UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT:
(Date of earliest event reported)
OCTOBER 31, 2005
BLUE HOLDINGS, INC.
(Exact name of registrant as specified in charter)
NEVADA
(State or other Jurisdiction of Incorporation or Organization)
000-33297 88-0450923
(Commission File Number) (IRS Employer Identification No.)
5804 E. SLAUSON AVE., COMMERCE, CA 90040
(Address of Principal Executive Offices and zip code)
(323) 725-5555
(Registrant's telephone number, including area code)
MARINE JET TECHNOLOGY CORP.
936A BEACHLAND BOULEVARD, SUITE 13
VERO BEACH, FL 32963
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of registrant under any of the
following provisions:
[_] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[_] Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act
(17 CFR 240.14a-12(b))
[_] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[_] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
This Current Report on Form 8-K/A amends Items 9.01(a) and 9.01(b) of
the Registrant's Current Report on Form 8-K dated October 31, 2005, and filed
with the Securities and Exchange Commission on November 4, 2005, regarding the
closing of the transactions contemplated by a certain Exchange Agreement dated
October 31, 2005, by and among the Registrant, Taverniti So Jeans, LLC, and the
members of Taverniti So Jeans, LLC set forth therein. The sole purpose of this
amendment is to provide the audited financial statements of the business
acquired as of, and for, the fiscal year ended December 31, 2004, and unaudited
financial statements of the business acquired as of, and for, the nine-month
period ended September 30, 2005, as required by Item 9.01(a), and the unaudited
pro forma balance sheet as of September 30, 2005, and unaudited pro forma
statements of operations for the nine-month period ended September 30, 2005 and
for the period from inception (September 13, 2004) to December 31, 2004, as
required by Item 9.01(b), which financial statements and unaudited pro forma
financial information were excluded from the original Current Report on Form 8-K
in reliance on Items 9.01(a)(4) and 9.01(b)(2), respectively, of Form 8-K.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
Audited Financial Statements of Taverniti So Jeans, LLC as of December
31, 2004, and for the period from inception (September 13, 2004) through
December 31, 2004.
2
INDEPENDENT AUDITOR'S REPORT
To the Members
TAVERNITI SO JEANS, LLC
(A DEVELOPMENT STAGE COMPANY)
Commerce, California
We have audited the accompanying balance sheet of TAVERNITI SO JEANS, LLC (A
DEVELOPMENT STAGE COMPANY) as of December 31, 2004 and the related statements of
operations and members' deficit, and of cash flows for the period September 13,
2004, (Inception) to December 31, 2004. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TAVERNITI SO JEANS, LLC (A
DEVELOPMENT STAGE COMPANY) as of December 31, 2004, and the results of its
operations and its cash flows for the period September 13, 2004, (Inception) to
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Katz & Varon
--------------------
KATZ & VARON
Los Angeles, California
October 19, 2005
3
TAVERNITI SO JEANS, LLC
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 2004
ASSETS
CURRENT ASSETS:
Cash ........................................................ $ 10,812
Inventories ................................................ 130,431
Advance Payment of Royalties ............................... 117,000
Prepaid Expenses and Other Current Assets .................. 6,500
---------
Total Current Assets .................................... 264,743
Property and Equipment - at cost less
Accumulated Depreciation .................................... 6,880
---------
TOTAL ASSETS .................................................. $ 271,623
=========
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable ........................................... $ 63,958
Due to Customers ........................................... 13,434
Due to Members ............................................. 329,375
State Income Tax Payable ................................... 800
Accrued Expenses and Other Current Liabilities ............. 7,640
---------
Total Current Liabilities ............................... 415,207
Members' Deficit .............................................. (143,584)
---------
TOTAL LIABILITIES AND MEMBERS' DEFICIT ........................ $ 271,623
=========
4
TAVERNITI SO JEANS, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS AND MEMBERS' DEFICIT
FOR THE PERIOD SEPTEMBER 13, 2004 (INCEPTION) TO DECEMBER 31, 2004
NET SALES ....................................................... $ --
---------
COST OF GOODS SOLD
Purchases - Piece Goods ...................................... 42,007
- Trims ............................................ 42,646
Freight-in and duties ........................................ 13,628
Contract Labor ............................................... 32,150
---------
Cost of Goods Available For Sale ............................. 130,431
Less: Inventories At the End of Period ....................... (130,431)
---------
COST OF GOODS SOLD .............................................. --
---------
GROSS PROFIT .................................................... --
---------
OPERATING EXPENSES .............................................. 242,784
---------
LOSS FROM OPERATIONS BEFORE PROVISION FOR STATE INCOME TAX ...... (242,784)
PROVISION FOR STATE INCOME TAXES ................................ 800
---------
NET LOSS ........................................................ (243,584)
MEMBERS' CONTRIBUTIONS .......................................... 100,000
---------
MEMBERS' DEFICIT AT END OF PERIOD ............................... $(143,584)
=========
5
TAVERNITI SO JEANS, LLC
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD SEPTEMBER 13, 2004 (INCEPTION) TO DECEMBER 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ................................................... $(243,584)
Adjustments to Reconcile Net Loss to Net Cash used by
Operating Activities:
Depreciation ............................................... 765
Allocated Expenses ......................................... 130,903
CHANGES IN ASSETS AND LIABILITIES:
