue to evaluate its strategies to remain competitively responsive to the market. The Company may in the future elect to adopt different market strategies. It is one of the Company's strategies to continue to simultaneously increase production capacity to meet the growth in orders and to create a more diverse and less concentrated portfolio of business. This strategy is designed to reduce the extent of impact, which could be material and adverse, that the loss of any one or more customers might have on the Company's overall results of operations and capital resources. The Company currently can not assess the extent to which this strategy will be successful. GROSS PROFIT Gross profit was $2,800,186 for the 1997 Year, an increase of $904,044 from $1,896,142 for the 1996 Year. The gross profit percentage was 14.2% in the 1997 Year, a slight decrease from 14.7% in the 1996 Year. The decrease in gross profit was primarily attributable to an increase in freight forwarding as a result of air freight costs. The Company continues to attempt to increase consumption rates in the utilization of raw materials for the manufacture of finished goods and management of delivery costs. Consumption rates of raw materials refers to the continual process of managing the customer-provided design specs so that the Company can produce the required garment using the least amount of raw material practicable and creating production and cutting methodologies enabling the Company to utilize more of the fabric, minimizing waste. 14 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $909,255 or 4.6% of sales for the 1997 Year, an increase of $181,879 from $727,376 or 5.6% of sales for the 1996 Year. The increase in expenses was attributable to the increase in insurance coverage costs that increase as the number of units and shipments increase. Other cost increases included recognition of bad debts from ECI (see Item 13) and from an uncollectible insurance claim. INTEREST EXPENSE Interest expense for the 1997 Year was $45,286, a decrease of $16,171 compared to $61,457 for the 1996 Year. Interest expense was primarily attributable to the Company's bridge loan financing and its utilization of its line of credit facility. The Company expects interest expense to increase as it more fully utilizes this line of credit and to the extent that the Company is able to increase the line of credit. It also expects interest expenses to increase in that it intends to increase the utilization of its factoring arrangement commencing with the 1998 Year. As of the end of the 1997 Year, the Company had not started to utilize its factoring arrangement. PROVISION FOR INCOME TAXES The provision for income taxes was $775,000 and $462,455 for the 1997 and 1996 Years, respectively. The marginal tax rate experience of the Company has been approximately 40%. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (THE "1996 YEAR" AND "1995 YEAR", RESPECTIVELY.) SALES Sales for the 1996 Year were $12,902,195 which represented an increase of $1,522,369 or 13.4% over the 1995 Year net sales of $11,379,826. The growth in sales was primarily attributable to increased purchases by existing customers. Generally the Company receives relatively small initial orders from new customers. As the relationship with the customer continues, the purchase orders often increase substantially. Net sales increases during the period reflected these increased customer orders. Sales of the Company's own labeled products and private label products were $3,381,524 and $9,520,671, respectively, in 1996 compared to $2,214,378 and $9,165,448, respectively, in 1995. Increased sales of the Company's own labeled products were attributable to promotion of the Company's Easy Concepts brand during the period. Effective January 1, 1997, however, the Company adopted a strategy to focus exclusively on private label production and accordingly stopped production of its own labeled products as of that date. The Company may evaluate that strategy in the future. GROSS PROFIT Gross profit was $1,896,142 for the 1996 Year, an increase of $493,249 from $1,402,893 for the 1995 Period. The gross profit percentage was 14.7% in the 1996 Year, an increase from 12.3% in the 1995 Period. Tighter control of consumption of raw materials used in the production of finished goods enabled the Company to produce more units using less raw materials. This and an increase in sales were the primary reasons for the increase in gross profit and gross profit as a percentage of sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $727,376 or 5.6% of sales for the 1996 Year, an increase of $181,259 from $546,117 or 4.8% of sales for the 1995 Year. The 15 increase in SG&A expense levels was primarily the result of increased costs of insurance to cover the exposure associated with increased production and import volume and costs related to the completion of a bridge loan financing of $150,000 and accounting fees. The increase in SG&A expense also reflects the growth in the Company's management and the expense associated with building the infrastructure necessary to support the growth strategies of the Company. Such infrastructure expenses included costs associated with upgrading computer hardware and software systems, furniture and fixture purchases and adding accounting personnel. Marketing expenses were $170,179 or 1.3% of sales in 1996, a decrease of $60,122 from $230,301 or 2.0% of sales in 1995. The decrease was primarily due to the reduction of sales commissions as the Company's executive officers called directly on more customers. INTEREST EXPENSE Interest expense for the 1996 Year was $61,457 compared to $21,241 for the 1995 Year. The increase in interest expense was the result of financing obtained through bridge loans and the increased utilization of the Company's line of credit. PROVISION FOR INCOME TAXES The provision for income taxes was $462,455 and $174,000 for the 1996 and 1995 Years, respectively. The increase in the provision for income taxes in 1996 was primarily attributable to increased earnings. The level of increase was also due to the tax benefits employed by the Company in 1995. The Company's effective tax rate increased to 41.3% in 1996 from 20.7% in 1995, principally due to the loss carry forwards used in 1995. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (THE "1995 YEAR" AND "1994 YEAR", RESPECTIVELY.) SALES Sales for the 1995 Year were $11,379,826 which represented an increase of $5,858,024 or 106.1% over the 1994 Year net sales of $5,521,802. The growth in sales was primarily attributable to increased purchases by existing customers. Generally, the Company receives relatively small initial orders from new customers. As the relationship with the customer continues, the purchase orders often increase substantially. Net sales increases during the period reflected these increased customer orders. Sales of the Company's own labeled products and private label products were $2,214,378 and $9,165,448, respectively, in 1995 compared to $0 and $5,521,802, respectively, in 1994. The Company did not begin marketing and production of its own labeled products until 1995. GROSS PROFIT Gross profit was $1,402,893 for the 1995 Year, an increase of $705,802 from $697,091 for the 1994 Year. The gross profit percentage was 12.3% in the 1995 Year, a decrease from 12.6% in the 1994 Year. The slight decrease in gross profit was due primarily to an increase in air freight expense versus transporting goods by ship. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses were $546,117 or 4.8% of sales for the 1995 Year, a decrease of $57,374 from $603,491or 10.9% of sales for the 1994 Year. The decrease in SG&A expense levels was primarily the result of a decrease in officer's salary. 16 INTEREST EXPENSE Interest expense for the 1995 Year was $21,241 compared to $2,430 for the 1994 Year. The increase in interest expense was the result of increased utilization of the Company's line of credit. PROVISION FOR (BENEFIT FROM) INCOME TAXES The provision for income taxes was $174,000 and benefit from income taxes was $(179,500) for the 1995 and 1994 Years, respectively. The increase in the provision for income taxes in 1995 was primarily attributable to increased earnings and reduced tax benefits available from prior year. The Company's effective tax rate increased to 20.7% in 1995 from (200.3%) in 1994, principally due to the loss carry forwards used in 1994. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY Prior to its IPO the Company had limited cash resources available to it. Cost of sales increased to $16,924,565 in the 1997 Period, an increase of $5,918,512 from $11,006,053 in the 1996 Period. Additional uses of working capital arose from the Company's initial public offering (e.g.; commissions, printing, legal and accounting fees). The expenditures related to the Company's initial public offering while requiring working capital did not impact the Statements of Income pursuant to generally accepted accounting principles but accordingly impacted Stockholders' Equity (see Statement of Changes in Stockholders' Equity). 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 2 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 1998. 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. It is the Company's intention, however, to utilize more fully and possibly increase its existing line of credit with a major lending institution and its credit facility arrangement with a New York factoring company. These measures are required due to the significant cash requirements related to increases in revenues. The Company does not expect its historical rate of increase in sales growth to continue and further expects its rate of growth to be lower in the future as it begins to reach its full operating capacity constraints and utilization of its existing capital resources. In the event the Company is able to obtain additional equity capital through the exercise, if any, of its outstanding warrants or other increases in potential working capital as mentioned above, however, the Company believes that this new working capital may allow it to grow more quickly. CASH FLOWS TO OPERATING ACTIVITIES In 1997, operating activities used net cash of $5,312,109. Cash flows to operating activities were primarily attributable to purchases of raw materials, trim and finished goods required to support the Company's corresponding increase in customer orders, increases in accounts receivable, utilization of deferred offering costs and utilization of customer advances. CASH FLOWS USED FOR INVESTING ACTIVITIES In 1997, the Company's cash flow used by investing activities totaled $431,730. Cash flows used by investing activities were primarily attributable to the purchase of wool manufacturing equipment and loans to a stockholder. These purchases used some of the proceeds from the Company's initial public offer as set forth more fully in the Use of Proceeds section of the Company's SB-2 initial public offering registration statement filed with the Securities and Exchange Commission in 1997. 17 CASH FLOWS FROM FINANCING ACTIVITIES In 1997, cash flows from financing activities totaled $7,202,967. Cash flows from financing activities were primarily attributable to the Company's IPO. CAPITAL RESOURCES Since its formation, the Company has financed its operations and met its capital requirements primarily through cash flows from operations, customer advances, from principals, credit facilities, bridge loans, a private placement and its IPO. The initial use of IPO funds was to repay certain debt and to purchase raw materials, for working capital and the eventual purchase of wool manufacturing equipment. The Company's primary need for cash is for working capital purposes. The Company may raise capital through the issuance of long-term or short-term debt, or the issuance of securities in private or public transactions to fund future expansion of its business. There can be no assurance that acceptable financing for future transactions can be obtained. INFLATION 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. YEAR 2000 ISSUES Many computer systems in use today were designed and developed using two digits, rather than four, to specify the year. As a result, such systems will recognize the year 2000 as "00". This could cause many computer applications to fail completely or to create erroneous results unless corrective measures are taken. The Company currently uses software and related computer technologies essential to its operations that the Company believes will not be affected by the year 2000 issue. The Company, however, can not determine the extent to which its vendors and customers may or may not be affected by the year 2000 issue. The Company intends over the next 2 years to establish relationships with customers that may require the use of EDI (electronic data interchange) whereby all invoicing and payments will take place electronically over the internet through computers. The Company believes that since these prospective customers already utilize EDI, that they either have in place now, or will have successfully taken whatever steps are necessary to solve the year 2000 issue. 18 ITEM 8. FINANCIAL STATEMENTS See Part IV, Item 14(a) Financial Statement Schedules ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. 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 NAME AGE POSITION OFFICER OR ---- --- -------- DIRECTOR SINCE ---------- DIRECTORS, EXECUTIVE OFFICERS Borivoje Vukadinovic 39 Chief Executive Officer, President, 1991 Chairman of the Board (1) Michael D. Silberman 41 Chief Financial Officer, Director (2) 1996 Ivan Zogovic 38 Manager-Export/Import, Director 1996 Mojgan Keywanfar 35 Accounting Manager, Director 1996 S. William Yost 69 Director (1), (2) 1996 Donald E. Tormey 66 Director (1), (2) 1996 Philip E. Graham 41 Director (1) 1996 KEY EMPLOYEES Natasha Vukadinovic 34 General Manager-International Quality Control Jovica Kecman 33 General manager-International Quality Control
(1) Member of the compensation committee. (2) Member of the audit committee. DIRECTORS AND EXECUTIVE OFFICERS BORIVOJE VUKADINOVIC has been a director and executive officer of the Company since January 1991, and its Chief Executive Officer since January 1993. From June 1990 to August 1993, he was Vice President and a principal stockholder of Celtex ENT, a Los Angeles, California based company that established and administered production of yarns and raw textiles in Yugoslavia, Turkey and Macedonia. From May 1988 to June 1990, he was founder, owner and President of DUTY OFF, Inc., a Los Angeles, California based company that produced young men's apparel. He earned a Bachelor of Arts degree in Business from the University of Banja Luka in Yugoslavia and a Bachelor of Arts degree in Art from Bern University in Switzerland. MICHAEL D. SILBERMAN has served as Chief Financial Officer and as a Director of the Company since April 1996. From May 1994 until he joined the Company in April 1996, Mr. Silberman was a financial advisor with Prudential Securities Inc. From April 1992 to February 1994, he was a portfolio manager for Private Investment Fund, a privately held and managed investment fund. From September 1991 to April 1992, Mr. Silberman was president of UMB Commercial Capital, a division of United Mercantile Bank of Pasadena, California, a federally chartered bank, where he administered the division's accounts' receivable finance department. From 1983 to 1991, Mr. Silberman served as the Executive Vice President of Allied Business Capital, a privately held Los Angeles, California based commercial finance company. Mr. Silberman received his Bachelor of Arts degree majoring in Economics from the University of California, Los Angeles (UCLA) and his 19 MBA (Masters of Business Administration) degree from the Anderson School at the University of California, Los Angeles (UCLA). 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. S. WILLIAM YOST became a director of the Company in May 1996. He has been an adjunct professor of Operations and Technology Management at the Anderson Graduate School of Management of the University of California, Los Angeles, since 1986. During his tenure at Anderson, Dr. Yost has developed two new graduate courses, Managing Service and Managing Entrepreneurial Operations. In addition, he has over 20 years experience in industrial positions together with four years as a presidential appointee in the executive branch of the federal government. three years in Management Consulting and in the early 1980's as the Assistant Commissioner of the Trademark and Patent Office of the United States Government in Washington, D.C.. Dr. Yost holds a doctorate in Business Administration (DBA) from the Harvard Business School, and MBA from the Anderson Graduate School of Management at the University of California, Los Angeles, and a B.A. from the University of California, Berkeley. He serves on the Board of Directors of a number of small privately held companies and is a consultant to a variety of public and private clients. DONALD TORMEY became a director of the Company in May 1996. From 1958 until he retired in 1995, Chevron Corporation employed him in a number of positions culminating as the Refinery General Manager in El Segundo, California from 1994 until his retirement. He holds a BSCE degree in engineering from the University of Wisconsin School of Engineering. PHILIP E. GRAHAM became a director of the Company in May 1996. Since February 1997, he has been the Information Technology Executive at the Avionics and Communications Finance and Information Technology department of Rockwell Avionics and Communications, Inc. From 1989 until February 1997, AirTouch Cellular employed him in a number of positions, culminating as its director of Information Technology from July 1989 to February 1997. Mr. Graham holds an MBA degree from the Anderson Graduate School of Management at the University of California, Los Angeles, and M.S. degree from the California State University at Fullerton and a B.S. degree from the University of California at Irvine. KEY EMPLOYEES NATASHA VUKADINOVIC has been employed by the Company since 1990 initially as a designer and subsequently as a manager responsible for quality control and organization of the Company's offshore production. In 1986, Ms. Vukadinovic, who is Borivoje Vukadinovic's sister, earned an advanced degree in textile design from the Textile Design School in Prague, Czechoslovakia. JOVICA KECMAN has been employed by the Company as general manager of international quality control since 1990. Mr. Kecman earned a degree in economics from the University of Banja Luka. He is Mr. Vukadinovic's brother-in-law. 20 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Michael D. Silberman failed to timely report, on Form 4, the sale of 2,500 shares of common stock in September, 1997 by the required deadline of the 10th of October, 1997(1). The Form 4 was filed in November 1997. (1) Form 4 requires that transactions (purchases or sales of common stock of the Company) by Officers, Directors or Employees are to be reported using Form 4 by the 10th of the month following the month in which the transaction occurred. ITEM 11. 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, 1997. No other executive officer's annual compensation exceeded $100,000 in 1997. LONG TERM COMPENSATION ANNUAL -------------------------------- COMPENSATION AWARDS PAYOUTS ------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (j) OTHER ALL ANNUAL RESTRICTED OTHER NAME AND PRINCIPAL COMPEN- STOCK OPTIONS/ LTIP COMPEN- POSITION YEAR SALARY($) BONUS($) SATION($) AWARD(S)($) SARS(#) PAYOUTS($) SATION($) - ------------------------------------------------------------------------------------------------- Borivoje Vukadinovic Chief Exe. Officer 1997 80,001 -0- -0- -0- -0- -0- -0- 1996 40,928 -0- -0- -0- 1,358,067(1) -0- -0- 1995 26,500 -0- 34,258(2) -0- -0- -0- -0- 1994 46,576 -0- 25,886(2) -0- -0- -0- -0-
