Exhibit 99.1
Following are portions of the Preliminary Offering Memorandum dated April 7, 2005, relating to the proposed private placement of the Notes. Except as otherwise indicated in the information set forth below, or as the context may otherwise require, references to (i) the terms “Company,” “we,” “us,” “Brown Shoe,” and “our” refer to Brown Shoe Company, Inc. and its subsidiaries; (ii) the term “Bennett” refers to Bennett Footwear Holdings, LLC and its subsidiaries; and (iii) the term “Acquisition” refers to our acquisition of the units of Bennett Footwear Holdings, LLC and of the stock of Bennett Investment Corporation; and (iv) “Transactions” refers to the Acquisition, the offering of the senior notes, the application of the proceeds therefrom, additional borrowings under our existing senior secured credit facility and the repatriation of cash in connection with the offering.
1
2004 U.S. Footwear | ||||||||||
Channels | Representative Retailers | Retail Sales(1) | ||||||||
$ (in billions) | Percentage | |||||||||
Department Store/ | Nordstrom, Macy’s, Bloomingdale’s, Dillard’s, | |||||||||
Specialty Retail | Naturalizer, Nine West, Cole Haan and Rockport | $ | 17.8 | 45.6 | % | |||||
Mid-Tier | National chain retailers (such as Famous Footwear, DSW, Sears and J.C. Penney), off-price retailers (such as T.J. Maxx and Ross Stores), catalog retailers and factory outlet stores | 11.8 | 30.3 | % | ||||||
Discount Store/ | Wal-Mart, Kmart, Target | |||||||||
Mass Merchandiser | and Payless ShoeSource | 6.8 | 17.4 | % | ||||||
Other | QVC, Kids R Us | 2.6 | 6.7 | % |
2
Category | Price Point | Primary Sales Channel(s) | ||
Designer | $179.99 + | Department Store/Specialty Retail | ||
Bridge | $89.99 – $199.99 | Department Store/Specialty Retail | ||
Better | $49.99 – $89.99 | Department Store/Specialty Retail | ||
Moderate | $19.99 – $59.99 | Department Store/Specialty Retail and Mid-Tier | ||
Mass | $9.99 – $34.99 | Discount Store/Mass Merchandiser |
3
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• | Working with our suppliers to provide compelling branded value-priced footwear, including current styles and exclusive offerings | |
• | Providing a convenient, consumer-oriented shopping experience | |
• | Reaching target consumers through innovative marketing, including in-store media campaigns | |
• | Opening new stores in targeted markets, including an expected 45 net new stores in fiscal 2005 |
• | Increasing the style component of our offerings and delivering compelling product to build brand preference | |
• | Continuing to add design talent to meet the changing demands of the consumer | |
• | Increasing floor space with our existing retail customers and penetrating new retail accounts | |
• | Developing specialty retail concepts around Bennett’s brands over time | |
• | Strengthening brand awareness among retailers and consumers through continued marketing and brand-building activities |
5
• | Increasing the style component of the Naturalizer brand to focus on the younger, more active consumer and differentiate the brand | |
• | Enhancing our in-store merchandising and the Naturalizer retail shopping experience | |
• | Closing underperforming Naturalizer retail stores, including an expected 17 net stores in fiscal 2005 |
2004 | 2003 | 2002 | ||||||||||||
Famous Footwear | ||||||||||||||
Family footwear stores which feature a wide selection of brand-name, value-priced footwear; located in shopping centers, outlet malls and regional malls in the U.S., Puerto Rico and Guam; includes stores operated under the Famous Footwear, Factory Brand Shoes, Supermarket of Shoes and Warehouse Shoes names | 919 | 893 | 918 | |||||||||||