Merchandise Inventory ...................................... (130,431)
Other Current Assets ....................................... (6,500)
Accounts Payable ........................................... 63,958
Other Current Liabilities .................................. 21,874
---------
Net Cash used by Operating Activities ........................ (163,015)
CASH FLOWS FROM INVESTING ACTIVITIES:
Advance Payment of Royalties ............................... (117,000)
Acquisitions of Property and Equipment ..................... (7,645)
---------
Net Cash used by Investing Activities ........................ (124,645)
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' Capital Contributions ............................. 100,000
Due to Members ............................................. 198,472
---------
Net Cash used by Financing Activities ........................ 298,472
---------
NET INCREASE IN CASH AND CASH AT END OF PERIOD .................. $ 10,812
=========
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
Allocated Expense included in Due to Members ................. $ 130,903
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash Paid for Interest ....................................... $ --
=========
Cash Paid for Income Taxes ................................... $ --
=========
6
TAVERNITI SO JEANS, LLC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
(a) ORGANIZATION:
Taverniti So Jeans, LLC ("the Company" or "Taverniti") was organized
as a California limited liability company on September 13, 2004, under the laws
of the State of California. The Company commenced operations on the same day.
(b) NATURE OF OPERATIONS/DEVELOPMENT STAGE:
The Company is in the development stage and operates exclusively in
the wholesale apparel industry. Taverniti designs, develops, markets and
distributes high fashion jeans and accessories under the brand name "Taverniti
So Jeans." The Company's products include jeans, jackets, and knit sportswear.
Taverniti will sell its products in the United States, Canada, Japan and the
European Union directly to department stores and boutiques and through
distribution arrangements in certain foreign jurisdictions. Taverniti is
headquartered in Commerce, California and maintains showrooms in New York and
Los Angeles.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(b) INVENTORY VALUATION:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
(c) REVENUE RECOGNITION:
Revenue will be recognized when merchandise is shipped to a customer,
based on agreed upon terms. Revenue will be recorded net of estimated returns,
chargebacks and markdowns based upon management's estimates and historical
experience.
(d) ADVERTISING:
Advertising costs are expensed as of the first date the
advertisements take place. Advertising expenses included in selling expenses
aggregated $420.
7
(e) PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is provided by
the straight-line method at rates calculated to amortize cost over the estimated
useful lives of the respective assets. Upon sale or retirement of such assets,
the related cost and accumulated depreciation are eliminated from the accounts
and gains or losses are reflected in operations. Repairs and maintenance
expenditures not anticipated to extend asset lives are charged to operations as
incurred.
(f) INCOME TAXES:
The taxes on the income of a Limited Liability Company are payable
individually by each member. The amount that might be withdrawn by the members
in order to pay such taxes will be determined as necessary and distributed from
members equity. The Company is subject to California minimum tax of $800 and a
fee based on total annual revenue.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES:
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
(h) CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially expose the Company to a
concentration of credit risk, will consist primarily of cash, trade accounts
receivable and amounts due from factor. Concentration of credit risk with
respect to trade accounts receivable will be limited due to the number of
customers comprising the Company's customer base and their dispersion throughout
the United States, Europe Union and Asia. The Company will extend unsecured
credit to its customers in the normal course of business.
The Company's products will be primarily sold to department stores
and specialty retail stores. These customers can be significantly affected by
changes in economic, competitive or other factors. The Company will make
substantial sales to a relatively few, large customers. In order to minimize the
risk of loss, the Company will assign a certain amount of domestic accounts
receivable to a factor without recourse or require letters of credit from its
customers prior to the shipment of goods. For non-factored receivables,
account-monitoring procedures will be utilized to minimize the risk of loss.
Collateral will generally not be required.
(i) MERCHANDISE RISK:
The Company's success will be largely dependent upon its ability to
gauge the fashion tastes of its targeted consumers and provide merchandise that
satisfies consumer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company's business, operating results and financial condition.
(j) ACCOUNTS RECEIVABLE - ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS:
The Company will evaluate the collectibility of accounts receivable
and charge backs (disputes from the customer) based upon a combination of
factors. In circumstances where the Company is aware of a specific customer's
inability to meet its financial obligations (such as in the case of bankruptcy
filings or substantial downgrading by credit sources), a specific reserve for
bad debts will be taken against amounts due to reduce the net recognized
receivable to the amount reasonably expected to be collected. For all other
customers, the Company will recognize reserves for bad debts and uncollectible
chargebacks based on management's judgment.
If collection experience deteriorates for example, due to an
unexpected material adverse change in a major customer's ability to meet its
financial obligations to the Company, the estimates of the recoverability of
amounts due could be reduced by a material amount.