(1) See "1996 Stock Option Plan" for description of the options and certain re-pricing information. (2) Represents sales commission paid to Mr. Vukadinovic. 1996 STOCK OPTION PLAN In May 1996, the Company adopted a stock option plan for officers, directors, employees and consultants (the "Plan") which provides for the grant of options intended to qualify as "incentive stock options" and "nonqualified stock options" within the meaning of Section 422 of the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock options are issuable only to eligible officers and key employees of the Company, and nonqualified options may be granted to officers, employees, directors and consultants. The Plan is administered by at least three members of the Board, at least two of whom are not executive officers or salaried employees of the Company. As of May 1996, the Company had reserved 1,786,930 shares of Common Stock for issuance under the Plan. Under the Plan, the Board of Directors determines which individuals shall receive options, the time period during which the options may be partially or fully exercised, the number of shares of Common Stock that may be purchased under each option and the option price. Each option granted under the Plan shall be evidenced by a stock option agreement. The per share exercise price of options granted under the Plan may not be less than the fair market value of the Common Stock on the date the options are granted. No person who owns, directly or indirectly, at the time of the granting of an incentive stock option, more than 10% of the total combined voting power of all classes of stock of the Company is eligible to receive incentive stock options under the Plan unless the option price is at least 100% of the fair market value of the Common Stock subject to the option on the date of grant. No options may be transferred by an optionee other than by will or the laws of descent and distribution, and during the lifetime of an optionee, the option may only be exercisable by the 21 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, 1,701,633 options have been granted under the Plan to officers, directors, employees and consultants including 1,477,198 options granted to Messrs. Vukadinovic and Silberman, an aggregated 71,478 options granted to the Company's three non-employee directors and 212,961 options to other employees and consultants. The per share exercise prices range from $0.63 to $6.75, which prices represent at least the fair market value of Company's Common Stock on the respective dates the options were granted, based on prior sales of the Company's Common Stock. The table below sets for the total number of options issued to each executive officer and director of the Company and the exercise price. Messrs. Vukadinovic's and Silberman's options are exercisable until April 2006. The remaining options expire at various times in 2006. All options were granted in 1996 and no options were exercised in 1996. In May 1996, the Board granted to Mr. Silberman (i) a stock option to purchase 238,440 shares of Common Stock at an exercise price of $3.04 per share, (ii) a stock option to purchase 59,610 shares of Common Stock at an exercise price of $2.91 per share, and (iii) a stock option to purchase 59,610 shares of Common Stock at an exercise price of $3.88 per share. In November 1996, the Board amended Mr. Silberman's option grant to reduce the number of stock options granted to Mr. Silberman from 357,657 to 119,128 options. 59,564 of these options were re-priced to the exercise price of $3.15 per share. The remaining 59,564 options were re-priced to the exercise price of $3.78 per share. In December 1996, the Company amended Mr. Silberman' stock option grants to provide for an adjustment of the exercise price of both of his stock option grants in the event of an initial public offering of the Company's securities, a merger or acquisition. In June 1997, the Board re-priced all 119,128 of Mr. Silberman's options to the current exercise price of $6.75 per share. In June 1997, the exercise prices of 1,191,290 of Mr. Vukadinovic's options were re-priced from $2.83 per share to $6.75 per share. Effective December, 1996 the exercise price of 1,191,290 of Mr. Vukadinovic's options and 119,128 of Mr. Silberman's options were re-priced from $6.75 to $6.25 by the Board per the Minutes of Action taken by Consent of the Board of Directors meeting in December, 1996 whereby Mr. Silberman's and Mr. Vukadinovic's stock option grants were amended to provide for an adjustment of the exercise price in the event of an initial public offering of the Company's securities, a merger or acquisition. Such adjustment was to occur only one time and be a decrease in the exercise price per share equal to the amount that a share of common stock is less than $6.50 at the time of the event requiring adjustment. Since the initial public offering price of the shares of common stock was $6.00 versus $6.50 the option exercise prices have been re-priced accordingly. OPTION GRANTS IN 1996 PERCENT OF TOTAL OPTIONS GRANTED TO TOTAL NUMBER OF EMPLOYEES IN EXERCISE EXPIRATION NAME OF EXECUTIVE OFFICER OR DIRECTOR OPTIONS ISSUED FISCAL YEAR PRICE DATE - ----------------------------------------------------------------------------------------- Borivoje Vukadinovic 1,358,070[1] 77.1 (1) 2006 Michael D. Silberman 119,128 6.8 $ 6.25 2006 Ivan Zogovic 66,712 3.8 [2] [3] 22 Mojgan Keywanfar 66,712 3.8 [2] [3] S. William Yost 23,826 1.4 $ 2.94 2006 Donald E. Tormey 23,826 1.4 $ 2.94 2006 Philip E. Graham 23,826 1.4 $ 2.94 2006 ---------- Totals 1,682,100 95.7
(1) Consists of 166,777 options exercisable at $.63 per share and the remaining 1,191,290 options exercisable at $6.25 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 as to each individual. (3) Represents stock options to purchase up to 11,913 shares exercisable until May 2001, 30,973 shares exercisable until April 2006, and 23,826 shares exercisable until April 2006. ITEM 12. 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, 1997, by (i) each person who is known by the Company to own of record of beneficially more than 5% of the Company" common stock, (ii) the Company's Chief Executive Officer and each of the Company'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. AMOUNT OF PERCENT OF NAME OWNERSHIP CLASS ---- --------- ---------- Borivoje Vukadinovic(1) 2,454,051 53.6% Michael D. Silberman(2) 194,735 4.3% Ivan Zogovic(3) 66,712 1.5% Mojgan Keywanfar(3) 66,712 1.5% S. William Yost(4) 23,826 0.5% Donald E. Tormey(4) 23,826 0.5% Philip E. Graham(4) 23,826 0.5% --------- ---- All officers and directors as a group (7 persons) 2,853,688(5) 62.4%
(1) Includes stock options to purchase up to 1,191,300 shares of common stock at $6.25 per share and 166,777 shares at $.63 per share exercisable until April 2006. (2) Includes stock options to purchase up to 119,128 shares of common stock at $6.25 per share exercisable until April 2006. (3) Represents stock options to purchase up to 30,973 shares at $1.68 per share exercisable until April 2001, 11,913 shares at $2.94 per share exercisable until May 2001, and 23,826 shares at $2.94 per share exercisable until April 2006. (4) Represents stock options to purchase up to 23,826 shares of common stock at $2.94 per share exercisable until May 2001. (5) Percentages of class determined by dividing total shares of common stock and shares of common stock underlying options held by officers and directors by the total shares of common stock and shares of common stock underlying options outstanding as follows; as of December 31, 1997, there were 2,900,000 shares of common stock outstanding (note: weighted shares of common stock outstanding as of December 31, 1997 is approximately 2,052,000 due to the Company's IPO and private placements during the year ended December 31, 1997). Total shares of common stock underlying options is 1,682,100 combined with total shares of common stock outstanding results in total of 4,582,100 which was the denominator used in the calculations above. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In April 1996, the Company executed three-year employment agreement with Mr. Vukadinovic, its Chief Executive Officer, and Mr. Silberman, its Chief Financial Officer, providing for annual salaries of $95,000 and $60,000 respectively, upon and IPO or merger of the Company with a publicly-traded company. In connection with their employment, Messrs. Vukadinovic and Silberman received options under the plan to purchase 1,191,300 shares and 119,128 shares, 23 respectively, of the Company's common stock. Mr. Silberman also received 81,007 shares of common stock for services rendered valued at $.0042 per share on the date of grant, or an aggregate value on such date of $34,000. At December 31, 1997, Mr. Vukadinovic was indebted to the Company in the amount of $288,496.27 advanced by the Company under a credit facility granted to Mr. Vukadinovic in the maximum amount of $350,000 and evidenced by three promissory notes. The three promissory notes are unsecured; bear interest at 10% per annum and are due on demand. The sums advanced to Mr. Vukadinovic were primarily used by him to pay certain medical and related expenses of a family member. Until December 31, 1996, Mr. Vukadinovic was a 22.5% stockholder in Easy Concepts, Inc. ("ECI"), and apparel customer of the Company. At December 31, 1996 and December 31, 1997, ECI was indebted to the Company for apparel purchases on open account in the amounts of $1,182,202 and $218,457 respectively. On January 1, 1997 Mr. Vukadinovic returned all of his ECI stock to ECI for no consideration. He elected to do so because he had received his ECI stock for nominal consideration in the form of services rendered and he wanted to eliminate any potential for conflict of interest caused by his ECI stockholdings. He was never an officer or director of ECI and ECI is no longer a customer of the Company. The Company uses a portion of a consolidating warehouse in Astoria, New York for short term storage and for consolidating services in connection with finished goods imported from Macedonia pending pick up by the Company's customer's Positive Influence, Inc. ("PII"), the owner of the warehouse and the provider of the consolidating services, is a non-affiliated former customer of the Company which was indebted to the Company in the amount of $115,210 at December 31, 1997 for goods previously purchased from the Company. The Company is charged an average of approximately $10,000 per month for use of the warehouse and for consolidating services provided by PII which amount is deducted from the amount owed by PII to the Company. PII also provides Easy Concepts, Inc. ("ECI"), a former affiliate of the Company, with warehouse space and consolidating services. Charges due from ECI to PII are also deducted from the amount owed by PII to the Company and ECI pays such amounts directly to the Company. Consolidating services involve accepting finished goods shipments, combining the goods into larger quantities for pickup by, or delivery to, customers and storage of the goods prior to customer acceptance. In July 1997, Mr. Vukadinovic personally guaranteed the Company's line of credit with Merrill Lynch Business Financial Services Inc. in the amount of up to $500,000. In November 1997, the line of credit was increased to a maximum of $1,500,000 based on a formula. At December 31, 1997, ECI's indebtedness to the Company was $218,457. The amount relates to apparel purchased through February 1997 and is therefore more than 180 days past due. As the indebtedness was incurred on open account for apparel purchases, the amount is not evidenced by a promissory note, no interest has been charged and there is no maturity date for full payment. However, the Company believed that ECI would pay off the remaining amount due by December 1997 and if it failed to do so, the Company was prepared to take such legal action as was necessary to enforce its claim against ECI. At December 31, 1997, ECI had $106,000 worth of pants at cost in the PII warehouse. The market value of the pants is estimated to be $150,000 and it is ECI's intention to sell those goods to pay indebtedness to the Company. To reflect the partial potential uncollectibility of ECI's indebtedness, the Company elected to take an allowance of $83,000. The Company believes that the goods will be sold by June 30, 1998 and the proceeds will be paid to the Company in its entirety. 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. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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, 1997. (c) Exhibit Listing EXHIBIT TITLE NO. 1.01 Form of Underwriting Agreement (1) 1.02 Form of Agreement Among Underwriters(1) 1.03 Form of Selected Dealer Agreement (1) 1.04 Form of Representatives' Warrant(1) 1.05 Form of Amended Underwriting Agreement (1) 3.01 Restated Articles of Incorporation of the Registrant (1) 3.02 Bylaws of the Registrant (1) 4.01 Form of Warrant (1) 4.02 Form of Common Stock Certificate (1) 5.01 Opinion of Gary A. Agron, regarding legality of the Units (includes Consent) (1) 10.01 1996 Employee Stock Option Plan (1) 10.02 Office Lease and Amendments thereto (Beverly Hills, California) (1) 10.03 Employment Agreement with Mr. Vukadinovic, as amended (1) 10.04 Employment Agreement with Mr. Silberman, as amended (1) 10.05 Promissory Note issued by Mr. Vukadinovic (1) 10.06 License Agreement with J.G. Hook, Inc 10.07 Consulting Agreement with Kevin Dieball 10.08 Factoring Agreement with Commodore Factors, Inc. 10.09 Agreement with David N 11.01 Computation of Earnings Per Share (1) 11.02 Computation of Earnings Per Share (1) 23.01 Consent of AJ. Robbins, P.C. (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 27.02 Financial Data Schedule/Restated (1) Previously filed 25 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report be signed on behalf by the undersigned, thereunto duly authorized on March 24, 1998. RETROSPETTIVA, INC. By: /s/ Borivoje Vukadinovic --------------------------------------- Borivoje Vukadinovic President and Chief Executive Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 1998. SIGNATURE CAPACITY /s/ Borivoje Vukadinovic - -------------------------------- Chairman of the Board of Directors, Borivoje Vukadinovic President, Chief Executive Officer /s/ Michael D. Silberman - -------------------------------- Chief Financial Officer (Principal Michael D. Silberman Accounting Officer), Secretary and Director /s/ Ivan Zogovic - -------------------------------- Director Ivan Zogovic /s/ Mojgan Keywanfar - -------------------------------- Director Mojgan Keywanfar /s/ S. William Yost - -------------------------------- Director S. William Yost /s/ Donald Tormey - -------------------------------- Director Donald Tormey /s/ Philip E. Graham - -------------------------------- Director Philip E. Graham 26 INDEX TO FINANCIAL STATEMENTS PAGE ---- Independent Auditors' Report F-2 Balance Sheets F-3 Statements of Income F-5 Statements of Changes in Stockholders' Equity (Deficit) F-6 Statements of Cash Flows F-7 Notes to Financial Statements F-8 F-1 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS RETROSPETTIVA, INC. BEVERLY HILLS, CALIFORNIA We have audited the accompanying balance sheets of Retrospettiva, Inc. as of December 31, 1994, 1995, 1996 and 1997 and the related statements of income, changes in stockholders' equity (deficit) and cash flows for each of the years in the four years ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Retrospettiva, Inc. as of December 31, 1994, 1995, 1996 and 1997 and the results of its operations and its cash flows for each of the years in the four years ended December 31, 1997 in conformity with generally accepted accounting principles. AJ. ROBBINS, P.C. CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS DENVER, COLORADO FEBRUARY 6, 1998 F-2 RETROSPETTIVA, INC. BALANCE SHEETS ASSETS DECEMBER 31, ------------------------------------------------------- 1994 1995 1996 1997 ---------- ---------- ---------- ----------- CURRENT ASSETS: Cash $ 68,157 $ 38,297 $ 110,777 $ 1,569,905 Accounts receivable, net, pledged 462,048 187,578 760,495 2,958,770 Accounts receivable, related party, pledged - 441,830 1,182,202 - Note receivable, current portion - 20,000 140,000 115,210 Note receivable, stockholder - - - 288,496 Inventories, pledged 1,262,553 2,520,068 3,112,678 6,389,896 Deferred tax assets, current portion 160,000 44,000 11,000 - Accrued interest receivable - stockholder - - - 21,042 Deferred offering costs - - 101,354 - Other 6,200 3,600 14,825 79,999 ---------- ---------- ---------- ----------- Total Current Assets 1,958,958 3,255,373 5,433,331 11,423,318 PROPERTY AND EQUIPMENT, at cost, net 73,673 72,052 61,386 183,293 NOTE RECEIVABLE, net of current portion 196,000 176,000 47,583 - DEFERRED TAX ASSETS, net of current portion 23,000 - 5,000 34,000 OTHER ASSETS 4,500 80,666 80,666 4,610 ---------- ---------- ---------- ----------- $2,256,131 $3,584,091 $5,627,966 $11,645,221 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-3 RETROSPETTIVA, INC. BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, ------------------------------------------------------- 1994 1995 1996 1997 ---------- ---------- ---------- ----------- CURRENT LIABILITIES: Accounts payable, trade $2,666,943 $2,917,838 $2,806,812 $ 2,881,620 Line of credit 9,900 257,305 - 95,610 Note payable - - 237,580 131,124 Notes payable, bridge loans 28,617 78,403 250,000 - Accrued expenses - 7,132 51,070 66,140 Accrued income taxes - - 443,080 160,966 Customer advances - - 909,681 137,385 ---------- ---------- ---------- ----------- Total Current Liabilities 2,705,460 3,260,678 4,698,223 3,472,845 NOTE PAYABLE - STOCKHOLDER 77,479 183,726 - - ---------- ---------- ---------- ----------- Total Liabilities 2,782,939 3,444,404 4,698,223 3,472,845 ---------- ---------- ---------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Preferred stock - authorized 1,000,000 shares - none issued or outstanding - - - - Common stock - authorized 15,000,000 shares, no par value; issued and outstanding 1,095,984, 1,095,984, 1,415,241 and 2,900,000 shares 20,000 20,000 154,000 6,258,190 Additional paid-in capital 230,000 230,000 230,000 230,000 Retained earnings (Deficit) (776,808) (110,313) 545,743 1,684,186 ---------- ---------- ---------- ----------- Total Stockholders' Equity (Deficit) (526,808) 139,687 929,743 8,172,376 ---------- ---------- ---------- ----------- $2,256,131 $3,584,091 $5,627,966 $11,645,221 ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-4 RETROSPETTIVA, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1994 1995 1996 1997 ---------- ----------- ----------- ----------- SALES $5,521,802 $ 9,165,448 $ 9,520,671 $19,724,751 SALES, related party - 2,214,378 3,381,524 - ---------- ----------- ----------- ----------- Total Sales 5,521,802 11,379,826 12,902,195 19,724,751 COST OF SALES 4,824,711 9,976,933 11,006,053 16,924,565 ---------- ----------- ----------- ----------- GROSS PROFIT 697,091 1,402,893 1,896,142 2,800,186 ---------- ----------- ----------- ----------- OPERATING EXPENSES: Selling expenses 373,101 230,301 170,179 249,728 General and administrative 230,390 315,816 557,197 659,527 ---------- ----------- ----------- ----------- Total Operating Expenses 603,491 546,117 727,376 909,255 ---------- ----------- ----------- ----------- INCOME FROM OPERATIONS 93,600 856,776 1,168,766 1,890,931 OTHER INCOME (EXPENSES): Other income/(expense) (1,560) 4,960 11,202 46,756 Interest income - related party - - - 21,042 Interest expense (2,430) (21,241) (61,457) (45,286) ---------- ----------- ----------- ----------- Net Other Income (Expenses) (3,990) (16,281) (50,255) 22,512 ---------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 89,610 840,495 1,118,511 1,913,443 INCOME TAX PROVISION/(BENEFIT) (179,500) 174,000 462,455 775,000 ---------- ----------- ----------- ----------- NET INCOME $ 269,110 $ 666,495 $ 656,056 $ 1,138,443 ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- NET INCOME PER COMMON SHARE $ .15 $ .38 $ .37 $ .55 ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,750,000 1,750,000 1,750,000 2,052,877 ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- NET INCOME PER COMMON SHARE - ASSUMING DILUTION $ .15 $ .38 $ .37 $ .50 ---------- ----------- ----------- ----------- ---------- ----------- ----------- ----------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,750,000 1,750,000 1,750,000 2,271,976 ---------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-5 RETROSPETTIVA, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND 1997 COMMON STOCK ADDITIONAL RETAINED ------------------------ PAID IN EARNINGS SHARES AMOUNT CAPITAL (DEFICIT) TOTAL --------- ---------- ---------- ----------- ----------- BALANCES, DECEMBER 31, 1994 1,095,984 $ 20,000 $230,000 $ (776,808) $ (526,808) Net income for the year - - - 666,495 666,495 --------- ---------- -------- ---------- ---------- BALANCES, DECEMBER 31, 1995 1,095,984 20,000 230,000 (110,313) 139,687 Stock issued for compensation 81,007 34,000 - - 34,000 Stock issued for bridge loans 238,250 100,000 - - 100,000 Net income for the year - - - 656,056 656,056 --------- ---------- -------- ---------- ---------- BALANCES, DECEMBER 31, 1996 1,415,241 154,000 230,000 545,743 929,743 Stock issued in private offering net of offering costs 334,759 382,630 - - 382,630 Stock issued in initial public offering net of offering costs 1,150,000 5,721,560 - - 5,721,560 Net income for the year - - - 1,138,443 1,138,443 --------- ---------- -------- ---------- ---------- BALANCES, DECEMBER 31, 1997 2,900,000 $6,258,190 $230,000 $1,684,186 $8,172,376 --------- ---------- -------- ---------- ---------- --------- ---------- -------- ---------- ----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-6 RETROSPETTIVA INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, -------------------------------------------------------- 1994 1995 1996 1997 ----------- ----------- --------- ----------- CASH FLOWS FROM (TO) OPERATING ACTIVITIES: Net income $ 269,110 $ 666,495 $ 656,056 $ 1,138,443 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 5,424 17,792 17,491 21,217 Stock issued for compensation - - 34,000 - Deferred income taxes (183,000) 160,000 7,000 (18,000) Services provided to reduce note receivable - - 8,417 72,373 Stock issued for loan - - 100,000 - Utilization of deferred offering costs - - - (1,258,269) Changes in: Accounts receivable (140,199) 274,471 (572,917) (2,198,275) Accounts receivable, related party - (441,830) (740,372) 1,182,202 Inventories (1,242,553) (1,257,515) (592,610) (3,277,218) Accrued interest - related party - - - (21,042) Other - (79,766) (11,225) 34,181 Accounts payable and accrued expenses 1,471,100 300,682 (138,765) 89,878 Accrued income taxes (8,150) (7,668) 456,948 (305,303) Customer advances (300,000) - 909,681 (772,296) ----------- ----------- --------- ----------- Cash flows provided (used) by operating activities (128,268) (367,339) 133,704 (5,312,109) ----------- ----------- --------- ----------- CASH FLOWS FROM (TO) INVESTING ACTIVITIES: Purchase of property and equipment (45,036) (16,172) (6,825) (143,124) Issuance of note receivable (196,000) - - - Loans to stockholder - - - (357,503) Collections on note receivable, stockholder - - - 69,007 Other assets (4,400) - - (110) ----------- ----------- --------- ----------- Cash flows provided (used) by investing activities (245,436) (16,172) (6,825) (431,730) ----------- ----------- --------- ----------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Proceeds from note payable, stockholder 354,719 351,263 170,856 - Payments on note payable, stockholder (275,671) (245,015) (354,176) - Proceeds from notes payable, bridge loans - - 250,000 - Payments on notes payable - bridge loans - - - (250,000) Proceeds from note payable 10,100 247,403 - 181,124 Payments on note payable (198) - (19,725) (287,580) Proceeds from line of credit - - - 577,207 Payments on line of credit - - - (481,597) Payments for deferred offering costs - - (101,354) - Proceeds from issuance of common stock - - - 7,463,813 Contributed capital 230,000 - - - ----------- ----------- --------- ----------- Cash flows provided (used) by financing activities 318,950 353,651 (54,399) 7,202,967 ----------- ----------- --------- ----------- NET INCREASE (DECREASE) IN CASH (54,754) (29,860) 72,480 1,459,128 CASH IN BANK, beginning of period 122,911 68,157 38,297 110,777 ----------- ----------- --------- ----------- CASH IN BANK, end of period $ 68,157 $ 38,297 $ 110,777 $ 1,569,905 ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- SEE NOTE 13
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS F-7 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACTIVITY Retrospettiva, Inc. (the Company) located in Beverly Hills, California was organized in November 1990 to manufacture and import textile products from Europe including finished garments and fabrics. By 1993, the Company was purchasing fabrics from firms and factories around the world and contracting for the manufacture of the fabrics in Eastern Europe (primarily Macedonia) for importation into the United States. The Company designs, contracts for manufacture and markets a variety of garments. Fabrics are purchased from suppliers worldwide including firms in China, India, Russia, Romania, Italy and the United States. The fabrics are shipped to contractor factories primarily in Macedonia to be manufactured into finished garments for shipment to the Company's customers in the United States. STOCK SPLITS In May 1996, the Company's Board of Directors authorized a 46 for one stock split. In May 1997, the Company's Board of Directors authorized a 2.3826 for one stock split approved by the Company's stockholders in June 1997. The financial statements have been presented as if the splits had occurred at the beginning of each period presented. CASH AND CASH EQUIVALENT Cash and cash equivalents include cash on hand and investments with original maturities of three months or less. ACCOUNTS RECEIVABLE The Company provides an allowance for doubtful accounts, as needed, for accounts deemed uncollectible. Allowance for uncollectible accounts was recorded at $-0-, $17,196, $17,196 and $100,000 for the years ended December 31, 1994, 1995, 1996 and 1997, respectively. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. F-8 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization expense is generally provided on a straight-line basis using estimated useful lives of 5-10 years for equipment. Leasehold improvements are amortized over the lesser of the estimated useful life of the asset or the term of the lease. Depreciation and amortization expense of property and equipment was $5,424, $17,792, $17,491, and $21,217 for the years ended December 31, 1994, 1995, 1996 and 1997, respectively. REVENUE RECOGNITION Revenue is recognized when sold merchandise has cleared customs in the United States and is available to be shipped to customers from a port of entry or has been segregated in the Company's contract manufacturer's warehouses in Macedonia. INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences in future years of temporary differences between the tax basis of the assets and liabilities and their financial statement amounts at the end of each reporting period. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the current period and the change during the period in deferred tax assets and liabilities. The deferred tax assets and liabilities have been netted to reflect the tax impact of temporary differences. The adoption of SFAS 109 did not have a material effect on the Company's financial statements. EARNINGS PER COMMON SHARE Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128) was issued in February 1997 (effective for financial statements issued for periods ending after December 15, 1997). This Statement simplifies the standards for computing earnings per share (EPS) previously found in Accounting Principles Board Opinion No. 15, Earnings Per Share, and makes them more comparable to international EPS standards. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. In addition, the Statement requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Common shares issued by the Company in the twelve months immediately preceding a proposed public offering plus the number of common equivalent shares which became issuable during the same period pursuant to the grant of warrants and stock options (using the treasury stock method) at prices substantially less than the initial public offering price have been included in the calculation of common stock and common stock equivalent shares as if they were outstanding for all periods presented. Therefore, for the years ended December 31, 1996, 1995 and 1994, 1,750,000 shares were used in the computation of earnings per share. F-9 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In 1997, the FASB issued Statements No. 130, Reporting Comprehensive Income, and No. 131, Disclosures About Segments of an Enterprise and Related Information, effective for fiscal years beginning after December 15, 1997. The adoption by the Company of these Statements in January 1998 is not expected to have a material impact on the Company's financial statements. RECLASSIFICATION Certain amounts reported in the Company's financial statements for the years ended December 31, 1994, 1995 and 1996 have been reclassified to conform to the current year presentation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. 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 amount of future cash flows associated with each instrument discounted using the Company's borrowing rate. At December 31, 1994, 1995, 1996 and 1997, respectively, the carrying value of all financial instruments was not materially different from fair value. YEAR 2000 ISSUES Many existing computer programs use only two digits to identify a year in the date field, with the result that data referring to year 2000 and subsequent years may be misinterpreted by these programs. If present in the computer applications of the Company or its suppliers and customers and not corrected, this problem could cause computer applications to fail or to create erroneous results and could cause a disruption in operations and have a short-term adverse effect on the Company's business and results of operations. The Company will evaluate its principal computer system to determine if they are substantially Year 2000 compliant. CREDIT RISK The Company sells its merchandise principally to customers throughout the United States. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's credit losses for the periods presented have not exceeded management's estimates. F-10 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A limited number of customers accounted for 12% (3 customers), 100% (3 customers), 93% (2 customers) and 91% (2 customers) of the accounts receivable balance at December 31, 1994, 1995, 1996 and 1997, respectively. The Company maintains all cash in bank deposit accounts, which at times may exceed federally insured limits. The Company has not experienced a loss in such accounts. SIGNIFICANT CUSTOMERS Individual customers aggregating in excess of 10% of net sales are as follows: YEARS ENDED DECEMBER 31, -------------------------------------------------- 1994 1995 1996 1997 ---------- ---------- ---------- ----------- SALES Customer A $2,223,089 $5,413,771 $4,102,545 $ - Customer B $ - $2,325,851 $3,745,836 $12,368,619 Customer C, related party $ - $2,214,378 $3,381,524 $ - Customer D $ 833,465 $ - $ - $ - Customer E $ 631,500 $ - $ - $ - Customer F $ - $ - $ - $ 5,614,994
RELATED PARTY TRANSACTIONS The Company had sales to a related party customer. The Company's officer/ stockholder was part owner of Customer C, above. Effective January 1, 1997, the Company's officer/stockholder relinquished his ownership in Customer C. Accounts receivable for Customer C were $441,829, $1,182,202 and $218,457 at December 31, 1995, 1996 and 1997, respectively. F-11 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 2 - INVENTORIES Inventories consist of the following: YEARS ENDED DECEMBER 31, ------------------------------------------------- 1994 1995 1996 1997 ---------- ---------- ---------- ---------- Finished goods $ 72,377 $1,170,672 $ 923,373 $2,875,471 Work-in-process 695,257 260,084 908,752 1,697,258 Raw materials 494,919 1,089,312 1,280,553 1,817,167 ---------- ---------- ---------- ---------- $1,262,553 $2,520,068 $3,112,678 $6,389,896 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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 3 - EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------------- PER INCOME SHARES SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ BASIC EPS Income available to common stockholders $1,138,443 2,052,877 $ 0.55 EFFECT OF DILUTIVE SECURITIES Options - 219,099 (.05) ---------- --------- ------ DILUTED EPS Income available to common stockholders including assumed conversions $1,138,443 2,271,976 $ 0.50 ---------- --------- ------ ---------- --------- ------
A reconciliation of Basic and Diluted EPS for the years ended December 31, 1994, 1995 and 1996 is not presented as the options are not common stock equivalents during those years. F-12 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment consists of the following: YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1994 1995 1996 1997 --------- --------- --------- ---------- Manufacturing equipment $ - $ - $ - $ 123,709 Automobile 20,568 20,568 20,568 20,568 Furniture and fixtures 16,803 28,669 35,494 54,909 Leasehold improvements 46,208 50,514 50,514 50,514 --------- --------- --------- ---------- Total 83,579 99,751 106,576 249,700 Less accumulated depreciation and amortization (9,906) (27,699) (45,190) (66,407) --------- --------- --------- ---------- $ 73,673 $ 72,052 $ 61,386 $ 183,293 --------- --------- --------- ---------- --------- --------- --------- ----------
NOTE 5 - NOTE RECEIVABLE During 1994, the Company was owed an outstanding trade receivable of $266,000. Approximately $70,000 was written off as uncollectible in 1994. On October 15, 1996, $196,000 was converted to a note receivable, bearing interest at 10%, and requiring 24 monthly payments of $10,000 in consolidation services. Services are valued at the market value of comparative consolidation services in the area. The Company realized $8,417 and $25,519 in services during 1996 and 1997, respectively. The Company negotiated with a customer (former related party) to also use the consolidation services. The customer reimburses the Company for the services and the note receivable is reduced accordingly. During 1997, the note receivable was reduced by $72,374, by use of the consolidation services by the Company and its customer. The customer is making payments to the Company. NOTE 6 - NOTE RECEIVABLE FROM STOCKHOLDER The Company's note receivable ($350,000 maximum) due from an officer/stockholder is unsecured, due on demand and bears interest at 10% per annum. The balance at December 31, 1997 is $288,496. F-13 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 7 - NOTES PAYABLE AND LINE OF CREDIT On September 27, 1995, the Company obtained a line of credit of $250,000 with a bank due October 10, 1996. The loan was collateralized by accounts receivable, inventory and personal guarantee of an officer/stockholder. Interest was payable monthly at 3% over the financial institutions variable prime rate. During March 1997 the line of credit was refinanced with a variable rate (4% over prime rate, initial rate of 12.25%). Payments were due in four monthly installments of $20,000 principal plus interest beginning April 15, 1997, with one final principal and interest payment due August 15, 1997. The line of credit was paid in July 1997. On July 18, 1997 the Company refinanced its existing line of credit by obtaining a new line of credit with Merrill Lynch Business Financial Services, Inc. for $500,000 due August 31, 1998. The new debt is collateralized by accounts receivable, inventory, property and equipment, notes receivable and the personal guarantee of an officer/stockholder. Interest is payable at 2.90% over the 30 day commercial paper rate (8.7% at December 31, 1997). The line of credit was increased to $1,500,000 on November 6, 1997, and was subordinated to a factoring agreement in December 1997 (see Note 15). In August 1997, the Company settled a lawsuit with its former contract manufacturer for $181,000 payable as follows: $50,000 due September 15, 1997, $50,000 due November 14, 1997, $50,000 due January 15, 1998, and $31,000 due February 27, 1998. The Company had its first payment of $50,000 due under the agreement, and then discovered that the plaintiff continued to pursue a similar suit against the Company in another jurisdiction. The Company has initiated legal action and has stopped making payments. The Company is currently in default on the note payable. A judgement of $176,000 was entered against the Company on December 23, 1997. The Company has appealed the judgement and is awaiting the results of its appeal prior to resuming payments. The Company believes it will only be liable for the original settlement less payments previously made. At December 31, 1997 the balance was $131,124. NOTE 8 - NOTES PAYABLE, BRIDGE LOANS During June 1996 the Company completed an offering of 25 units in a Private Placement. Each unit consisted of one $10,000 promissory note (totaling $250,000) bearing interest at 8% per annum and 9,530 shares of the Company's Common Stock. The notes were payable the earlier of June 30, 1997 or on the closing date of an initial public offering of the Company's stock. The underwriter was paid a commission of $50,000. Effective July 1, 1997, notes were amended to be payable September 30, 1997 and bear interest at 18% per annum. The notes were paid in September 1997. F-14 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 9 - STOCK OPTION PLAN STOCK OPTION PLAN On May 1, 1996 the Company adopted the Stock Option Plan (the Plan) which provides for the granting of options to officers, directors, employees and consultants. 1,786,930 shares of common stock have been reserved under the plan for the granting of options. The Plan will be in effect until April 30, 2006, unless extended by the Company's shareholders. The options are exercisable to purchase stock for a period of ten years from the date of grant. Incentive Stock Options granted pursuant to this Plan may not have an option price that is less than the fair market value of the stock on the date the option is granted. Incentive stock options granted to significant stockholders shall have an option price of not less than 110% of the fair market value of the stock on the date of the grant. No options were granted during the year ended December 31, 1997. OUTSTANDING OPTIONS ------------------------- RESERVED PRICE PER SHARES SHARES SHARES --------- --------- ----------- Initial reserved shares 1,786,930 - $ - Granted during 1996 1,701,635 1,701,635 $ .63-6.25 --------- --------- ----------- Balance, December 31, 1997 and 1996 85,295 1,701,635 $ .63-6.25 --------- --------- ----------- --------- --------- -----------
At December 31, 1997, 1,701,635 options granted under the plan were exercisable. NOTE 10 - COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company signed a 61 month lease agreement for its offices commencing December 1, 1995. The monthly lease payment is $2,300. The Company signed a ten-month sublease agreement in New York commencing December 1, 1996, which automatically renews annually. The terms of the sublease agreement require monthly payments of $1,250 plus 50% of the maintenance costs. The Company has another sublease in New York, with a two year term through April 1, 1998. The terms require monthly payments of $2,175 through January 31, 1997 and monthly payments of $2,285 for the remainder of the agreement. F-15 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum rental payments under non-cancelable operating leases at December 31, 1997 are as follows: 1998 $ 80,175 1999 27,600 2000 27,600 ---------- Total $ 135,375 ---------- ----------