Naturalizer | ||||||||||||||
Stores selling primarily the Naturalizer brand of women’s footwear, located in regional malls, shopping centers and outlet malls in the U.S. and Canada | 359 | 362 | 373 | |||||||||||
F.X. LaSalle | ||||||||||||||
Stores selling women’s and men’s better grade footwear in major regional malls in Canada | 16 | 16 | 16 | |||||||||||
Total | 1,294 | 1,271 | 1,307 | |||||||||||
Famous Footwear |
6
2004 | 2003 | ||||||||
Strip centers | 537 | 522 | |||||||
Outlet malls | 196 | 191 | |||||||
Regional enclosed malls | 186 | 180 | |||||||
Total | 919 | 893 | |||||||
7
Naturalizer |
F.X. LaSalle |
Via Spiga |
8
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10
Women’s | Men’s and Athletic | Children’s | ||
AirStep | Bass (1) | Airborne | ||
Bass (1) | Basswood | Baby Gund (6) | ||
Basswood | Big Country | Barbie (7) | ||
Bootalinos | Brown Shoe | Bass (1) | ||
b.u.m. equipment (2) | b.u.m. equipment (2) | Blue Jean Teddy (8) | ||
Carlos by Carlos Santana (3) | Dr. Scholl’s (4) | Bob the Builder (9) | ||
Connie | F.X. LaSalle | b.u.m. equipment (2) | ||
Dr. Scholl’s (4) | FX | Buster Brown | ||
Eurosole | Francois Xavier Collection | Chill Chasers by Buster Brown | ||
Eurostep | Natural Soul | Disney Standard Characters (10) | ||
Exalt | Regal | Mary-Kate and Ashley (11) | ||
Extremes by Naturalizer | TX Traction | Matchbox (7) | ||
Fanfares | Miffy and Friends (12) | |||
F.X. LaSalle | Mijos (13) | |||
FX | Original Dr. Scholl’s (4) | |||
Francois Xavier Collection | Power Rangers (10) | |||
Hot Kiss (5) | Red Goose | |||
LifeStride | Spider-Man 2 (14) | |||
LS Studio | Spidey and Friends (15) | |||
Marquise | Spy Kids 3 (16) | |||
Maserati | Star Wars (17) | |||
Naturalizer | Sweet Kids | |||
NaturalSport | T.R.E.A.T.S. | |||
NightLife | Toe Zone (18) | |||
Opale | Winnie The Pooh (10) | |||
Original Dr. Scholl’s (4) | ||||
TX Traction | ||||
Vision Comfort |
(1) Phillips-Van Heusen Corporation (2) BUM Equipment LLC (3) Guts & Grace Records, Inc. (4) Schering-Plough Healthcare Products, Inc. (5) Hot Kiss, Inc. (6) Gund, Inc (7) Mattel, Inc (8) Springs Licensing Group, Inc. (9) HIT Entertainment PLC | (10) Disney Enterprises, Inc. (11) Dualstar Consumer Products, LLC (12) Big Tent Entertainment LLC (13) HomieShop LLP (14) Marvel Characters, Inc. (15) Spider-Man Merchandising LP (16) Dimension Films, a division of Miramax Film Corporation (17) Lucasfilm LTD (18) Sole Concepts, Inc. |
11
Sourcing |
Millions of | ||||
Country | Pairs | |||
China | 62.3 | |||
Brazil | 11.4 | |||
Italy | 0.4 | |||
Vietnam | 0.3 | |||
All Other | 0.9 | |||
Total | 75.3 | |||
12
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We may not realize some of the expected benefits of the acquisition of Bennett. |
• | the necessity of coordinating geographically disparate organizations, systems and facilities; | |
• | assimilating and retaining employees with diverse business backgrounds; | |
• | consolidating corporate and administrative functions; | |
• | limiting the diversion of management resources necessary to facilitate the integration; | |
• | implementing compatible information and communication systems, as well as common operating procedures; | |
• | creating compatible financial controls and comparable human resource management practices; | |
• | coordinating sales and marketing functions; | |