(k) SHIPPING AND HANDLING COSTS:
Freight-out will be included in distribution expenses.
8
NOTE 3 - DUE FROM FACTOR
The Company will use a factor for working capital and credit
administration purposes. Under the factoring agreement, the factor will purchase
a substantial portion of the trade accounts receivable and assumes all credit
risk with respect to such approved accounts.
The factor agreement, which terminates on November 22, 2005, provides
that the Company can borrow an amount up to 85% of the value of its approved
factored customer invoices, less a reserve of 15% of unpaid accounts purchased
and a reserve of 100% of all such accounts which are disputed. The factor
commission is .8% of the customer invoice amount for terms up to 90 days, plus
one quarter of one percent (.25%) for each additional thirty-day term.
Receivables sold in excess of maximums established by the factor are
subject to recourse in the event of nonpayment by the customer. The Company is
contingently liable to the factor for merchandise disputes, customer claims and
the like on receivables sold to the factor.
To the extent that the Company draws funds prior to the deemed
collection date of the accounts receivable sold to the factor, interest will be
charged at the rate of 1% over the factor's prime lending rate per annum. Factor
advances will be collateralized by the non-factored accounts receivable,
inventories, the personal guarantee of a member and a related party that is 100%
owned by two members of the Company.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
Raw materials ........................ $ 9,299
Work-in-process ...................... 121,132
--------
$130,431
========
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
Machinery and equipment .................... $5,629
Computer equipment ......................... 2,016
------
7,645
Less: Accumulated depreciation .......... 765
------
$6,880
======
NOTE 6 - RELATED PARTY TRANSACTIONS
(a) ALLOCATED EXPENSES:
During the period September 13, 2004, (Inception) to December 31,
2004, the Company was allocated $130,903 for certain expenses (consisting of
salaries, payroll taxes, utilities, common area services, rent, insurance and
other office services) from Blue Concept, LLC, an entity that is 100% owned by
two members of the Company. These amounts were for the benefit of the Company
and are included in operating expenses in the accompanying Statement of
Operations.
(b) TAVERNITI HOLDINGS, LLC:
The following transaction occurred between the Company and Taverniti
Holdings, LLC, which is 60% owned by a member of the Company:
9
A member of the Company advanced $117,000 as a prepayment of
royalties (see Note 10, Licensing Agreement).
NOTE 7 - MAJOR SUPPLIERS/CONTRACTOR
For the period September 13, 2004, (Inception) to December 31, 2004,
two suppliers comprised greater than 10% of the Company's piece goods purchases.
Purchases from these suppliers approximated $39,000 or 92.8% of gross piece
goods purchases.
For the period September 13, 2004, (Inception) to December 31, 2004,
one contractor comprised greater than 10% of the Company's contract labor.
Contract labor costs from this contractor approximated $20,000 or 62.2% of gross
contract labor.
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cash, Accounts payable, Due to customers, Due
to Member, State income tax payable, Accrued expenses and other current
liabilities approximate fair value because of the short maturity of these items.
NOTE 9 - MEMBERS' EQUITY
The Company is a limited liability company; therefore, no member,
manager, agent or employee of the Company is personally liable for the debts,
obligations, or liabilities of the Company, whether arising in contract, tort or
otherwise, or for the acts or omissions of any other member, director, manager,
agent or employee of the Company, unless the individual has signed a specific
personal guarantee.
The Company was formed on September 13, 2004 with four members, two
of which have a 37.5% ownership interest, and the other two members each having
a 12.5% ownership interest. Member contributions in cash were as follows:
contributions of $75,000 by the 37.5% members and contributions of $12,500 by
each 12.5% member.
The members' equity account, as of December 31, 2004, was as follows:
Contributions by 37.5% members - cash .... $ 75,000
Contributions by 12.5% members ........... 25,000
---------
100,000
Less: Net loss ........................ (243,584)
---------
Total contributions ................... $(143,584)
=========
Net profits and losses are allocated to the capital account of each
member at the end of each accounting period as follows:
Net profits are first allocated to the 37.5% members to the extent of
the amount by which the cumulative net losses for the current and all prior
fiscal years of the Company allocated to such members exceed the cumulative net
profits for the current and all prior fiscal years of the Company allocated to
such members, thereafter, to all 12.5% members, in the same manner that
allocations of profits are made to the 37.5% members and finally to members in
proportion to their respective negative capital accounts, if any.
NOTE 10 - LICENSING AGREEMENT
The Company entered into a license agreement with Taverniti Holdings,
LLC to use a certain trademark worldwide to produce denim and knit sportswear
for men and women. The term of the agreement begins June 1, 2004 and ends on
December 31, 2015.