The Company rents office and showroom space from a major supplier in New York on a month to month basis. Rent expense for the years ended December 31, 1994, 1995, 1996 and 1997 was $11,186, $37,900, $62,920 and $75,082, respectively. EMPLOYMENT AGREEMENTS In April 1996, the Company entered into a three year employment agreement with an officer/stockholder which provides for annual salary of $95,000, commencing September 1997 and a non-competition clause for two years following termination of the employment agreement. Stock options to purchase up to 1,191,300 shares of Common Stock at $6.25 per share exercisable for a period of 10 years were issued at the signing of the agreement. In April 1996, the Company entered into a three year employment agreement with the chief financial officer which provides for annual salary of $60,000 commencing September 1997. As signing compensation he received 81,007 shares of Common Stock and stock options to purchase up to 119,128 shares of Common Stock at $6.25 per share exercisable for a period of 10 years. LICENSING AGREEMENT The Company signed a 42 month licensing agreement for the exclusive use of licensee's trademarked brand name on some of the Company's selected apparel commencing January 1, 1998. The license agreement has certain covenants regarding usage of the license, revenue, royalty payments, renewal and other terms and conditions. F-16 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Minimum payments under the licensing agreement are as follows: 1998 $ 86,667 1999 128,333 2000 190,000 2001 105,000 ---------- Total $ 510,000 ---------- ----------
The Company prepaid $26,000 of royalty payments at the signing of the agreement at December 1997. 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 operations. NOTE 11 - INCOME TAXES The components of deferred tax assets and (liabilities) are as follows: YEARS ENDED DECEMBER 31, ------------------------------------------------- 1994 1995 1996 1997 ---------- --------- --------- --------- Total deferred tax assets $ 183,000 $ 44,000 $ 16,000 $ 34,000 Total deferred tax (liabilities) - - - - ---------- --------- --------- --------- Net deferred tax assets $ 183,000 $ 44,000 $ 16,000 $ 34,000 ---------- --------- --------- --------- ---------- --------- --------- ---------
F-17 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to deferred tax assets and (liabilities) are as follows: YEARS ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 --------- ------- ------- ------- Temporary differences: Allowance for bad debts $ - $ 7,000 $ 7,000 $40,000 Property and equipment - - 5,000 2,000 Other - - 4,000 (8,000) Net operating loss carryover 380,000 37,000 - - Less valuation allowance (197,000) - - - --------- ------- ------- ------- $ 183,000 $44,000 $16,000 $34,000 --------- ------- ------- ------- --------- ------- ------- -------
The provision for income taxes consists of the following: YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1994 1995 1996 1997 --------- -------- -------- -------- Current $ 3,500 $ 14,000 $455,455 $793,000 Deferred (183,000) 160,000 7,000 (18,000) --------- -------- -------- -------- Provision (Benefit) $(179,500) $174,000 $462,455 $775,000 --------- -------- -------- -------- --------- -------- -------- --------
F-18 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 11 - INCOME TAXES (CONTINUED) Following is a reconciliation of the amount of income tax (benefit) expense that would result from applying the statutory federal income tax rates to pre-tax income and the reported amount of income tax expense for the periods: YEARS ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 --------- --------- -------- -------- Tax expense at federal statutory rates $ 30,000 $ 285,000 $375,000 $651,000 State tax, net of federal benefit - 11,000 104,170 121,000 Alternative minimum tax (credit) - 3,000 (3,000) - Allowance for bad debt - - - 28,000 Depreciation - - 3,000 (2,000) Other 3,500 - 3,285 (5,000) (Benefit) of net operating loss carryforward (30,000) (285,000) (27,000) - --------- --------- -------- -------- $ 3,500 $ 14,000 $455,455 $793,000 --------- --------- -------- -------- --------- --------- -------- --------
The components of deferred income tax (benefit) expense are as follows: YEARS ENDED DECEMBER 31, --------------------------------------------------- 1994 1995 1996 1997 --------- --------- ------- -------- Bad debts $ - $ 7,000 $ - $(33,000) Depreciation - 2,000 (3,000) 2,000 Other - 4,000 (4,000) 13,000 Net operating loss carryover 45,000 364,000 14,000 - Valuation allowance (228,000) (217,000) - - --------- --------- ------- -------- $(183,000) $ 160,000 $ 7,000 $(18,000) --------- --------- ------- -------- --------- --------- ------- --------
F-19 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 12 - STOCK-BASED COMPENSATION During 1996 the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The new standard requires the Company to adopt 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 employee stock options; the Company continues to account for these under the "intrinsic value" method. Had the Company adopted the fair value method with respect to options issued to employees as well, an additional charge to income of $52,300 would have been required in 1996; proforma net income would have been $319,000 and earnings per share would have been $.18 on both a primary and fully diluted basis. In estimating the above expense, the Company used the Modified Black-Scholes European pricing model. The average risk-free interest rate used was 6.2%, volatility was estimated at 31%; the expected life was less than three years. NOTE 13 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR NONCASH INVESTING AND FINANCING ACTIVITIES YEARS ENDED DECEMBER 31, ---------------------------------------------- 1994 1995 1996 1997 ------ ------- ------- -------- Cash paid for interest $2,430 $ 8,180 $26,820 $ 63,817 ------ ------- ------- -------- ------ ------- ------- -------- Cash paid for income taxes $2,216 $26,113 $ 2,196 $718,300 ------ ------- ------- -------- ------ ------- ------- --------
NOTE 14 - COMMON STOCK In September 1997, the Company completed an initial public offering of common stock. The Company issued 1,150,000 shares of common stock and warrants to purchase 500,000 shares of common stock for $7.50 per share and received proceeds of $5,721,560, net of offering costs. The value of the warrants was immaterial to the offering. In March 1997, the Company completed a private placement of common stock. The Company issued 334,759 shares of common stock and received proceeds of $382,630 net of offering costs. F-20 RETROSPETTIVA, INC. NOTES TO FINANCIAL STATEMENTS NOTE 15 - FACTORING AGREEMENT In December 1997, the Company entered into a factoring agreement with Commodore Factors, to factor its accounts receivable up to $2,000,000. The Company will receive up to 80% of the receivables at the time of factoring. Interest on the factored receivables will be at the prime rate plus 2%, but never less than 10% per annum. As of December 31, 1997, the Company had not factored any receivables. F-21 EX-10.06 2 LICENSE AGREEMENT WITH J.G. HOOK LICENSE AGREEMENT THIS LICENSE AGREEMENT is made this First day of December, 1997, by and between J. G. HOOK, INC., a Pennsylvania Corporation, with its principal place of business at 1616 Walnut Street, Suite 1122, Philadelphia, Pennsylvania 19103 (hereinafter referred to as "LICENSOR"), and RETROSPETTIVA, INC., a California Corporation, with its principal place of business at 8825 W. Olympic Boulevard, Beverly Hills, CA 90211 (hereinafter referred to as "LICENSEE"). BACKGROUND LICENSOR is the owner of the trademarks, set forth in Exhibit A attached hereto and made a part hereof (hereinafter collectively referred to as the "Trademarks"). The parties desire that LICENSOR grant to LICENSEE a license to use the Trademarks in the design, manufacture, advertising and sale of Nell Flowers by J. G. Hook classic related separates, more specifically designated hereinafter. 1 NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto, intending to be legally bound, agree as follows: 1. GRANT OF LICENSE AND DESIGNATION OF LICENSED PRODUCTS. LICENSOR agrees to and does hereby grant to LICENSEE for the period and upon the terms and conditions hereinafter set forth, the exclusive right and license to use the Trademarks within the geographic area described in Paragraph 3 hereof, in the design, manufacture, advertising and sale of Nell Flowers by J. G. Hook classic related separates, to include lined sports jackets, skirts, pants, shorts and layering pieces, to specifically not include collection or classification merchandise (hereinafter referred to as the "Products"). As used herein, the term "Licensed Products" means all Products sold or shipped by LICENSEE which bear the Trademarks. In the event any questions arise regarding the classification of Products which LICENSEE may wish to produce as Licensed Products, the decision of LICENSOR shall be final and binding. The rights granted to LICENSEE herein are limited to use of the Trademarks on or in connection with the Licensed Products and LICENSEE specifically agrees not to use the Trademarks or consent to their use in any manner on any other product or items. LICENSOR reserves all rights to the Trademarks except to the extent specifically granted to LICENSEE herein. 2 2. TERM. The Agreement shall be for a term commencing on January 1, 1998 and continuing for a period of three years and six months, terminating on June 30, 2001. The First Year shall consist of the eighteen-month period from January 1, 1998 to June 30, 1999, the Second Year shall be the one-year period from July 1, 1999 to June 30, 2000, and the Third Year shall be the one-year period from July 1, 2000 to June 30, 2001. LICENSEE shall have one three-year option to renew this Agreement, provided LICENSEE is not in default of any of the provisions hereof at the time of exercise of this option, and provided it gives LICENSOR written notice of its intention to so renew at least one hundred twenty (120) days prior to the end of the then current term; and, in addition, provided that it has achieved net sales in the amount of Five Million Five Dollars ($5,000,000) during the Third Year of the initial three-year term of this Agreement. The Renewal Option Period shall be the period from July 1, 2001 to June 30, 2004. 3. GEOGRAPHIC AREA. The rights granted to LICENSEE hereunder shall be exercised by LICENSEE solely within the United States of America, its territories and possessions, and Canada and Mexico (hereinafter referred to as the "Geographic Area"), and shall be exclusive therein with respect to the Licensed Products. 4. ROYALTIES. LICENSEE agrees to pay royalties for the use of the Trademarks as follows: 3 A. MINIMUM GUARANTEED ROYALTY - LICENSEE agrees to pay LICENSOR a Minimum Guaranteed Royalty of $130,000 during the First Year of the License Agreement, $170,000 during the Second Year of the License Agreement and $210,000 during the Third Year of the License Agreement. The Minimum Guaranteed Royalty for each year of the Renewal Option Period, should LICENSEE exercise said Option, shall be $210,000. Minimum Guaranteed Royalties are payable as follows: 1) The sum of $26,000 upon execution, receipt whereof is hereby acknowledged. 2) The balance of $104,000 for the First Year's Minimum Guaranteed Royalty shall be paid in twelve equal installments of $8,666.66 each, on July 1, 1998, August 1, 1998, September 1, 1998, October 1, 1998, November 1, 1998, December 1, 1998, January 1, 1999, February 1, 1999, March 1, 1999, April 1, 1999, May 1, 1999 and June 1, 1999. 3) The sum of $170,000 for the Second Year's Minimum Guaranteed Royalty shall be paid in twelve equal installments of $14,166.66 each, on July 1, 1999, August 1, 1999, September 1, 1999, October l, l999, November l, l999, December 1, 1999, January l, 2000, February 1, 2000, March 1, 2000, April 1, 2000, May 1, 2000 and June 1, 2000. 4) The sum of $210,000 for the Third Year's Minimum Guaranteed Royalty shall be paid in twelve equal installments of $17,500 each, on July 1, 2000, August 1, 2000, 4 September 1, 2000, October 1, 2000, November 1, 2000, December 1, 2000, January 1, 2001, February 1, 2001, March 1, 2001, April 1, 2001, May 1, 2001 and June 1, 2001. 5) The sum of $210,000 for the Minimum Guaranteed Royalty for each year of the three-year Renewal option Period shall be paid yearly in twelve equal installments of $17,500 on July 1, August 1, September 1, October 1, November 1, December 1, January 1, February 1, March 1, April l, May l and June l. B. OPERATINA ROVALTIES - LICENSEE agrees to pay to LICENSOR operating royalties equal to four and one-half percent (4-l/2%) of the first Two Millions Dollars ($2l,000,000) of Net Shipments of Licensed Products sold by LICENSEE pursuant to this Agreement during any calendar year hereof, and four percent (4%) of the excess of Net Shipments of Licensed Products over Two Million Dollars ($2,000,000) sold by LICENSEE pursuant to this Agreement during any calendar year hereof. With respect to Licensed Products which are sold by LICENSEE as either irregular, seconds or discontinued styles, the operating royalty applicable to such Licensed Products shall be equal to one-half of the percentage ascribed above to operating royalties on Net Shipments of regular Licensed Products; such sales, however, shall not exceed ten percent (10%) of total Net Shipments during any yearly period hereof. As used herein, yearly period shall mean, for the First Year of this agreement, the eighteen-month period from January 1, 1998 to June 30, 1999, and for all other years shall 5 mean the 12 month period from July 1 to June 30. Minimum Guaranteed Royalties remitted by LICENSEE shall be credited and offset against operating royalties first coming due hereunder. Should the operating royalties be less than the Minimum Guaranteed Royalty hereunder, the latter shall be non-refundable and nevertheless remain the property of LICENSOR. Operating royalties due to LICENSOR shall be paid by LICENSEE concurrently with delivery of the periodic reports required by Paragraph 5 hereof. In the event LICENSEE shall fail to pay any sum required to be paid hereunder (Minimum Guaranteed Royalties or operating royalties) within ten (10) days after the due date thereof, the amount owing shall thereupon bear interest at the then current Prime rate plus two and one-half percent (2.5%) per annum until paid, and LICENSOR shall have the right to invoke the provisions of Paragraph 15 hereof. C. DEFINITION OF "NET SHIPMENTS" - As used herein, the term "Net Shipments" shall mean the invoice price charged by LICENSEE for Licensed Products sold and shipped by LICENSEE less trade discounts afforded to and actually taken by customers as payment for Licensed Products. If LICENSEE sells the Licensed Products to a related marketing organization or any individual or company in whole or in part controlled or owned by LICENSEE, the invoice price used to determine Net Shipments hereunder shall be the invoice price at which the Licensed Products are resold by 6 such related entity to an unrelated customer in an arm's length transaction. 5. LICENSEE'S MONTHLY REPORTS OF SHIPMENTS AND ROYALTY PAYMENTS. On or before the fifteenth day of each month following the end of each monthly period during the term hereof, LICENSEE shall deliver to LICENSOR a written statement certified to be true and correct by the Chief Financial Officer of LICENSEE, setting forth the gross and Net Shipments of Licensed Products (broken down by gross and Net Shipments for each separate category (item) of Licensed Products as set forth in Paragraph 1 hereof) for the preceding month, together with a check payable to LICENSOR in full payment of the royalties shown on said statement to be due under Paragraph 4 hereof accompanied by a statement of invoices by customer showing the date, invoice number, dollar amount of sale and salesman's name. In addition, LICENSEE will simultaneously report the open, undelivered orders as of the close of the preceding month. 6. LICENSEE'S ANNUAL REPORTS. Within ninety (90) days of the end of each of LICENSEE's fiscal year's ending during the term of this Agreement (LICENSEE hereby certifies that its fiscal year ends December 31), and within ninety (90) days of the termination of this Agreement, LICENSEE shall deliver to LICENSOR a report prepared by the certified public accounting firm then servicing LICENSEE, showing gross shipments, Net Shipments (broken down as set forth above), royalties due, and royalties 7 paid for LICENSEE's preceding fiscal year or, in the case of termination of this Agreement, such information for the period ending at termination. 7. LICENSEE'S RECORDS. LICENSEE shall keep and maintain at its regular place of business complete books and records of all business transacted by LICENSEE in connection with the Licensed Products, including, but not limited to, books and records relating to Net Shipments and sales of Licensed Products. LICENSEE's accounting records of sales, shipments and returns of Licensed Products shall be maintained separately from LICENSEE's accounting records relating to other items manufactured or sold by LICENSEE. Such books and records shall be maintained in accordance with generally accepted accounting procedures and principles consistently applied. LICENSOR, or its duly authorized agents or representatives, shall have the right to inspect said books and records at LICENSEE's premises during LICENSEE's regular business hours, provided that LICENSOR shall give to LICENSEE at least ten (10) days advance written notice thereof. 8. AUDIT BY LICENSOR. LICENSOR, upon giving to LICENSEE at least ten (10) days advance written notice of its intention to do so, shall have the right to audit all books and records which LICENSEE is required to maintain pursuant to Paragraph 7 hereof, and in the event any such audit shall disclose the LICENSEE has understated Net Shipments or underpaid royalties for any 8 reporting period, LICENSEE shall forthwith and upon written demand pay to LICENSOR the amount by which the royalties due exceed royalties paid, together with interest thereon, at the then current Prime rate plus two and one-half percent (2.5%) per annum calculated from the due date of such royalties. In the event that LICENSEE has understated Net Shipments or underpaid royalties in excess of five percent (5%) of said Net Shipments for any payment period, LICENSEE shall forthwith and upon written demand, also pay to LICENSOR all costs, fees and expenses incurred by LICENSOR in conducting such audit, and LICENSOR shall have the right to terminate this Agreement, immediately. Should such audit disclose that the royalties paid exceed the royalties due, LICENSEE shall be entitled to a credit equal to such excess royalties against the royalties next accruing under this Agreement. 9. BEST EFFORTS OF LICENSEE. LICENSEE shall use its best efforts and skill to design, manufacture, advertise, sell and ship the Licensed Products and shall continuously and diligently during the term hereof produce an inventory of Licensed Products and produce and maintain facilities and trained personnel sufficient and adequate to accomplish the foregoing. Upon cessation of any of the above for a continuous period of ninety (90) days, LICENSOR shall have the right to terminate this Agreement, immediately. 