• | maintaining customer care services and retaining key customers; | |
• | expenses of any undisclosed or potential legal liabilities; | |
• | retaining key management and employees; and | |
• | preserving the collaboration, licensing, distribution, marketing, promotion and other important relationships of each company. |
15
We face risks relating to our licensed and owned intellectual property. |
We are dependent on leased locations. |
We are dependent on major branded suppliers. |
16
Brown Shoe | |||||||||||||||||
Pro Forma | |||||||||||||||||
Historical | Historical | Pro Forma | Condensed | ||||||||||||||
Brown Shoe | Bennett | Adjustments | Consolidated | ||||||||||||||
Assets | |||||||||||||||||
Current Assets | |||||||||||||||||
Cash and cash equivalents | $ | 79.4 | $ | 0.9 | $ | (59.2 | )(a) | $ | 21.1 | ||||||||
Receivables, net of allowances | 97.5 | 29.2 | — | 126.7 | |||||||||||||
Inventories | 421.5 | 33.4 | 3.8 | (b) | 458.7 | ||||||||||||
Deferred income taxes | 12.4 | — | — | 12.4 | |||||||||||||
Prepaid expenses and other current assets | 12.1 | 1.1 | — | 13.2 | |||||||||||||
Total current assets | 622.9 | 64.6 | (55.4 | ) | 632.1 | ||||||||||||
Prepaid pension costs | 55.9 | — | — | 55.9 | |||||||||||||
Other assets | 31.5 | 1.1 | 4.1 | (c) | 36.7 | ||||||||||||
Property and equipment, net | 114.4 | 3.0 | — | 117.4 | |||||||||||||
Goodwill and intangible assets, net | 21.5 | 9.3 | 152.1 | (d) | 182.9 | ||||||||||||
Total assets | $ | 846.2 | $ | 78.0 | $ | 100.8 | $ | 1,025.0 | |||||||||
Liabilities and Shareholders’ Equity | |||||||||||||||||
Current Liabilities | |||||||||||||||||
Current maturities of long-term debt | $ | 92.0 | $ | 31.2 | $ | (18.2 | )(e) | $ | 105.0 | ||||||||
Trade accounts payable | 144.0 | 9.7 | — | 153.7 | |||||||||||||
Employee compensation and benefits | 37.3 | 2.8 | — | 40.1 | |||||||||||||
Other accrued expenses | 60.8 | 2.0 | — | 62.8 | |||||||||||||
Income taxes | 7.4 | 0.1 | (0.4 | )(f) | 7.1 | ||||||||||||
Total current liabilities | 341.5 | 45.8 | (18.6 | ) | 368.7 | ||||||||||||
Other Liabilities | |||||||||||||||||
Long-term debt | 50.0 | 11.5 | 138.5 | (g) | 200.0 | ||||||||||||
Deferred rent | 34.1 | — | — | 34.1 | |||||||||||||
Deferred income taxes | 2.2 | — | 10.0 | (h) | 12.2 | ||||||||||||
Other liabilities | 27.1 | 0.4 | — | 27.5 | |||||||||||||
Total other liabilities | 113.4 | 11.9 | 148.5 | 273.8 | |||||||||||||
Total shareholders’ equity | 391.3 | 20.3 | (29.1 | )(i) | 382.5 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 846.2 | $ | 78.0 | $ | 100.8 | $ | 1,025.0 | |||||||||
17
(a) | The pro forma adjustment to cash was determined as follows: |
Sources of cash: | ||||
Senior notes offered hereby | $ | 150.0 | ||
Additional borrowings under existing revolving credit facility | 13.0 | |||
$ | 163.0 | |||
Uses of cash: | ||||
Purchase price of Bennett(1) | $ | 205.0 | ||
Estimated fees and expenses associated with the Acquisition, net of fees already paid of $0.5 million | 3.0 | |||
Payment of tax associated with foreign earnings repatriation | 8.0 | |||
Estimated fees and expenses(2) | 6.2 | |||
$ | 222.2 | |||
Pro forma adjustment to cash | $ | (59.2 | ) | |
(1) | Includes any indebtedness of Bennett repaid by us upon the closing of the Acquisition. | |
(2) | Includes $5.0 million in fees associated with the notes and $1.2 million in fees associated with a bridge loan commitment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Post-Transactions Liquidity and Capital Resources.” |
(b) | Inventories |