10
Royalties are as follows:
ANNUAL NET SALES ROYALTY PERCENTAGE
---------------- ------------------
First $3,000,000 each year of term 8%
Over $3,000,000 to $5,000,000 7%
Over $5,000,000 to $10,000,000 6%
Over $10,000,000 5%
Royalties accrue when the licensed products are sold, distributed,
billed/or paid whichever occurs first. "Net sales" means gross sales, less:
discounts, shown on invoices, freight charges and allowances, and bona fide
returns, providing such returns do not exceed 10% of gross sales.
Royalties payable on sales to affiliates are calculated on the
greater of (a) the highest wholesale price licensee receives from independent
parties, or (b) the invoice price at which licensed products are resold by such
individual or entity to an unrelated customer in an arms-length transaction.
11
Unaudited Financial Statements of Taverniti So Jeans, LLC as of
September 30, 2005, and for the nine month period ended September 30, 2005.
TABLE OF CONTENTS
Page
----
PART I Financial Information
Item 1. Financial Statements
Independent Registered Public Accounting Firm's
Review Report 13
Balance Sheet (Unaudited) 14
Statement of Operations (Unaudited) 15
Statement of Cash Flows (Unaudited) 16
Notes to the Financial Statements (Unaudited) 17-22
12
PART I
Independent Registered Public Accounting Firm's Review Report
To the Members of Taverniti So Jeans, LLC
We have reviewed the accompanying balance sheet of Taverniti So Jeans,
LLC as of September 30, 2005 and the related statements of operations and cash
flows for the nine-month period then ended. These interim financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial statements for them to
be in conformity with U.S. generally accepted accounting principles.
/s/ Weinberg & Company
----------------------
Weinberg & Company
Boca Raton, Florida
December 2, 2005
13
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a. BALANCE SHEET
TAVERNITI SO JEANS, LLC
BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 2005
ASSETS
CURRENT ASSETS:
ACCOUNTS RECEIVABLE, NET OF RESERVES OF $70,000 ............ $ 259,056
DUE FROM RELATED PARTIES ................................... 211,507
INVENTORIES, NET ........................................... 1,682,000
PREPAID EXPENSES AND OTHER CURRENT ASSETS .................. 1,200
----------
TOTAL CURRENT ASSETS .................................... 2,153,763
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF $6,192 ..................................... 60,611
----------
TOTAL ASSETS .................................................. $2,214,374
==========
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
BANK OVERDRAFT ............................................. $ 37,641
ACCOUNTS PAYABLE ........................................... 497,310
DUE TO FACTOR .............................................. 166,885
DUE TO RELATED PARTIES ..................................... 1,049,059
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES ............. 191,199
----------
TOTAL CURRENT LIABILITIES ............................... 1,942,094
MEMBERS' EQUITY ......................................... 272,280
----------
TOTAL LIABILITIES AND MEMBERS' EQUITY ......................... $2,214,374
==========
See Accountants' Review Report And Notes to Financial Statements
14
TAVERNITI SO JEANS, LLC
STATEMENTS OF OPERATIONS (UNAUDITIED)
For the period
September 13,
For the nine 2004
months ended (Inception) to
September 30, September 30,
2005 2004
---------- ----------
Net Sales ......................................... $4,003,692 $ --
Cost of Goods Sold ................................ 1,924,751 15,256
---------- ----------
Gross Profit (Loss) ............................... 2,078,941 (15,256)
Total Operating Expenses .......................... 1,662,277 74,273
---------- ----------
Income (loss) before provision for income taxes ... 416,664 (89,529)
Provision for income taxes ........................ 800 --
---------- ----------
Net Income (Loss) ................................. $ 415,864 $ (89,529)
========== ==========
See Accountants' Review Report And Notes to Financial Statements
15
TAVERNITI SO JEANS, LLC
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the period
September 13,
For the nine 2004
months ended (Inception) to
September 30, September 30,
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ................................ $ 415,864 $ (89,529)
Adjustment to income not effecting use of cash
Depreciation .................................. 5,427 91
Changes in assets and liabilities
Accounts Receivable ........................... (259,056) --
Advance payment of royalty .................... 117,000 --
Inventories ................................... (1,551,569) --
Prepaid Expenses and other current assets ..... 5,300 --
Accounts Payable .............................. 419,918 15
Other Current Liabilities ..................... 182,759 --
----------- -----------
Net cash provided by operating activities ........ (664,357) (89,423)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment ......................... (59,158) (5,480)
----------- -----------
Net Cash used in investing activities ......... (59,158) (5,480)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor ................................. 166,885 --
Bank overdraft ................................ 37,641 --
Due to related parties, net ................... 508,177 94,903
----------- -----------
Net Cash used in financing activities ......... 712,703 94,903
----------- -----------
Net Decrease in Cash ............................. (10,812) --
Cash at the beginning of the period .............. 10,812 10,812
----------- -----------
Cash, end of the period .......................... $ -- $ 10,812
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW STATEMENT
Cash paid for income tax ......................... $ 800 $ --
=========== ===========
See Accountants' Review Report And Notes to Financial Statements
16
TAVERNITI SO JEANS, LLC
NOTES TO FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2005 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION, ORGANIZATION AND NATURE OF OPERATIONS
The interim condensed consolidated financial statements are
unaudited, but in the opinion of management of the Company, contain all
adjustments, which include normal recurring adjustments, necessary to present
fairly the financial position at September 30, 2005, the results of operations
and cash flows for the nine months ended September 30, 2005 and for the period
September 13, 2004 (Inception) to September 30, 2004.