9 10. APPROVALS. LICENSEE shall not sell any Licensed Products using any advertising or promotional material or packaging material bearing the Trademarks, or using LICENSOR's name without the Trademarks, without prior approval of LICENSOR. LICENSEE shall furnish to LICENSOR, without cost, the following: A. Photographs and/or design sketches of the proposed styling of each item of Licensed Products; B. At least one (1) sample, randomly selected, of finished production models of each such item at least thirty (30) days before Licensed Products will be marketed for LICENSOR's approval as to styling, material and manufacturing quality; C. Samples of all packaging materials, labels, tags, hang tags and other indicia to be used on or in connection with the item; D. All advertising and promotional items, programs and materials relating to the Licensed Products at least fourteen (14) days prior to media deadlines. The foregoing provisions in this Paragraph 10 shall also apply to any changes in any Licensed Products, advertising or promotional material or packaging material bearing the Trademarks. LICENSOR shall have the right to disapprove the use by LICENSEE of any of the above which, in LICENSOR's opinion, do not meet LICENSOR's standards, but failure of LICENSOR to notify LICENSEE of such disapproval within fourteen (14) days after 10 receipt of the items required to be submitted hereunder shall constitute LICENSOR's approval. In addition thereto, prior to submission of samples pursuant to Subparagraph B hereof, LICENSEE shall conduct its normal tests and verification procedures on each sample to assure that the quality of Licensed Products is at least equal to the quality of similar non-licensed items manufactured by LICENSEE and sold at retail at comparable prices, including but not limited to, tests and procedures relating to color fastness, maximum shrinkage, burst strength, curing and the like. If, at any time, LICENSOR is of the opinion that LICENSEE is not properly using the Trademarks on the Licensed Products on labels, tags, hang tags, packaging, or in advertising, or that the standard of quality of any item of the Licensed Products does not conform to the standards set by LICENSOR or is not of a quality at least equal to similar, non-licensed products manufactured by LICENSEE, LICENSOR may give LICENSEE written notice to this effect, identifying in such notice the situation to which it objects. LICENSEE shall have thirty (30) days after receipt of such notice to correct, to LICENSOR's satisfaction, the situation or situations to which LICENSOR has objected, and failing which, LICENSOR may terminate this Agreement forthwith, and LICENSEE shall immediately discontinue use of the Trademarks and shall not thereafter adopt any conflicting or confusing 11 similar mark or symbol for use on the class of goods to which this license relates. ll. ADVERTISING REOUIREMENTS. LICENSEE agrees to establish an advertising budget in the amount they deem proper for consumer and trade advertising, fixturing, packaging, catalogues, brochures and related materials for the sale and promotion of the Licensed Products. 12. PROHIBITIONS OF ASSIGNMENTS OR TRANSFERS. LICENSEE shall not voluntarily or by operation of law assign or transfer this Agreement or any of LICENSEE's rights or duties hereunder or any interest of LICENSEE without the written consent of LICENSOR, except to a wholly-owned subsidiary or an affiliated corporation, nor shall LICENSEE enter into any sublicense of the use of the Trademarks by any third party. Should LICENSOR permit such an assignment or should such assignment be to a wholly-owned subsidiary or an affiliated corporation, LICENSEE shall continue, nevertheless, to remain liable for the performance of this Agreement. Should LICENSEE sell its stock or a majority thereof, or its assets or a substantial part thereof, to a third party, this license shall terminate unless LICENSOR gives its written consent to the said sale. It is understood that despite the fact that LICENSOR and LICENSEE are corporations, this License Agreement is a highly personal document, closely associated with the individuals employed by the corporations who run the said programs. Should LICENSOR fail to give its written consent to a 12 sale, as described above, this License Agreement shall terminate immediately pursuant to the termination provisions contained herein, and LICENSOR shall, upon such termination, be free, thereupon, to license the rights granted herein to any other person, firm or corporation, without any further obligations to LICENSEE or its buyer or buyers. 13. PRESERVATION OF TRADEMARKS AND CHANGES IN OR IMPROVEMENTS TO LICENSED PRODUCTS. LICENSEE shall cause to appear on all Licensed Products and on all materials on or in connection with which the Trademarks are used, such legends, markings and notices as may be required by the laws governing the Geographic Area in order to give appropriate notice of any trademark rights therein or pertaining thereto. LICENSEE shall not use or permit the use of the Trademarks on or in connection with any product or service, other than the Licensed Products which are manufactured or sold by or for LICENSEE. No Licensed Products shall be sold without a Trademark affixed to it, or on the package or label. Any permutation of the Trademarks and any secondary rights adopted and used by LICENSEE on the Licensed Products, except trademarks already registered by LICENSEE, shall be and become the property of LICENSOR and shall be included as a Trademark subject to this Agreement. Any change or improvement in the Licensed Product, initiated by LICENSEE or anyone on its behalf, 13 shall likewise become the property of LICENSOR and shall be included under the Trademark subject to this Agreement. 14. INFRINGEMENT AND OTHER TRADEMARK LITIGATION. LICENSOR hereby indemnifies LICENSEE (including its officers and directors) and shall defend it against any claims or suits and hold it harmless against any damages awarded by judgment of a court of competent jurisdiction arising out of or in connection with any claims of Trademark infringement asserted against LICENSEE by third parties relating to LICENSEE's use of the Trademarks as authorized by this Agreement, provided that LICENSEE shall give reasonably prompt notice, cooperation and assistance, other than financial assistance, to LICENSOR relative to any claim or suit, and further provided that LICENSOR shall have the option to undertake the conduct and defense of any suit so brought. Notwithstanding the foregoing, LICENSOR's liability to LICENSEE is restricted to the total of royalties actually paid LICENSOR. LICENSEE shall give written notice to LICENSOR as soon as practicable of any infringement of the Trademarks which comes to the attention of LICENSEE. LICENSOR, at its sole cost and expense and in its own name and at its sole discretion, may prosecute any action or proceeding which LICENSOR deems necessary or desirable to protect the Trademarks, including, but not limited to, actions or proceedings involving infringement of the Trademarks. LICENSEE may, and upon written request by LICENSOR 14 shall, join LICENSOR in any such action or proceeding. LICENSEE shall not commence any action or proceeding alleging infringement of the Trademarks without prior written consent of LICENSOR. Any and all damages recovered in any action or proceeding commenced by LICENSOR shall belong solely and exclusively to LICENSOR. 15. DEFAULT BY LICENSEE. A. LICENSEE shall default under this Agreement if: 1. LICENSEE fails to make payment of any amount due hereunder and such payment has not been received by LICENSOR within ten (10) days after written notice to LICENSEE, or 2. LICENSEE fails to perform pursuant to this Agreement and such failure does not involve the payment of money and LICENSEE shall not commence curing the same within ten (10) days after written notice to LICENSEE, or if such default is not thereafter completely cured within thirty (30) days thereof, or 3. A Receiver is appointed or one or more creditors takes possession of all or substantially all of the assets of the LICENSEE, or if LICENSEE shall make a general assignment for the benefit of creditors, or if LICENSEE resolves to go into voluntary liquidation or if proceedings in voluntary or involuntary bankruptcy are commenced by or against LICENSEE. B. In the event of a default by LICENSEE, LICENSOR may at its option, immediately or at any time thereafter cancel and terminate this Agreement. In such event, LICENSEE shall not 15 be relieved of any of its obligations which have accrued or will accrue hereunder and LICENSOR shall retain all of its right to damages therefor in law or in equity, including but not limited to loss of profits during the unexpired portion of this Agreement. In addition, all monies due or to become due as Minimum Guaranteed Royalties hereunder shall become immediately due and payable. 16. DISPOSAL OF INVENTORY UPON TERMINATION OR EXPIRATION. Upon expiration or sooner termination of this Agreement (unless sooner termination takes place because of LICENSEE's default hereunder), LICENSEE shall have the right to dispose (in a manner consistent with its prior methods of selling the Licensed Products during the term hereof) of all Licensed Products on hand, on order, or in the process of manufacture on the effective date of such expiration or termination for the period of ninety (90) days following the date of expiration or termination hereof. Within thirty (30) days following the effective date of expiration or termination hereof, LICENSEE shall provide LICENSOR with a written statement indicating the number and description of Licensed Products on hand, on order, or in process of manufacture as of the effective date of expiration or termination, and LICENSOR shall have the right to conduct a physical inventory to verify such statement. In the event LICENSEE refuses to permit LICENSOR to conduct such physical inventory or fails to deliver such written statement, the LICENSEE shall forfeit its rights 16 hereunder to dispose of Licensed Products following the date of expiration or termination. With respect to all Licensed Products sold pursuant to this Paragraph 16, LICENSEE shall pay LICENSOR an operating royalty as provided in Paragraph 4B above, but not a Minimum Guaranteed Royalty. Such operating royalties shall be payable within sixty (60) days following the end of the aforesaid ninety (90) day period. Should termination or cancellation occur because of LICENSEE's default hereunder, LICENSEE shall have only thirty (30) days from the date of termination to dispose of its inventory. 17. ADDITIONAL RIGHTS UPON TERMINATION. A. During the final twelve (12) months of the term hereof, LICENSOR shall have the right to negotiate and conclude such agreements as it desires, pursuant to which it shall grant a license to any party or parties of any or all of the rights herein granted to LICENSEE, except that no merchandise herein identified as Licensed Products shall be advertised or sold by LICENSOR or any third party other than LICENSEE prior to the expiration or termination of this Agreement. B. Upon the expiration of the license granted hereunder or the earlier termination thereof (unless earlier termination occurs because of LICENSEE's default hereunder), the license shall revert to LICENSOR and LICENSEE thereafter shall not use or refer to the Trademarks and LICENSOR shall be free to 17 license others to use the Trademarks in connection with the Licensed Products in the Geographic Area. 18. GOODWILL. LICENSEE acknowledges that the Trademarks have acquired a valuable secondary meaning and goodwill with the public. Accordingly, LICENSEE undertakes and agrees not to use the Trademarks in any manner whatsoever which, directly or indirectly, would derogate or detract from its repute and to use its best efforts to insure and uphold LICENSOR's excellent image and its trademarks in the marketplace. Except as may be otherwise specified in this Agreement, LICENSEE shall not use the Trademarks herein licensed or any name confusingly similar thereto as part of its company name or as part of the name of any company or corporate name of any corporation which it controls or with which it is affiliated. LICENSEE will not attack LICENSOR's right or title in and to the Trademarks and hereby acknowledges LICENSOR'S ownership of the Trademarks. 19. INDEMNIFICATION. LICENSEE hereby agrees to pay on behalf of LICENSOR, its officers and directors, and to defend it and them (and to pay all counsel fees necessary to do so) against any and all claims or suits and hold it and them harmless against any and all claims, suits, liabilities, causes of action, damages or expenses arising out of any unauthorized use by LICENSEE of the Trademarks, and from any and all claims or suits, liabilities, causes of action, damages or expenses which are the sole fault of LICENSEE and which arise out of the manufacture, 18 use, advertising or sale by LICENSEE of the Licensed Products, other than claims of trademark infringement, as referred to in Paragraph 14 hereof, including, but not limited to, actions or subrogations brought by employees, agents, trustees, insurance companies or others, acting with or on behalf of LICENSEE. LICENSEE agrees to carry (1) worldwide product liability insurance with respect to the Licensed Products with a limit of liability of Two Million Dollars (S2,000,000) and (2) bodily injury and property damage liability insurance (including contractual liability) with respect to the Licensed Products with a limit of liability of Two Million Dollars ($2,000,000). In addition, (3) LICENSEE agrees to provide business interruption insurance for the benefit of LICENSOR, with limits equal at least to the anticipated annual royalties payable to LICENSOR by LICENSEE during the first effective year of this Agreement, such projection to be made by LICENSEE. Thereafter, for each year of this Agreement, the projection of such royalties shall be made annually by LICENSEE, approved by LICENSOR, and shall govern the business interruption insurance coverage. Business interruption insurance coverage will be provided on a "valued" basis (i.e. no coinsurance and no need for calculation after loss) and will be "all risk". LICENSOR shall be named in each such insurance policy as additional insured as its interest may appear. Such insurance may be obtained in conjunction with a policy or policies of insurance which cover products other than the 19 Licensed Products, and shall provide at least thirty (30) days prior written notice to LICENSOR of the cancellation, non-renewal or substantial modification thereof. LICENSEE shall deliver to LICENSOR a certificate evidencing the existence of such insurance policies promptly after the execution of this Agreement, the insurance companies to be acceptable to LICENSOR. 20. ATTORNEY'S FEES. SITUS OF ACTION. APPLICABLE LAW. In the event LICENSOR or LICENSEE shall commence any action or proceeding against the other by reason of any breach or claimed breach of the performance of any of the terms or conditions of this Agreement, or seek a declaration of rights hereunder, the prevailing party in such action or proceeding against the other by reason of any breach or claimed breach of the performance of any of the terms or conditions of this Agreement, or in seeking a declaration of rights hereunder, the prevailing party in such action or proceeding shall be entitled to reasonable attorney's fees to be fixed by the trial court. Any legal action or proceeding of any sort against LICENSOR by or on behalf of LICENSEE shall be brought in a court of competent jurisdiction in Philadelphia County, Pennsylvania. In any legal action or proceeding brought in which any rights or obligations arising from this Agreement is an issue, the law applicable thereto shall be the law of the Commonwealth of Pennsylvania. 21. NON-AGENCY OF PARTIES. This Agreement does not constitute LICENSEE as the agent or legal representative of 20 LICENSOR or LICENSOR as the agent or legal representative of LICENSEE for any purpose whatsoever. LICENSEE is not granted any rights or authority to assume or to create any obligation or responsibility, express or implied, on behalf of or in the name of LICENSOR or to bind LICENSOR in any manner or thing whatsoever; nor is LICENSOR granted any right or authority to assume or create any obligation or responsibility, express or implied, on behalf of or in the name of LICENSEE or to bind LICENSEE in any manner or thing whatsoever. No joint venture or partnership between LICENSOR and LICENSEE is intended or shall be inferred. 22. SPECIFIC UNDERTAKINGS OF LICENSEE. During the term of this Agreement, LICENSEE agrees that: A. It will manufacture, sell and distribute the Licensed Products in an ethical manner and in accordance with the terms and intent of this Agreement. B. It will protect, to the best of its ability, its right to manufacture, sell and distribute the Licensed Products. C. It will not directly or indirectly knowingly distribute Licensed Products outside of the Geographic Area, nor shall it sell Licensed Products to any customers whom LICENSEE knows or has reason to believe will resell Licensed Products outside of the Geographic Area. D. It acknowledges that the Trademarks are the property of the LICENSOR and that all use of the Trademarks and 21 goodwill created thereby by LICENSEE shall inure to the benefit of LICENSOR. LICENSEE shall render reasonable assistance, other than financial assistance, to LICENSOR which may be required by LICENSOR to enforce and preserve the Trademarks. E. No brokers and finders were involved in connection with this Agreement. F. LICENSOR reserves all rights to use the Trademarks except to the extent of the rights granted to the Trademarks by LICENSOR to LICENSEE hereunder. G. If LICENSEE obtains any copyrights with respect to labels and/or packaging materials used in connection with the Licensed Products, such copyrights shall be obtained in the name of LICENSOR and shall revert to LICENSOR at the expiration or earlier termination of this Agreement. H. It will not, during the term of this Agreement, or any renewal thereof, handle, ship, manufacture, sell or distribute any product which will be a competing licensed product or licensed designer name in LICENSOR's quality level or in its present distribution channels. 23. ADDRESSES FOR NOTICE. All notices between the LICENSOR and LICENSEE shall be in writing by certified mail, return receipt requested, addressed to LICENSEE or LICENSOR, at the respective addresses set forth below, and shall be effective upon receipt: 22 LICENSOR: J. G. HOOK, INC. 1616 Walnut Street, Suite 1122 Philadelphia, PA 19103 Attention: Max L. Raab LICENSEE: RETROSPETTIVA, INC. 8825 W. Olympic Boulevard Beverly Hills, CA 90211 Attention: Boro Vukadinovic, President If any of the parties hereto shall, during the currency of this Agreement, change address, then upon giving written notice to the other party of the new address, the new address shall be the address for notice. 24. WAIVER OF LICENSOR. In the event LICENSOR shall at any time waive any of its rights under this Agreement or the performance by LICENSEE of any of its obligations hereunder, such waiver shall not be construed as a continuing waiver of the same rights or obligations or a waiver of any other rights or obligations. 25. INTEGRATED AGREEMENT. This Agreement constitutes the entire agreement between the parties as to the Licensed Products, there are no other understandings between the parties, oral or otherwise, nor any representations made by either party to the other prior to this Agreement, and no modifications or revisions hereof shall be of any force or effect unless the same are in writing and executed by the parties hereto. 26. SEPARABILITY OF PROVISIONS AND TITLES. Any provisions of this Agreement which shall be or be determined to be invalid 23 shall be ineffective, but such invalidity shall not affect the remaining provisions hereof. The titles to the paragraphs hereof are for convenience only and have no substantive effect. 27. BINDING UPON SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. This Paragraph 27 shall not be construed to alter or modify the prohibitions upon assignments or transfers by LICENSEE expressed elsewhere in this Agreement. 28. FAILURE TO SHIP CERTAIN ITEMS. All of the various categories (items) set forth in Paragraph 1 hereof as Licensed Products must be designed, manufactured and sold by LICENSEE no later than one year after the execution of this Agreement. Failure of LICENSEE to ship any category (item) as aforesaid within one year after the execution hereof, shall cause the said unshipped item or items, as the case may be, to be deleted from the category of a Licensed Product hereunder, and LICENSOR shall be free then to license said item to any third party, free and clear of any restrictions in this Agreement. J. G. HOOK, INC. (Corporate Seal) By: /s/ Gary A. Hane, Pres. --------------------------------- RETROSPETTIVA, INC. (Corporate Seal) By: /s/ Ineligible --------------------------------- 24 EXHIBIT A NELL FLOWERS AND DESIGN Registered U.S. Patent [LOGO] and Trademark Office, Issued January 12, 1982, Reg. No. 1,185,893. Registered U.S. Patent [LOGO] and Trademark Office, Issued April 3, 1990, Reg. No. 1,590,011 NOTE: The name "J. G. Hook" must not be more than 1/5th of the size of "Nell Flowers" EX-10.07 3 CONSULTING AGREEMENT WITH KEVIN DIEBALL CONSULTING AGREEMENT THIS AGREEMENT (hereinafter referred to as the "Agreement"), is made as of the ___ day of February, 1998, by and between RETROSPETTIVA, INC. (the "Company") and KEVIN DIEBALL ("Dieball"). 