Estimated write-up of inventory to fair value under purchase accounting | $ | 3.8 |
(c) | Other assets |
Estimated fees and expenses associated with debt issuance | $ | 5.0 | ||
Elimination of Bennett deferred financing costs | (0.4 | ) | ||
Reclassification of Brown’s deferred acquisition costs from Other assets to Goodwill and intangible assets | (0.5 | ) | ||
$ | 4.1 | |||
(d) | Goodwill and intangible assets, net |
Goodwill and intangible assets resulting from the Acquisition | $ | 161.4 | ||
Elimination of Bennett goodwill and intangible assets | (9.3 | ) | ||
$ | 152.1 | |||
Reflects the adjustment to goodwill for the excess of purchase price over the estimated fair value of Bennett net assets acquired after consideration of the pro forma adjustments outlined herein. The Acquisition will be accounted for using the purchase method of accounting, and a preliminary estimation of the purchase price allocation has been made. A final determination of the fair values and useful lives of assets and fair values of liabilities acquired cannot be made prior to the completion of the Acquisition and may differ materially from the preliminary estimates made by management. Any final adjustments may change the allocation of purchase price which could affect the fair value assigned to the assets and liabilities acquired and could result in significant changes to the unaudited pro forma condensed consolidated financial statements. |
(e) | Current maturities of long-term debt |
Additional borrowings under existing senior secured credit facility | $ | 13.0 | ||
Repayment of Bennett current maturities of long-term debt | (31.2 | ) | ||
$ | (18.2 | ) | ||
(f) | Income taxes |
Reduction of accrued taxes related to tax benefit associated with bridge loan commitment fee | $ | (0.4 | ) |
(g) | Long-term debt |
Senior notes offered hereby | $ | 150.0 | ||
Repayment of Bennett long-term debt | (11.5 | ) | ||
$ | 138.5 | |||
(h) | Deferred income taxes |
Estimated deferred tax liability (non-cash) generated as a result of basis differences of acquired assets and liabilities for book and tax purposes | $ | 10.0 |
Elimination of Bennett members’ equity resulting from purchase accounting adjustments | $ | (20.3 | ) | |
Tax expense associated with foreign earnings repatriation | (8.0 | ) | ||
Expense associated with bridge loan commitment fee, net of tax benefit of $0.4 million | (0.8 | ) | ||
$ | (29.1 | ) | ||
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Brown Shoe | ||||||||||||||||
Pro Forma | ||||||||||||||||
Historical | Historical | Pro Forma | Condensed | |||||||||||||
Brown Shoe | Bennett(a) | Adjustments | Consolidated | |||||||||||||
Net sales | $ | 1,941.8 | $ | 207.7 | $ | (1.1 | )(b) | $ | 2,148.4 | |||||||
Cost of goods sold | 1,157.4 | 136.4 | 2.8 | (c) | 1,296.6 | |||||||||||
Gross profit | 784.4 | 71.3 | (3.9 | ) | 851.8 | |||||||||||
Selling, administrative and other expenses | 720.6 | 52.4 | 5.4 | (d) | 778.4 | |||||||||||
Operating earnings | 63.8 | 18.9 | (9.3 | ) | 73.4 | |||||||||||
Interest expense, net | (7.5 | ) | (2.4 | ) | (13.1 | )(e) | (23.0 | ) | ||||||||
Earnings before income taxes | 56.3 | 16.5 | (22.4 | ) | 50.4 | |||||||||||
Income tax provision | (13.0 | ) | (0.7 | ) | (5.1 | )(f) | (18.8 | ) | ||||||||
Net earnings | $ | 43.3 | $ | 15.8 | $ | (27.5 | ) | $ | 31.6 | |||||||
(a) | Certain data reflected in the “Historical Bennett” column have been reclassified to conform to Brown Shoe’s current presentation. Commission and license income of Bennett in the amount of $18.1 million has been reclassified to net sales with no corresponding adjustment to cost of goods sold. | |||||