The Company's results of operations for the nine months ended
September 30, 2005 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 2005.
(a) ORGANIZATION:
Taverniti So Jeans, LLC ("the Company" or "Taverniti") was organized
as a California limited liability company on September 13, 2004, under the laws
of the State of California. The Company commenced operations on the same day.
(b) NATURE OF OPERATIONS:
The Company operates exclusively in the wholesale apparel industry.
The Company designs, develops, markets and distributes high fashion jeans and
accessories under the brand name "Taverniti So Jeans." The Company's products
include jeans, jackets and knit sportswear. Taverniti currently sells its
products in the United States, Canada, Japan and the European Union directly to
department stores and boutiques and through distribution arrangements in certain
foreign jurisdictions. Taverniti is headquartered in Commerce, California and
maintains showrooms in New York and Los Angeles.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
(b) INVENTORY VALUATION:
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
(c) REVENUE RECOGNITION:
Revenue is recognized when merchandise is shipped to the customer
based upon agreed terms and is recorded net of estimated returns, charge backs
and markdowns based upon management's estimates and historical experience. We
sometimes arrange, on behalf of manufacturers, for the purchase of fabric from a
single supplier. We have the fabric shipped directly to the cutting factory and
invoice the factory for the fabric. The factories then pay us for the fabric
with offsets against the price of the finished goods.
17
(d) ADVERTISING:
Advertising costs are expensed as of the first date the
advertisements take place. Advertising expenses included in selling expenses
approximated $27,961for nine months ended September 30, 2005.
(e) PROPERTY AND EQUIPMENT:
Property and equipment is stated at cost. Depreciation is provided by
the straight-line method at rates calculated to amortize cost over the estimated
useful lives of the respective assets.
Upon sale or retirement of such assets, the related cost and
accumulated depreciation are eliminated from the accounts and gains or losses
are reflected in operations. Repairs and maintenance expenditures not
anticipated to extend asset lives are charged to operations as incurred.
(f) INCOME TAXES:
The taxes on the income of a Limited Liability Company are payable
individually by each member. The amount that might be withdrawn by the members
in order to pay such taxes will be determined as necessary and distributed
from member's equity. The Company is subject to California minimum tax of $800
and a fee based on total annual revenue.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES:
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(h) CONCENTRATION OF CREDIT RISK:
Financial instruments, which potentially expose us to concentration
of credit risk, consist primarily of cash, trade accounts receivable, and
amounts due from our factor. Concentration of credit risk with respect to trade
accounts receivable at September 30, 2005 is limited due to the number of
customers comprising the Company's customer base and their dispersion throughout
the United States. The Company extends unsecured credit to its customers in the
normal course of business.
The Company's cash balances on deposit with banks are guaranteed by
the Federal Deposit Insurance Corporation up to $100,000. The Company may be
exposed to risk for the amounts of funds held in one bank in excess of the
insurance limit. In assessing the risk, the Company's policy is to maintain cash
balances with high quality financial institutions.
The Company's products are primarily sold to specialty retail stores.
These customers can be significantly affected by changes in economic,
competitive or other factors. In order to minimize the risk of loss, the Company
assigns certain amount of domestic accounts receivable to a factor without
recourse or requires letters of credit from its customers prior to the shipment
of goods. For non-factored receivables, account-monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required. No
single customer accounted for more than 10% of total sales in the nine months
ended September 30, 2005, and only two customers accounted for 9% in the nine
months ended September 30, 2005, of total sales.
(i) MERCHANDISE RISK:
The Company's success is largely dependent upon its ability to gauge
the fashion tastes of its targeted consumers and provide merchandise that
satisfies consumer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company's business, operating results and financial condition.
18
(j) ACCOUNTS RECEIVABLE - ALLOWANCE FOR RETURNS, DISCOUNTS AND BAD DEBTS:
The Company evaluates its ability to collect accounts receivable and
the circumstances surrounding chargebacks (disputes from the customer) based
upon a combination of factors. In circumstances where the Company is aware of a
specific customer's inability to meet its financial obligations (such as in the
case of bankruptcy filings or substantial downgrading by credit sources), a
specific reserve for bad debts is taken against amounts due to reduce the net
recognized receivable to the amount reasonably expected to be collected. For all
other customers, the Company recognizes reserves for bad debts and uncollectible
chargebacks based on its historical collection experience. If collection
experience deteriorates (for example, due to an unexpected material adverse
change in a major customer's ability to meet its financial obligations to the
Company), the estimates of the recoverability of amounts due could be reduced by
a material amount.