1. ENGAGEMENT. The Company hereby retains Dieball as an independent contractor on behalf of the Company upon the terms and conditions, hereinafter set forth. 2. TERM. The term of this Agreement shall be for the period beginning the effective date of this Agreement and extending until and through March 31, 1999. 3. DUTIES. Dieball is retained as an independent contractor by the Company and his duties shall be those related to (i) all phases of investment banking and investor relations between the Company and the brokerage community and market makers, (ii) enhance the name recognition of the Company, (iii) increase investor/broker and industry awareness of the Company, (iv) further the value of the Company and its securities and (v) such other duties relating to investor relations as the Company may reasonably direct. 4. COMPENSATION. As the entire compensation for his services to the Company under and during the term of this Agreement, in whatever capacity rendered, the Company shall pay to Dieball the total sum of Eighty Seven Thousand Dollars ($87,000) payable Thirty Thousand Dollars ($30,000) within five (5) days of the execution of this Agreement and equal quarterly payments of Fourteen Thousand Two Hundred Fifty Dollars ($14,250) each commencing June 30, 1998 and payable thereafter on September 30, 1998, December 31, 1998, and one final payment on March 31, 1999. 5. EXTENT OF SERVICE. Dieball shall devote such time as is necessary to perform his duties under this Agreement and shall utilize has best efforts in furtherance of the business of the Company. Dieball specifically may set whatever hours he deems appropriate to accomplish his duties and the Company may not direct the manner in which Dieball performs his duties hereunder. 6. TERMINATION. This Agreement will terminate upon the occurrence of any of the following events: a. The death of Employee; b. The "Total Disability" (as hereinafter defined) of Dieball; c. Written notice to Dieball from the Company of termination for "Cause" (as hereinafter defined); d. The voluntary termination of this Agreement by Dieball upon thirty (30) days prior written notice; e. March 31, 1999 unless earlier terminated; or f. Written notice to Dieball from the Company for any reason without "cause". For purposes of Section 6(b), the term "Total Disability" means physical or mental disability, or both, determined to be (or reasonably expected to be, based upon then available medical information) of not less than (12) months duration or more. The determination shall rest upon the opinion of the physician regularly attending Dieball. If the Company disagrees with said physician's opinion, the Company may engage at their own expense a physician to examine the Dieball and Dieball hereby consents to such examination and to waive, if applicable any privilege between the physician and Dieball that may arise as a result of said examination. If after conferring, the two physicians cannot concur on a final opinion, they shall choose a third consulting physician whose opinion shall control. The expense of the third consulting physician shall be borne equally by the Dieball and the Company. For purposes of Section 7(c), "Cause" means (i) Dieball has failed to substantially perform his duties as reasonably determined by the chief executive officer of the Company or the Board of Directors of the Company, (ii) Dieball engages in poor performance that is not cured within thirty (30) days after counseling by the Company, (iii) Dieball has failed to comply with the reasonable directives and policies of the Board of Directors of the Company or of the chief executive officer of the Company, or (iv) Dieball breaches his fiduciary duty to the Company or commits any dishonest, unethical, fraudulent, or felonious act in respect to Dieball's duties to the Company. 7. COMPANY'S OBLIGATION UPON TERMINATION OF DIEBALL. In the event of the Company's Termination of this Agreement pursuant to Sections 6a, 6b, 6c, 6d or 6f above, the Company's sole obligation shall be to pay all compensation owing for the services rendered by Dieball prior to such termination with such compensation based upon the rate of $87,000 divided by the number of days from the effective date of this Agreement through March 31, 1999. Notwithstanding the foregoing, any payments by the Company to Dieball pursuant to Section 4 above shall be deemed earned upon payment and there shall be no adjustments pursuant to this Section 7 regarding payments to Dieball previously paid by the Company. It is specifically agreed between the parties that the payments set forth in this Section 8 constitute the sole obligations of the Company regarding termination of this Agreement and are in lieu of any damages or other compensation that Dieball may claim in connection with this Agreement. 8. WAIVER OF BREACH. The waiver by any party hereto of a breach of any provision of this Agreement will not operate or be construed as a waiver of any subsequent breach by any party. 2 9. NOTICES. Any notices, consents, demands, request, approvals and other communications to be given under this Agreement by the party to the other will be deemed to have been duly given if given in writing and personally delivered or within two days if sent by mail, registered or certified, postage prepaid with return receipt requested, as follows: If to the Company: Retrospettiva Inc. 8825 West Olympia Blvd. Beverly Hills, CA 90211 Attn: Michael Silberman If to Dieball: Notices delivered personally will be deemed communicated as of actual receipt. 10. ENTIRE AGREEMENT. This Agreement and the agreements contemplated hereby constitute the entire agreement of the parties regarding the subject matter hereof, and supersede all prior agreements and understanding, both written and oral among the parties, or any of them, with respect to the subject matter hereof. 11. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws effective during this Agreement, such provision will be fully severable and this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision, or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there will be added automatically, as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. 12. GOVERNING LAW. To the extent permitted by applicable law, this Agreement and the rights and obligations of the parties will be governed by and construed and enforced exclusively in accordance with the substantive laws (but not the rules governing conflicts of laws) of the State of California and the State of California shall have exclusive jurisdiction regarding any legal actions relating to this Agreement. 13. CAPTIONS. The captions in this Agreement are for convenience of reference only and will not limit or otherwise affect any of the terms or provisions hereof. 14. GENDER AND NUMBER. When the context requires, the gender of all words used herein will include the masculine, feminine and neuter, and the number of all words will include the singular and plural. 3 15. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which will be deemed an original and all of which will constitute one and the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. RETROSPETTIVA, INC. By: /s/ Michael D. Silberman --------------------------------- Michael D. Silberman, CFO /s/ Kevin Dieball --------------------------------- Kevin Dieball 4 EX-10.08 4 FACTORING AGREEMENT WITH COMMODORE FACTORS, INC. COMMODORE FACTORS CORP. 1430 BROADWAY NEW YORK, N.Y. AMENDMENT TO FACTORING AGREEMENT Retrospettiva, Inc. 8825 West Olympic Boulevard Beverly Hills, CA 90211 Tel: 310-657-4488 Fax: 310-657-4499 Gentlemen: The following is an amendment to the factoring agreement executed on 12/23/97 by and between Commodore Factors Corp. (the "Factor) and Retrospettiva, Inc. (the "Client"), (the "Agreement"). In each numbered item the paragraph entitled Amendment will replace or amend the verbiage in the sections entitled Agreement immediately preceding them. 1. The following relates to the last sentence of paragraph 1 of the Agreement. Agreement: During the term of this Agreement you shall not sell, negotiate, pledge, assign or grant any security interest in any Receivables of yours to anyone other than us. Amendment: During the term of this Agreement, it is understood by the Factor that the Client has an existing credit facility with another lender and that the lender has a senior perfected security interest (UCC-1 filing) on: "All Accounts, Chattel Paper, Contract Rights, Inventory, Equipment, Fixtures, General Intangibles, Deposit Accounts, Documents and Instruments of Debtor, howsoever arising, whether now owned or existing or hererafter acquired or arising, and wherever located; together with all parts thereof (including spare parts), all accessories and accessions thereto, all books and records (including computer records) directly related thereto, and all proceeds thereof (including, without limitation, proceeds in the form of Accounts and Insurance proceeds." The Client agrees to execute the following agreements with and on behalf of the Factor and lender; (1) Parity agreement - whereby the lender agrees to file an amendment to their UCC-1 filing indicating that they agree to subordinate their senior position as to Accounts and the proceeds therefrom arising from sales utilizing the label, J.G. Hook, Inc. and any tradenames related to J.G. Hook, Inc., including but not limited to 'Nell Flowers by J.G. Hook'. (2) Factor UCC-1 - whereby the Factor agrees to file a UCC-1 filing and accept a junior position to all Accounts and the proceeds therefrom except those arising from the sales utilizing the label, J.G. Hook, Inc. and any tradenames related to J.G. Hook, Inc., including but not limited to "Nell Flowers by J.G. Hook". 2. The following relates to paragraph 6(d) of the Agreement. Agreement: (plus a charge of $600.00 per person per day for our examiners...) Amendment: (plus a charge of $600.00 per person per day for our examiners, except that the Client will only be obligated to pay a maximum of $1,200 in any Commodore Factors Corp. - Retrospettiva, Inc. Amendment to Factoring Agreement Page 1 of 3 one 365 day period for audits or examinations requested by the Factor.) The Factor acknowledges that the Client is a public company and as such undergoes periodic certified audits and the Client will submit those audits upon completion within a reasonable period of time to the Factor. 3. The following relates to paragraph 7(b) of the Agreement. Agreement. ..... that you have paid and shall pay all taxes which have become or shall hereafter become due and payable.... Amendment: Any failure to pay taxes when due to a dispute with any governmental taxing authority or due to a reasonable underestimate of taxes due as a direct result of the order of magnitude of the increase of the Clients business volume shall not create an Event of Default as further set forth in item 17 of the Agreement. 4. The following relates to paragraph 7(c) of the Agreement. Agreement: ....shall not be any judgments, assessments or liens filed against you or against any of your property. Amendment: ....shall not be any judgments, assessments or liens filed against you or against any of your property except that the Factor acknowledges the existence of a prior perfected senior position as further set forth in the amendment of paragraph 1 of the agreement and that from time to time, due to a reasonable dispute with taxing authorities that it is possible that there may be an assessment due either to a breakdown in paper flow at that authority or an assessment made due to a reasonable error on the part of the Client as to the estimate of taxes due or interest and penalties that the Client was not and or could not have been previously aware of. The Factor also further acknowledges that from time to time it is not unusual for a client to be the subject of lawsuits in the normal course of business and whether material or not, to the extent that there continues to be sufficient collateral to support the Clients loan due to Factor, this event, and any and all of the other events noted above shall not in any way trigger or be construed to be an Event of Default as further set forth in paragraph 17 of the Agreement. 5. The following relates to paragraph 7(g) of the Agreement. Agreement: that your transfers and assignments to us are free and clear of all encumbrances, liens and security interest and that you have full title in and to all Receivables. Amendment: that your transfers and assignments to us are free and clear of all encumbrances, liens and security interest and that you have full title in and to all Receivables except that the Factor acknowledges the existence of a prior perfected senior position as further set forth in the amendment of paragraph 1 of the agreement. 6. The following relates to paragraph 15 of the Agreement. Agreement: The minimum aggregate factoring commission payable under this agreement for each contract year shall be S20,000.. .. Commodore Factors Corp. - Retrospettiva, Inc. Amendment to Factoring Agreement Page 2 of 3 Amendment: There shall be no minimum aggregate factoring commission payable under this agreement. The Factor acknowledges that from time to time there may be a receivable(s) on which there may be additional terms or a change in terms. In that event the Factor agrees to accept those terms and conditions to the extent that they are reasonable and usual as to industry custom, the Factor will assess a charge to Client based on the formula set forth herein. 7. The following relates to paragraph 16(b) of the Agreement. Agreement: In the event of your early termination of this agreement, whether by virtue of a default hereunder or at your election as set forth herein above, you agree to pay us in cash or other immediately available funds, and in addition to all other obligations, an early termination fee as and for liquidated damages resulting from such early termination in an amount equal to the greater of the minimum commission as set forth in paragraph "15" hereof reduced by any commission already paid during the contract year ..... Amendment: In the event of your early termination of this agreement, whether by virtue of a default hereunder or at your election as set forth herein above, you, the Client, will not be obligated to pay nor be assessed an early termination fee. There will be no early termination fee required by the Factor to be paid by the Client under any circumstances. ACCEPTED AND AGREED: COMMODORE FACTORS CORP. By: /s/ Illegible Date: 1/17/98 ---------------------------- ----------------------------------- RETROSPETTIVA By: /s/ Illegible Date: 12/23/97 ---------------------------- ----------------------------------- COMMODORE FACTORS CORP. - RETROSPETTIVA, INC. AMENDMENT TO FACTORING AGREEMENT Page 3 of 3 COMMODORE FACTORS CORP. 1430 BROADWAY NEW YORK N.Y. FACTORING AGREEMENT New York, NY 12/23, 1997 Retrospettiva, Inc. 8825 West Olympic Blvd. Beverly Hills, CA 90211 Gentlemen: Upon your written acceptance, to be noted at the foot of this instrument, the following shall constitute the entire agreement except as amended on 12/23/97 and understanding between us pursuant to which you hereby appoint us your sole factor on the following basis: 1. You agree to, and do hereby, sell and assign to us all of your right title and interest in and to certain of your accounts receivable, notes, bills, acceptances, contract rights and other forms of obligation (as herein defined) and all security and guarantees therefore (herein collectively termed "Receivables") arising out of all of your sales of goods or rendition of services whether now existing or hereinafter created, together with title to any merchandise represented by such Receivables which may be rejected or returned by your customer for any reason whatsoever, also to all of the rights under insurance policies covering merchandise or services and all of your rights against carriers of such merchandise. During the term of this Agreement you shall not sell, negotiate, pledge, assign or grant any security interest in any Receivables of yours to anyone other than us. 2. Except as hereinafter set forth, we agree to purchase your Receivables without recourse to you, provided that the sale of the merchandise represented by the Receivables and the terms thereof have first been approved by us in writing (such approval being sometimes referred to herein as "Credit Approval"), and provided further that the merchandise represented by the Receivables is duly delivered to and finally accepted and retained by your customer without dispute, whether bona fide or not, as to price, terms of sale, delivery, quantity, quality, counterclaim or offset or otherwise (whether or not such claim, dispute, counterclaim or offset relates to the specific Receivable). We reserve the right to revoke our Credit Approval at any time prior to delivery to and acceptance by your customer. We shall be entitled to collect and receive all proceeds of your sales and shall enjoy all the rights and remedies of the seller of goods, including the right of stoppage in transit, reclamation, replevin and any similar rights or remedies as may be available to you. (Our Credit Approval numbers shall be valid for a period of 30 days from the date of such Credit Approval number or until 30 days after the delivery date set forth in our approval sheet unless revoked by us. Notwithstanding the foregoing, our Credit Approval shall not be valid for any shipment assigned to us on an assignment schedule more than thirty (30) days after the date of invoice. We shall not be liable in any manner for refusing to give or for withdrawing Credit Approval or for exercising our rights and remedies as set forth herein. No modifications or extensions may be granted by you with respect to any Receivable which has our Credit Approval without our prior written consent. In the event we shall give our written consent as aforesaid, upon each and every such consent to your requested modification or extension, whether as to terms, dates or otherwise, you shall pay us a service fee in the amount of $10.00 which fee shall be due and payable upon the issuance of our consent to your proposed modification or extension. Receivables as to which we have not given our written Credit Approval, either in whole or in part, shall nevertheless be deemed to have been sold and assigned to us with full recourse to you to the extent and in the respects and the amounts not so approved. The credit risk on sales not approved by us is assumed by you. Such sales shall be Department Risk (D.R) Receivables. All invoices in an amount less than $200.00 shall be deemed samples and shall automatically be considered as D.R Receivables. Each and every assignment of D.R. Receivables hereunder shall be deemed to be a grant of a security interest in our favor in and to any such Receivable. 