(k) SHIPPING AND HANDLING COSTS:
Freight charges are included in selling, distribution and
administrative expenses in the statement of operations and approximated $40,920
for the nine months ended September 30, 2005.
NOTE 3 - DUE FROM FACTOR
The Company uses a factor for working capital and credit
administration purposes. Under the factoring agreement, the factor purchases a
substantial portion of the trade accounts receivable and assumes all credit risk
with respect to such accounts. The factor agreement provides that the Company
can borrow an amount up to 85% of the value of its approved factored customer
invoices, less a reserve of 15% of unpaid accounts purchased and 100% of all
such accounts which are disputed.
As of September 30, 2005, the factor holds $745,803 of accounts
receivable purchased from us and has made advances to us of $592,688 against
those receivables resulting in a net amount due to us of $ 153,115. For
financial statement purposes, this amount has been reduced by a reserve for
chargebacks and other offsets of $320,000 for a net due to factor a $166,885 as
of September 30, 2005. The amount of the reserve held by the factor was
approximately $111,200. The factor commission is 0.8% of the customer invoice
amount for terms up to 90 days, plus one quarter of one percent (.25%) for each
additional thirty-day term. Receivables sold in excess of maximums established
by the factor are subject to recourse in the event of nonpayment by the
customer. The Company is contingently liable to the factor for merchandise
disputes, customer claims and the like on receivables sold to the factor. Items
subject to recourse approximated $364,207 as of September 30, 2005. To the
extent that the Company draws funds prior to the deemed collection date of the
accounts receivable sold to the factor, interest is charged at the rate of 1%
over the factor's prime lending rate per annum. Factor advances are
collateralized by the non-factored accounts receivable, inventories and the
personal guarantee of Paul Guez, our Chairman, Chief Executive Officer,
President and majority shareholder, and Blue Concept, LLC ("Blue Concept"), a
company co-owned by Paul Guez and his spouse, Elizabeth Guez.
NOTE 4 - INVENTORIES
Inventories at September 30, 2005 are summarized as follows:
Raw Materials ...................... $ 66,000
Work-in-Process .................... 962,000
Finished Goods ..................... 654,000
----------
TOTAL .......................... $1,682,000
==========
19
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2005 is summarized as
follows:
Machinery & Equipment ......................... $38,185
Furniture ..................................... 4,286
Leasehold Improvements ........................ 12,100
Computer Equipment ............................ 12,232
-------
SUBTOTAL .................................. 66,803
Less: Accumulated depreciation and Amortization 6,192
-------
TOTAL ..................................... $60,611
=======
NOTE 6 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2005, the Company
reimbursed $168,495 for certain expenses (consisting of salaries, payroll,
taxes, utilities, common area services, rent, insurance, and other office
services) to Blue Concept, LLC, an entity that is co-owned by a member of the
Company. These amounts were for the benefit of the Company and are included in
operating expenses in the accompanying Statement of Operations.
The Company also purchased fabric at cost from Blue Concept LLC an
entity co-owned by Paul and Elizabeth Guez, the Company's Chairman, Chief
Executive Officer and President, and Chief Operating Officer, respectively
(`Blue Concept') for $613,633 during the nine months ended September 30, 2005.
NOTE 7 - DUE FROM/TO AFFILIATES
The Affiliates are all Limited Liability Companies that are co-owned
by a Paul and Elizabeth Guez who are husband and wife and own 37.5% membership
interest each of the Company. All non-trade-related advances have since been
repaid. Trade-related outstanding follow regular payment terms as invoices.
NOTE 8 - MAJOR SUPPLIERS
During the nine months ended September 30, 2005, 3 suppliers
comprised greater than 10% of the Company's purchases. Purchases from these
suppliers were 32%, 18% and 12%, respectively.
NOTE 9 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, due from related parties, accounts
receivable, bank overdraft, due to factor, accounts payable, due to related
parties, accrued expenses and other current liabilities approximate fair value
because of the short maturity of these items.
NOTE 10 - OFF-BALANCE SHEET RISK
Financial instruments that potentially subject the Company to
off-balance sheet risk consist of factored accounts receivable. As described in
Note 3, the Company sells the majority of its trade accounts receivable to a
factor and is contingently liable to the factor for merchandise disputes and
other customer claims. The amount of total factor receivables approximated
$745,803 as of September 30, 2005.
20
NOTE 11 - MEMBERS' EQUITY
The Company is a limited liability company; therefore, no member,
manager, agent or employee of the Company is personally liable for the debts,
obligations, or liabilities of the Company, whether arising in contract, tort or
otherwise, or for the acts or omissions of any other member, director, manager,
agent or employee of the Company, unless the individual has signed a specific
personal guarantee.
The Company was formed on September 13, 2004 with four members, two
of which have a 37.5% ownership interest and the other two members each having a
12.5% ownership interest. Member contributions in cash were as follows:
contributions of $75,000 by the 37.5% members and contributions of $12,500 by
each 12.5% member.