3. (a) All of your sales shall be billed and invoiced by you at your expense upon forms of bills or invoices acceptable to us and shall constitute assignments to us of the Receivables represented thereby, irrespective of whether you execute any other specific instrument of assignment in our favor or otherwise. Each invoice shall be marked payable to us and/or the Re-Factor (as hereinafter defined) in a manner satisfactory to us and/or the Re-Factor. We may request shipping and/or delivery receipts covering any of your Receivables to be promptly delivered to us. You shall not be entitled to any credit with respect to any Receivable until the relevant shipping documents have been delivered to us. You will supply us with as many duplicate bills or invoices as we may from time to time require. At our request, invoices to your customers shall be mailed by us at your expense. (b) At the time of each sale you shall execute and deliver to us, in a form satisfactory to us, a written schedule and assignment of the Receivables arising out of such sales, together with proof of delivery to your customer. Notwithstanding your failure to execute and deliver any such written assignment as aforesaid, each Receivable created by you will be deemed assigned to us and shall become our property immediately upon shipment of the merchandise. Billing on your invoices, whether done by you or us, shall constitute assignment to us of the Receivable represented thereby. (c) Copies of all credit memoranda as may be issued by you to any of your account debtors shall be finished to us for the sole purpose of notifying us of the transmission of such credit memoranda to each such account debtor, it being understood and agreed that only the account debtor to whom such credit or allowance is issued shall be entitled thereto. 4. (a) The purchase price (Purchase Price) which we shall pay to you for Receivables accepted by us, as aforesaid, shall be the "Net Face Amount" thereof, calculated at our option on any terms offered by you, less our factoring commission, as set forth below. "Net Face Amount" shall be deemed to mean the gross amount of the Receivables less all discounts offered to the customer, whether taken by the customer or not. The Purchase Price less (a) any reserves which we may, in our sole discretion determine to hold; (b) any moneys remitted, paid, or otherwise advanced by us to you or for your account including any amounts which we may be obligated to pay in the future; and (c) any other of our charges to your account as provided for in this Agreement, shall be payable by us to you. We may, in our sole discretion, advance to you from time to time sums up to eighty (80%) percent of the Purchase Price of the Receivables purchased by us. (b) Notwithstanding the foregoing, we shall withhold a reserve of sums otherwise due to you and, in our discretion, may revise the amount of such reserves from time to time. We shall be entitled to hold all sums to your credit as security for D.R. Receivables, outstanding claims and any and all Obligations owing to us, the Re-Factor, our subsidiaries and affiliates by you, however arising. Further, at our request you shall maintain a credit balance with us in such amount as will, in our sole discretion, be commensurate with the volume and character of the business conducted by you so as to protect us against all possible returns, claims of your customers, indebtedness owing by you to us or any other contingencies (your "Obligations"). Except as in our sole discretion, the aggregate amount of your Obligations at any time shall not exceed $2,000,000. (c) Amounts owing to us or the Re-Factor in respect to your purchases from other persons, firms or corporations factored by us or our parent, subsidiary or affiliate or the Re-Factor are to be considered as advances against our account with you and may be charged by us to your account at any time whether before or after the maturity of such amounts. (d) In addition to our factoring commissions and to any other fees provided for herein or otherwise, you shall pay us a closing fee for establishing the factoring arrangements provided herein, in the amount of $500, which fee is payable on and fully earned as of the date hereof, and shall be included as part of the Obligations. (e) If any taxes are imposed, or if we shall withhold or pay any tax or penalty as a result of or in connection with any transaction or transactions between us, you hereby indemnify us and hold us harmless from and against all claims of every kind and nature whatsoever in respect thereof. In addition, you agree that any such payments made by us shall be charged to your account and shall be included as part of your Obligations. (f) We shall have the right and are hereby irrevocably authorized by you to charge your account or accounts in the amount or amounts of any and all of your Obligations. Notwithstanding the foregoing, we shall not be required at any time, or to any extent, to have recourse to any collateral security given by you to us to secure your Obligations and the exercise of our rights to look to any such collateral shall be and remain in our sole and absolute discretion. Accordingly, you shall at all times remain liable for repayment, upon our demand, of all your Obligations owing to us. 5. We shall be entitled to hold and you hereby grant to us and to our subsidiaries, affiliates and the Re-Factor, a continuing general lien and security interest in and to all accounts, contract rights, documents, instruments, chattel paper, general intangibles, reserves, credit balances, and all of your property at any time in our possession, or in the possession of any of our subsidiaries, affiliates or the Re-Factor, or upon or in which we may otherwise have a lien or security interest as collateral security for any and all of your Obligations at anytime owing to us, our subsidiaries, affiliates and the Re-Factor, whether fixed or contingent, no matter how or when arising, whether under this Agreement or otherwise, and including all Obligations incurred by you for purchases from any other person, firm or corporation factored or financed by us, all of which shall be included as part of your Obligations. In addition to the foregoing you hereby grant us a general lien and security interest in and to all security and guarantees in your favor as they may relate to your Receivables and to all of your books and records. You are to execute and deliver financing statements and any and all instruments and documents that we or the Re-Factor may request to prefect, protect, establish or enforce the security interests granted hereunder and any provisions thereof. You hereby authorize us and/or the Re-Factor to file such financing statements in your name signed by us and/or the Re-Factor, or a reproduction of this Agreement to reflect the security interest granted hereunder. 6 (a) All disputes, claims or controversies relating to any Receivable must be settled by you at your sole cost and expense. We shall have no responsibility or liability of any kind or nature whatsoever with respect to any Receivable, payment of which is refused or withheld by reason of any dispute, bona fide or not, and whether before or after maturity date, as to price, terms, delivery, quantity, quality or otherwise, nor where the customer claims release from liability or inability to pay because of any act of God or a public enemy or war or because of requirements of law or rules, orders or regulations having the force of law (each a "Dispute"). Upon our receipt of notice of the existence of a Dispute, we shall have the right to immediately charge your account for the entire amount of any Receivable as to which any such Dispute has arisen whether such Dispute regards that Receivable or any other Receivable and whether due or not due, and you agree to immediately pay the amount of all such disputed Receivables to us upon our demand. You shall promptly advise us in writing of the existence of each Dispute with your customers upon your receipt of notice thereof and you shall forthwith transmit to us copies of any and all charge back notices, allowance requests, claims, correspondence and the like received by you from your customer evidencing the existence of a Dispute. (b) Notwithstanding anything to the contrary contained in subparagraph (a) above and regardless of the date we charge back to you the full amount of any Receivable where there is a Dispute, it is understood, agreed and acknowledged that immediately upon the occurrence of any such Dispute we shall no longer bear or be responsible for the credit risk and/or loss, if any, with respect to any such Receivables due to financial inability of your customer to pay. Such risk and/or loss, if any, shall immediately revert to and be deemed to have been assumed by you without any further or other act on our part. A charge back shall not be deemed a reassignment. (c) All fees and expenses of any attorney employed by us or on your behalf to collect or sue upon any D.R. Receivable or upon any Receivable with respect to which we have a notice of Dispute shall be charged to your account and shall be paid by you and made part of your Obligations. If we, at your request and on your behalf, file a claim or forward a claim for collection with respect to a D.R. Receivable ("D.R. Claim") there shall be a charge of ten (10%) percent of the amount of the D.R. Claim collected in addition to all other costs and expenses incurred. (d) Immediately upon our request, you shall pay to us, or reimburse us for, all sums, costs and expenses (which shall be and are hereby included as part of the Obligations) which we may pay or incur in connection with or related to this Agreement. In addition to those items set forth herein above and hereafter, Obligations shall include: the negotiation, preparation, consummation, administration and enforcement of this Agreement and all other documents and/or its related financial accommodations, and the transactions contemplated hereunder, any future proposed amendments, supplements, consents or modifications to this Agreement (whether or not executed), all efforts made to advance, expand, defend, protect or enforce the security interests or other rights granted to us hereunder, enforcing payment of the Obligations; filing fees and taxes, recording taxes, expenses for searches incurred by us from time to time, periodic field examinations of our collateral or your operations (plus a charge of $600.00 per person per day for our examiners in addition to the reimbursement for their expenses); wire transfer fees, the fees and disbursements of our counsel, all fees and expenses for the service and/or filing of papers, premium on bonds and undertakings, fees of marshals, sheriffs, custodians or auctioneers and others, travel expenses and all court costs and collection charges. All Obligations shall accrue interest after demand at the Interest Rate (ad defined below). A "demand" as used herein shall be deemed to have been made upon posting any Obligation to your account. At our option, all principal, interest, fees, commissions, costs, expenses and other charges with respect to this Agreement may be charged directly to your account maintained by us. (e) Anticipation taken by customers in excess of two (2%) percent below Prime Rate shall be charged to you. 7. You represent and warrant: (a) that you are solvent; (b) that you have paid and shall pay all taxes which have become or shall hereafter become due and payable; (c) that there shall not be any judgements, assessments or liens filed against you or against any of your property, real or personal, during the term of this Agreement nor at the time of execution of this Agreement except as may have been disclosed by you to us in writing; (d) that each Receivable is based upon your bona fide sale and actual delivery to the customer of merchandise or rendition of services invoiced in the regular course of your business; (e) that the customer, without qualification or limitation, has made himself liable to pay by the maturity date of the invoice the full amount of the Receivable indicated thereon without deduction, claim, offset defense or counterclaim; (f) that you have full title to all merchandise sold; and (g) that your transfers and assignments to us are free and clear of all encumbrances, liens and security interests and that you have full title in and to all Receivables. 8. In the event of the rejection, return or recovery of any merchandise on any Receivable you shall pay us the amount of such Receivable, either in cash or by the assignment of new Receivables acceptable to us hereunder. We shall have the right to immediate possession of such merchandise which you shall hold in trust for our benefit, segregated and identified by you as our property, and shall have a lien upon it, as well as the ownership of any Receivables arising from the subsequent sale of such merchandise as security for the payment of your Obligations. Upon our request, at your expense, you shall deliver such merchandise, upon five (5) days written notice to you, at such place and upon such terms as we may deem proper. In the event you fail to deliver such merchandise as aforesaid, we shall have the right and are hereby authorized to enter your premises to take immediate possession thereof and to sell such merchandise, upon notice to you, at public or private sale, at which sale we may be the purchaser, and at such price or prices and upon such terms as we, in our sole discretion, may deem acceptable. Only the net proceeds of the sale, after deduction for all costs and expenses thereof, shall be credited to your account. 9. We reserve the right to limit the amount of D.R. Receivables, as well as the amount of any advance thereon. Upon the insolvency of any of your D.R. customers (as determined in our absolute discretion) or default in payment by such D.R. customers at maturity, we shall have the right to immediately charge such sale or sales to your account and you agree to pay the amount thereof to us on demand. In addition, we shall also be entitled to charge to you the amounts we receive in payment of any D.R. Receivables which thereafter we are required to turnover or return to customer or any legal representative thereof. The provisions of the foregoing shall survive the termination of this Agreement, and you hold us harmless from any loss or expense arising out of the assertion of such a claim, including attorneys' fees and expenses. 10. All checks, notes, remittances, acceptances, proceeds, other instruments, or cash received by you with respect to any Receivable shall be our property and if received by you shall be held in trust for us and immediately turned over to us in kind without deduction. You hereby authorize and irrevocably appoint us and/or the Re-Factor as your attorney-in-fact to endorse your name upon checks and other instruments or documents received by you or us pertaining to the Receivables, and to make, execute and deliver in your name such further instrument or instruments of assignment of Receivables to us in furtherance of this Agreement and its purpose as we may, from time to time, deem necessary. It is understood and agreed that we and/or the Re-Factor shall have the absolute right but not the obligation, to deposit all checks and other remittances received by us in payment of Receivables irrespective of any deductions shown or taken by your customers or any notification or conditions as may appear thereon. We may charge back to you or to your account any deduction or deficiencies therein, other than deficiencies in the payment of Receivables which have heretofore received our credit approval and which deductions or deficiencies result solely from your customer's financial inability to pay. Any charge back of your D.R. Receivables or Disputed Receivables or any of them, shall not be deemed a reassignment thereof, and title thereto and the merchandise represented thereby shall remain with and in us as security for your Obligations until we shall have been fully reimbursed. 11. We have advised you that, from time to time, we may re-assign and resell the Receivables to another factor (the "Re-Factor"), as we in our sole and absolute discretion may determine, pursuant to the terms and provisions of agreements (the "Reassignment Agreements") entered into with such Re-Factor. You acknowledge and agree that we reserve the right to re-assign to such Re-Factor any lien or security interest we may hold by virtue of this Agreement and you hereby consent to any such resale and reassignment. 12. You shall at all times maintain, at your sole cost and expense, books and records showing all sales and all claims, allowances, Disputes and similar information with respect to the Receivables and the goods and services relating thereto. We, or our representative, shall have the right at any time during normal business hours to examine all of your books which may pertain to merchandise or Receivables. You agree that you will furnish to us, as soon as available, but in any event not later than one hundred and twenty (120) days after the close of each fiscal year, your audited financial statements for such fiscal year (including balance sheets, statements of income and loss, statement of cash flow and statement of shareholders' equity), and the accompanying notes thereto. 13. Interest shall be charged at the Prime Rate plus 2 (the "Interest Rate") As used herein the "Prime Rate" shall be deemed the prime commercial rate charged by the Chase Manhattan Bank in effect on the date hereof and as same may be adjusted upwards or downwards from time to time. The Interest Rate shall never be less than 10% percent per annum nor greater than the highest rate permitted by law. Any change in the Interest shall become effective on the first day of the month following the month in which the Prime Rate shall have been increased or decreased, as the case may be. The Interest Rate shall be calculated based on a three hundred and sixty (360) day year for the actual number of days elapsed and shall be charged to you on all Obligations including, but not limited to, any debits due us and upon all moneys remitted, paid or otherwise advanced by us to you or for you account and shall be payable at the close of each month. All interest charged or chargeable to your account shall be as an additional advance and shall become part of your Obligations. You will be charged with interest on all sums advanced or charged under this Agreement and upon all other sums owed by you to us of every kind and nature at the Interest Rate (as such term is defined below) then in effect. For the purpose of computing interest payable by you under this Agreement, you will be charged with interest on the daily balance of all sums advanced or charged to you under this Agreement at the Interest Rate and will be credited with payments received from your customers after allowing five (5) working days for collection and clearance of remittances. (b) In no event shall the Interest Rate and any other charges exceed the highest rate permissible under the law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that a court determines that we have received interest and other charges hereunder in excess of the highest rate permissible under law, such excess shall be deemed received on account of, and shall be automatically applied to reduce the Obligations arising under or in connection with this Agreement other than interest, and the provisions hereof shall be deemed amended to provide for the highest permissible rate allowable under the law. If there are no such Obligations outstanding, we shall refund any such excess to you. (c) From time to time, one of your officers or employees may make a request, verbal or in writing, for disbursement of funds to yourselves, we shall have no obligation to verify the authorization or propriety of such requests; however, all requests for disbursements to third party payees must be made in writing and signed by an authorized signature. A fee of $15.00 shall be charged for each such disbursement made by check and a fee of $35.00 shall be charged for each disbursement made by wire transfer. These charges are due at the time of disbursement and are part of the Obligations. 14. On or about the 15th day of each month we shall render a statement to you covering the activity in your account over the previous month. Each such account as shall be rendered by us shall be deemed correct in all respects and shall be deemed conclusive and binding upon you and shall be admissible and conclusive in evidence in any action unless we are notified by you and, confirmed by us in writing, to the contrary within thirty (30) days after the due date of the rendering of such statement. In the event of timely objection to any such statement, only the items expressly objected to in your notice of objection shall be deemed to be disputed by you. In the event that we provide to you or on your behalf copies of additional statements, reports or accountings with respect to the Receivables or otherwise in connection herewith, you shall pay to us an additional fee in the amount of $50.00 for each such additional statement, report or accounting, which fee is due and payable on the date of the issuance by us of such additional statement, report or accounting, and which fee shall be included as part of your Obligations. 