The members' equity account is as follows:
Initial Members' contribution ......................... $ 100,000
Loss for the period ended December 31, 2004 ........... (243,584)
---------
Members' equity at January 1, 2005 .................... (143,584)
Net Income for the nine months ended September 30, 2005 415,864
---------
Members' equity at September 30, 2005 ................. $ 272,280
=========
Net profits and losses are allocated to the capital account of each
member at the end of each accounting period as follows:
Net profits are first allocated to the 37.5% members to the
extent of the amount by which the cumulative net losses for the current and
all prior fiscal years of the Company allocated to such members exceed the
cumulative net profits for the current and all prior fiscal years of the
Company allocated to such members, thereafter, to all 12.5% members, in the
same manner that allocations of profits are made to the 37.5% members and
finally to members in proportion to their respective negative capital
accounts, if any.
NOTE 12 - COMMITMENTS
The Company entered into a license agreement with Taverniti Holdings,
LLC to use a certain trademark worldwide to produce denim and knit sportswear
for men and women. The term of the agreement begins June 1, 2004 and ends on
December 31, 2015.
Royalties are as follows:
ANNUAL NET SALES ROYALTY PERCENTAGE
---------------- ------------------
First $3,000,000 each year of term 8%
Over $3,000,000 to $5,000,000 7%
Over $5,000,000 to $10,000,000 6%
Over $10,000,000 5%
Royalties accrue when the licensed products are sold, distributed,
billed/or paid whichever occurs first. "Net sales" means gross sales, less:
discounts, shown on invoices, freight charges and allowances, and bona fide
returns, providing such returns do not exceed 10% of gross sales.
21
Royalties payable on sales to affiliates are calculated on the
greater of (a) the highest wholesale price licensee receives from independent
parties, or (b) the invoice price at which licensed products are resold by such
individual or entity to an unrelated customer in an arms-length transaction.
Royalties under the agreement for the nine months ended September 30, 2005 were
$303,629 and are included in the accompanying statement of operations.
NOTE 13 - SUBSEQUENT EVENTS
On October 31, 2005, the Company entered into an Exchange Agreement
with Blue Holdings, Inc. (formerly known as Marine Jet Technology Corp.), a
Company controlled by Mr. Paul Guez. At the closing of the transactions
contemplated by the exchange agreement, Blue Holdings acquired all the assets
and liabilities of Taverniti So Jeans LLC, which was 100% owned by Paul Guez and
his family in consideration for $750,000 in cash and 500,000 in new shares in
common stock. The exchange will be accounted for by Blue Holdings, Inc. as a
combination of Companies under common control.
22
(b) Pro forma financial information.
Unaudited Pro Forma Financial Statements of Blue Holdings, Inc. and
Taverniti So Jeans, LLC as of September 30, 2005, and for the nine month period
ended September 30 2005 and the period from inception (September 13, 2004) to
December 31, 2004.
The pro-forma unaudited financial statements reflect the closing of the exchange
transaction of Blue Holdings, Inc. with Taverniti So Jeans, LLC as of September
30, 2005, for Balance Sheet purposes, and for the nine month period ending
September 30, 2005 and the period September 13, 2004 (Inception) to December 31,
2004 for Statements of Operations purposes, as if the closing had occurred as of
the date of inception. The unaudited pro-forma financial data and the notes
thereto should be read in conjunction with each of Registrant's and Taverniti So
Jeans' historical financial statements. The unaudited pro-forma financial data
is based upon certain assumptions and estimates of management that are subject
to change. The unaudited pro-forma financial data is presented for illustrative
purposes only and is not necessarily indicative of any future results of
operations or the results that might have occurred if the exchange transaction
had actually occurred on the indicated date.