15. (a) You shall pay us a factoring commission for our services hereunder which commission shall be and become due on the 15th day of each month in which we purchase your Receivables, such factoring commission to be in an amount equal to one (1%) percent of the amount of your gross sales. The minimum factoring commission on each invoice in respect to any Receivable shall be $5.00. The minimum aggregate factoring commission payable under this Agreement for each contract year shall be $20,000 which to the extent of any deficiency shall be chargeable to your account with us. Factoring commissions payable to us hereunder are based on your usual and regular terms of sale which do not exceed 70 days. On all Receivables on which there are additional terms or a change of terms, in addition to any service fee for such change, our commission thereon shall be increased at the rate of twenty five (25%) percent of the base commission or .25%, whichever is larger, for each additional thirty (30) days or fraction thereof by which your regular terms are increased. No credit for such change of terms, however, shall be granted without our prior written approval. (b) We may modify the charges set forth in Paragraphs 2, 6d, 13c and 14 above from time to time, on not less then thirty (30) days written notice. 16. (a) We shall have the right to terminate this Agreement at any time upon not less than thirty (30) days prior written notice or immediately upon any Event of Default, as defined below. This Agreement shall continue in effect until one year from the date hereof and shall be automatically renewed from year to year thereafter unless you notify us of your termination to be effective on any anniversary of this Agreement by giving us not less than sixty (60) days prior written notice. Notice of termination, whether by you or by us, shall be sent by certified mail, return receipt requested with postage prepaid. All of our rights and your Obligations arising out of the transactions prior to termination shall not be effected thereby. Upon any termination of this Agreement all Obligations shall be deemed to be immediately due and payable to us and after such termination any such credit balance in your favor shall continue to be held by us, without interest, until a final accounting is rendered unless you furnish us with an undertaking satisfactory to us against any items chargeable to you hereunder. (b) In the event of your early termination of this Agreement, whether by virtue of a default hereunder or at your election as set forth herein above, you agree to pay us in cash or other immediately available funds, and in addition to all other Obligations, an early termination fee as and for liquidated damages resulting from such early termination in an amount equal to the greater of the minimum commission as set forth in paragraph "15" hereof reduced by any commissions already paid during the contract year or an amount equal to (i) the percentage of our factoring commission as set forth in paragraph "15" herein multiplied by the aggregate amount of your Receivables for the twelve (12) month period immediately preceding the date of notice of such early termination, as determined by us, in our sole and absolute discretion; (ii) divided by twelve (12), and (iii) multiplied by the number of months (or any part thereof) remaining in the then current term. Such early termination fee shall be conclusively presumed to be the amount of our damages sustained by the early termination which fee you agree is reasonable and proper. The early termination fee shall be and is included in the Obligations. 17. The occurrence of any one or more of the following shall constitute an Event of Default hereunder and under any supplement hereto or any other agreement by you with, to, or in favor of us or any of our subsidiaries or affiliates: (a) you fail to pay or perform when due any of the Obligations; (b) you breach any of the terms, covenants, conditions or provisions contained in this Agreement or any other agreement between us; (c) any present or future representation, warranty or statement of fact made by you or on your behalf (including any representation, warranty or statement by any guarantor of your Obligations) to us in this Agreement or any other agreement, schedule or instrument referred to herein or therein or related hereto or thereto is false or misleading at any time; (d) we in good faith believe that because of a change in the conditions or affairs (financial or otherwise) of you or any guarantor of the Obligations, either (i) the prospect of payment or performance of the Obligations is impaired or (ii) the collateral is not sufficient to fully secure the Obligations; and (e) the occurrence of any of the following with respect to you or any guarantor of any of the Obligations; dissolution; a termination of existence; insolvency; business cessation or suspensions; calling of a meeting of creditors; appointment of a receiver for any property; assignment for the benefit of creditors; commencement of any voluntary or involuntary proceeding under any bankruptcy or other insolvency law; entry of any court order which enjoins or restrains the conduct of business in the ordinary course. Upon the occurrence of any Event of default hereunder we shall have all the rights and remedies of a secured party under the Uniform Commercial Code and other applicable laws with respect to all collateral in which we have a security interest. We may be, but are not obligated to sell or cause to be sold any and all of such collateral, in one or more sales or parcels, at such prices and upon such terms as we may deem best, and for cash or on credit or for future delivery and whether by public or private sale as we may deem appropriate. Unless the collateral is perishable or threatens to decline rapidly in value or is of a type customarily sold on a recognized market, we shall give you reasonable notice of the time and place of any public sale of collateral owned by you or of the time after which any private sale or any intended disposition thereof is to made. The requirements of reasonable notice shall be met if any such notice is mailed, postage prepaid, to your address shown herein, at least five (5) days before the time of sale or disposition thereof. We may be the purchaser at any such public sale. The proceeds of the sale of such collateral shall be applied first to all costs and expense of and incident to any such sale, including our attorneys' fees and then to the payment in such order as we may elect, of all sums owing to us hereunder. We shall return any excess to you, subject to the rights of third parties or as otherwise required by applicable law, and you shall remain liable for any deficiency. In addition, upon any default interest shall be charged on all Obligations at the "Default Rate" which rate shall be in an amount equal to two (2%) percent in excess of the Advance Rate. 18. Any delay or failure on our part to enforce any right or privilege hereunder, or our waiver of any privilege hereunder, or our waiver of any default by you as to any terms of this agreement, shall not constitute a waiver of our rights or privileges with regard to any subsequent or continuing default and no waiver whatsoever shall be valid unless in writing and signed by us and then only to the extent therein set forth. 19. You shall not be entitled to pledge our credit upon or in connection with any of your purchases, or for any other purpose whatsoever. 20. Each of the parties expressly submits and consents to the jurisdiction of the Supreme Court of the State of New York with respect to any controversy arising out of or relating to this Agreement or any supplement hereto or any transactions in connection herewith and hereby waives personal service of the summons and complaint or other process or papers to be issued therein and hereby agree that service of such summons and complaint or process may be made by Registered or Certified mail addressed to the other party at the address appearing herein. Failure on the part of either party to appear to answer within thirty (30) days after the mailing of such summons, complaints or process shall constitute a default entitling the other party to enter a judgment or order as demanded or prayed for therein. TRIAL BY JURY IS HEREBY WAIVED BY EACH OF THE PARTIES IN ANY ACTION OR PROCEEDING ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT OR ANY TRANSACTION BETWEEN THE PARTIES. 21. You hereby indemnify us and hold us harmless from and against any loss, liability, claim and expense of every kind and nature, including our attorneys' fees and disbursements, arising from any claim, dispute, action and proceeding by or against you or against any of your customers or any other party with regard to any Receivable or this Agreement. 22. From time to time we may designate certain account debtors as Special Risk. We may notify you in writing at any time and from time to time of account debtors which we have so designated. Receivables arising out of sales to account debtors which have been so designated shall be subject to a surcharge of 2% in addition to the other charges set forth in this Agreement. All sales to Debtors-in-Possession ("DIP Sales") are considered Special Risk. 23. This Agreement cannot be modified orally and can only be modified or amended by a written instrument signed by you and by us. This Agreement supersedes any prior written agreement between us and neither of us shall be bound by anything not expressed herein. 24. This Agreement, made in the State of New York, shall be construed, interpreted and enforced according to the laws of the State of New York and shall be binding upon and inure to the benefit of the parties hereto, their executors, administrators and assigns. If in the event of litigation between the parties over any matter connected with this Agreement or resulting from transactions hereunder, the right to trial by jury is hereby waived. Very truly yours, Commodore Factors Corp. /s/ illegible -------------------------------------- Title: ACCEPTED AND AGREED /s/ illegible - ----------------------------- Title - ----------------------------- Title COMMODORE FACTORS CORP. 1430 BROADWAY NEW YORK, N.Y. 10018 FACTORING AGREEMENT CANADIAN Retrospettiva, Inc. NEW YORK, N.Y. 12/23, 1997 8825 West Olympic Blvd. Beverly Hills, CA 90211 Re: CANADIAN FACTORING Gentlemen: Reference is made to the Factoring Agreement dated 12/23/97 between us as the same may be amended from time to time (the "Agreement"). All terms used and not otherwise defined herein shall have the meanings set forth in the Agreement. We are pleased to a confirm that we are prepared to purchase Receivables arising from sales made by you to your customers located in Canada ("Canadian Receivables"). Accordingly, notwithstanding anything to the contrary contained in the Agreement, effective as of the date hereof, the Agreement is amended as follows: 1. Subject to the terms and conditions of the Agreement, you hereby assign and sell to us as absolute owner all of your Canadian Receivables. 2. Net Sales relating to each Canadian Receivable shall be credited to your account, net of any deductions, on the Settlement Date of such Canadian Receivable and such credit shall constitute payment in full of such Canadian Receivable. Settlement date shall mean, for a Canadian Receivable having a Deposit Date of payment on Monday through Friday in any week, Friday of the following week. For the purposes of the preceding sentence, a Receivable on which we have assumed the risk of nonpayment under the Agreement which remains unpaid and has not been the subject of any Dispute 150 days after its due date (the "Deems Paid Date"), shall be deemed to have a Deposit Date of payment on the Deems Paid Date. 3. It is understood that we may assign any and all of the Canadian Receivables purchased by us to other persons or entities to act on our behalf on the performance of our services hereunder including, without limitation, investigations and approvals and collection of Canadian Receivables and the institution of legal or other proceedings necessary to effect collection thereof and you hereby consent thereto in all respects. You shall execute such instruments as we may from time to time require empowering our designees to act in your name, and endorse your name on any and all checks, drafts or other forms of remittance received in payment of Canadian Receivables purchased by us hereunder. 4. On all Canadian Receivables which are assigned by us to other persons or entities as provided in paragraph 3, you shall pay to us an additional factoring commission of 1% of the gross base amount of such Canadian Receivables. On all other Canadian Receivables, you shall pay to us only the regular factoring commission. 5. You shall specifically assign the Canadian Receivables to us in separate assignment schedules, clearly identified as such. You shall legend each of the Canadian Receivables and every copy thereof to the effect that the same has been assigned to us or to our assignee as we may direct and is payable in United States dollars only. 6. We shall charge your account with all of our out-of-pocket costs relative to the Canadian Receivables including, without limitation, cable and wire transfer of funds, international telephone and telex communications, and exchange rates and fees. 7. In the event remittances and payment of Canadian Receivables are received by us or our assignee in other than United States dollars, we will charge your account with any difference between the United States dollars owing under such Canadian Receivables and United States dollars actually received upon the exchange of the foreign currency, after deducting all costs and expenses incurred in the making of the exchange. 8. All credit approvals of Canadian Receivables are good only until final delivery date stated, there is no 30 day leeway as in domestic credit approvals. 9. Except as hereby specifically modified and amended, all of the terms and conditions of the Agreement shall remain in full force and effect and the term Receivable used therein shall include, without limitation, Canadian Receivables. Kindly indicate your acceptance of the foregoing by signing and returning the enclosed copy of this letter. Very truly yours, /s/ Illegible ------------------------------------- COMMODORE FACTORS CORP. READ AND AGREED TO: /s/ Illegible - ----------------------------------- title COLLATERAL SUBORDINATION AGREEMENT Commodore Factors Corp. 1430 Broadway Room 1612 New York, New York 10018 Ladies and Gentlemen: We understand that you have agreed to lend moneys to or extend or continue to extend credit to RETROSPETTIVA, INC. ("Customer") subject to, among other conditions, the receipt by you of a first security interest upon the following property (the "Property"): All present and future account, all unpaid seller rights, returned or repossessed goods with respect to the accounts and all rights to the goods represented by the foregoing and all proceeds thereof, that arise from sales of goods bearing the label J.G. Hook, Inc. or any trade names or marks owned by J.G. Hook, Inc. including but not limited to "Nell Flowers by J.G. Hook." We have or may have a prior security interest upon all or part of the Property. Accordingly, and in order to maintain or foster our business relationship with Customer, we hereby subordinate to you any and all security interests that we may have in any of the Property, and agree that as between us, you shall have a prior lien and security interest upon all of the Property regardless of the order of filing or other perfection of our respective security interests. We further agree that: (i) you may without notice to us or our consent amend or modify your credit or collateral arrangements with Customer; (ii) we waive notice of the acceptance of this letter by you; (iii) any transfer by us of our rights in the Property will be subject to your rights hereunder, and (iv) this letter shall benefit you and your successors and assigns. Our subordination hereunder will continue in effect until all of your commitments to extend credit or lend moneys to Customer have expired or been terminated and Customer has paid all moneys owed to you and performed all of its other obligations to you. Dated as of January 12, 1998. MERRILL LYNCH BUSINESS FINANCIAL SERVICES, INC. By: /s/ Mark Schmidt ------------------------------------------- Signature Mark Schmidt - ---------------------------------------------- Printed Name Assistant Vice President - ---------------------------------------------- Title EX-10.09 5 JOINT VENTURE [LETTERHEAD] July 16, 1997 JOINT VENTURE Retrospettiva (forwardly referred to as R) and D.N.S. (forwardly referred to as D) agree to a joint venture to sell heavyweight linen garments in the American Market for Spring 1997-1998 shipping. R's obligation is to furnish a landed duty paid garment at an agreed price. D's obligation is to sell such garments at an agreed minimum markup, ship and invoice these said garments. Fabric will be ordered by D to cover specific orders with no overages, except as may be agreed upon by the parties. No garments will be shipped to any customer which has not been approved by Milberg Factors, unless agreed to in writing by both parties. R will be paid 95% of the landed duty paid price of all garments within a week of the time D ships them. The balance will be paid when the factor collects on the receivables. D & R are entitled to recoup out of pocket expenses from the profits of the venture deemed above the agreed "normal" obligations under this agreement. Such profits consist of the selling price of each garment less the L.D.P. price of such garment. R is entitled to recoup the following out of pocket expenses: a) Cost of making sonbar tickets b) Cost of making hang tags c) Freight cost to get markers, patterns, labels, hang tags, etc. to European factories. d) Cost of special trims requested by D to be put on garments deemed to be above standard cost and supplied by R. D is entitled to recoup the following out of pocket expenses: a) Cost of making patterns and markers. b) Cost of making hang tags. c) Cost of all labels supplied, both David N and Private Label. d) Cost of freight of garments from pier to warehouse. e) Shipping costs. f) Invoicing costs. g) EDI costs. h) Factoring commissions costs on sales of garments. i) Factoring interest costs on advances to pay R prior to the due date of receivable. j) Labor costs of putting on price tickets where needed. D & R will be jointly responsible for: a) Normal irregulars. This does not include whole lots that do not meet required specifications. b) Air freight costs is both parties agree that such cost is necessary to save an order. This charge should be net of what sea freight shall cost. c) Markdowns and allowances agreed by both. EX-27.01 6 EXHIBIT 27.01
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RETROSPETTIVA'S 10-KSB FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1,569,905 0 3,058,771 100,000 6,389,896 11,423,318 249,700 66,407 11,645,221 3,472,845 0 0 0 6,258,190 1,914,186 11,645,221 19,724,751 19,724,751 16,924,565 17,833,820 0 0 45,286 1,913,443 775,000 0 0 0 0 1,138,443 .55 .50
EX-27.02 7 EXHIBIT 27.02
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RETROSPETTIVA'S 10-QSB FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 WHICH ARE UNAUDITED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 4,335,895 0 879,583 17,196 3,723,969 9,343,228 58,675 13,442 9,406,513 2,338,734 0 0 0 5,573,013 230,000 9,406,513 13,026,900 13,026,900 11,124,972 11,722,659 0 0 50,501 1,304,241 506,871 0 0 0 0 755,023 .43 .38
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