BLUE HOLDINGS INC. (FORMERLY KNOWN AS MARINE JET TECHNOLOGY CORP.) & SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 2005
ASSETS
BLUE
HOLDINGS, TAVERNITI, PRO FORMA PRO FORMA
Current Assets: INC. LLC. ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- -----------
Cash ........................................... $ 489,423 $ -- $ -- $ 489,423
Due from Factor, net of reserves of $293,949 ... 1,932,527 -- -- 1,932,527
Accounts Receivable, net of reserves of $200,000 753,742 259,056 -- 1,012,798
Due from Related Parties ....................... -- 211,507 (9,200) 202,307
Inventories .................................... 6,474,070 1,682,000 -- 8,156,070
Prepaid Expenses and Other Current Assets ...... 192,687 1,200 -- 193,887
----------- ----------- ----------- -----------
Total Current Assets ........................ 9,842,449 2,153,763 (9,200) 11,987,012
Deferred Income Taxes .......................... 278,639 -- -- 278,639
Property and Equipment, Less Accumulated
Depreciation ................................ 63,186 60,611 -- 123,797
Total Assets ...................................... $10,184,274 $ 2,214,374 $ (9,200) $12,389,448
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft ................................. $ -- $ 37,641 $ -- $ 37,641
Accounts Payable ............................... 1,853,224 497,310 -- 2,350,534
Due to Factor .................................. -- 166,885 -- 166,885
Due to Related Parties ......................... 492,472 1,049,059 (9,200) 1,532,331
Income Taxes Payable ........................... 1,659,673 (800) -- 1,658,873
Accrued Expenses and Other Current Liabilities . 608,492 191,999 750,000 1,550,491
----------- ----------- ----------- -----------
Total Current Liabilities ................... 4,613,861 1,942,094 740,800 7,296,755
----------- ----------- ----------- -----------
Stockholders' Equity
Members' Equity ................................ -- 272,280 (272,280) --
Common Stock $0.001 par value
Authorized 75,000,000 shares
Issued and outstanding 26,057,200 shares ..... 25,557 -- 500 26,057
Additional Paid-in Capital ..................... 3,209,070 -- (650,500) 2,558,570
Retained Earnings .............................. 2,335,786 -- 172,280 2,508,066
----------- ----------- ----------- -----------
Total Stockholders' Equity .................. 5,570,413 272,280 (750,000) 5,092,693
----------- ----------- ----------- -----------
Total Liabilities and Stockholders' Equity ........ $10,184,274 $ 2,214,374 $ (9,200) $12,389,448
=========== =========== =========== ===========
23
Note (A) The consolidated Balance Sheet includes the accounts of the Company
and its wholly owned subsidiary, Taverniti So Jeans, LLC. On October
31, 2005, the Company entered into an exchange agreement with
Taverniti and all its members to acquire the business and all assets
and liabilities in consideration for $750,000 in cash and 500,000 new
share of common stock. Taverniti was owned by Mr. Paul Guez and his
immediate family members. Mr. Guez is also the controlling
shareholder of the company. As such, the exchange will be accounted
for as a combination of entities under common control and the
$750,000 will be reflected as a deemed distribution to Mr. Guez and
family members.
Note (B) At the closing, initial Members' contribution of Taverniti, $100,000
will be reclassed to additional paid-in-capital, and $172,280 of
accumulated earnings will be reclassed to retained earnings.
BLUE HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005
TAVERNITI
BLUE SO JEANS, PRO FORMA
HOLDINGS INC. LLC. CONSOLIDATED
----------- ----------- -----------
Net sales ............................... $20,575,044 $ 4,003,692 $24,578,736
Cost of goods sold ...................... 10,431,204 1,924,751 12,355,955
----------- ----------- -----------
Gross profit ............................ 10,143,840 2,078,941 12,222,781
Selling, distribution & administrative
expenses ............................. 4,772,569 1,662,277 6,434,846
----------- ----------- -----------
Income before expenses relating to
exchange transaction and provision for
income taxes ......................... 5,371,271 416,664 5,787,935
Expenses relating to exchange transaction 527,617 -- 527,617
----------- ----------- -----------
Income before provision for income taxes 4,843,654 416,664 5,260,318
----------- ----------- -----------
Provision for income taxes .............. 1,376,114 800 1,376,914
----------- ----------- -----------
Net income .............................. $ 3,467,540 $ 415,864 $ 3,883,404
=========== =========== ===========
Basic and diluted earnings per share .... $ 0.15
===========
Basic and diluted weighted average shares 26,057,200
===========
Note: The Consolidated Proforma Statement of Operations includes the accounts of
the Company and its wholly owned subsidiary, Taverniti So Jeans, LLC.
24
BLUE HOLDINGS, INC. AND SUBSIDIARY
PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIOD SEPTEMBER 13, 2004 (INCEPTION) TO DECEMBER 31, 2004
BLUE
HOLDINGS, TAVERNITI, PRO FORMA
INC. LLC. CONSOLIDATED
(Unaudited) (Audited)
----------- ----------- -----------
Net sales ............................ $ 365,290 $ -- $ 365,290
Cost of goods sold ................... 157,545 -- 157,545
----------- ----------- -----------
Gross profit ......................... 207,745 -- 207,745
Selling, distribution & administrative
expenses .......................... 1,338,697 242,784 1,581,481
----------- ----------- -----------
Loss before provision for income taxes (1,130,952) (242,784) (1,373,736)
Provision for income taxes ........... 800 800 1,600
----------- ----------- -----------
Net loss ............................. $(1,131,752) $ (243,584) $(1,375,336)
=========== =========== ===========
Basic and diluted earnings per share . $ (0.05)
===========
Basic and diluted average shares ..... 26,057,200
===========
See Notes to Condensed Consolidated Financial Statements
Note: The Consolidated Proforma Statement of Operations includes the accounts of
the Company and its wholly owned subsidiary, Taverniti So Jeans, LLC.
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BLUE HOLDINGS, INC.
Date: January 6, 2006 By: /S/ PATRICK CHOW
-------------------------------------
Patrick Chow
Chief Financial Officer and Secretary
26