(b) | Net sales | |||||
Reflects the elimination of Bennett net sales of $1.1 million to Brown Shoe. | $ | (1.1 | ) | |||
(c) | Cost of goods sold |
Non-cash cost of goods sold impact of estimated fair value step up of acquired inventory | $ | 3.8 | ||
Reflects the elimination of Bennett cost of goods sold of $1.0 million to Brown Shoe, to the extent that such product remains in Brown Shoe’s ending inventory as of January 29, 2005 | (1.0 | ) | ||
$ | 2.8 | |||
(d) | Selling, administrative and other expenses |
Estimated amortization of acquired intangible assets | $ | 6.1 | ||
Elimination of Bennett’s amortization of intangible assets | (0.7 | ) | ||
$ | 5.4 | |||
(e) | Interest expense, net |
Estimated interest expense and associated fees and expenses on debt to finance the Acquisition | $ | (14.0 | ) | |
Elimination of Bennett’s interest expense, reflecting the repayment of debt upon acquisition | 2.4 | |||
Reduced interest income on existing cash and cash equivalents | (0.8 | ) | ||
Amortization of debt issuance costs associated with senior notes offered hereby | (0.7 | ) | ||
$ | (13.1 | ) | ||
(f) | Income tax provision |
Estimated tax expense associated with the repatriation of foreign earnings used to fund a portion of the acquisition | $ | (8.0 | ) | |
Adjustment of Bennett’s effective tax rate(1) | (5.4 | ) | ||
Tax effect of other pro forma adjustments | 8.3 | |||
$ | (5.1 | ) | ||
(1) | Historically, Bennett has been treated as a partnership for federal income tax purposes and, consequently, federal income tax liabilities flowed through to the members of Bennett. Following the Transactions, Bennett’s income will be subject to taxation as part of the Brown Shoe Company, Inc. consolidated tax returns. The pro forma adjustment reflects the estimated incremental U.S. federal and state income tax provision as if Bennett had been subject to taxation under subchapter C of the Internal Revenue Code for the full fiscal year. |
19
• | Special Compensation Costs — In conjunction with the restructuring of the ownership of Bennett in fiscal 2003, certain share-based compensation costs were incurred and special cash incentive |
20
compensation programs were instituted. These compensation costs totaled $3.6 million and $3.8 million in fiscal 2004 and fiscal 2003, respectively. | ||
• | Etienne Aigner Distribution Center Costs — In conjunction with the acquisition of the Etienne Aigner license in late 2003, Bennett incurred duplicate distribution center and systems processing costs during the start-up transition period of $1.1 million in fiscal 2004 and $0.3 million in fiscal 2003. | |
• | Intershoe Transition Costs — Transition and start-up costs associated with this acquisition in early fiscal 2004 totaled $1.3 million. These costs consisted primarily of staffing costs. | |
• | Professional Fees — In fiscal 2004, Bennett incurred $0.9 million of costs investigating additional acquisitions that were not consummated. In fiscal 2003, Bennett incurred professional fees of $1.5 million in connection with the ownership restructuring described above and $0.1 million of costs investigating additional acquisitions that were not consummated. |
21
Fiscal Years Ended December 31, | ||||||||||||||||||||||||
2004 | 2003 | 2002 | ||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
Net | Net | Net | ||||||||||||||||||||||
Product | Product | Product | ||||||||||||||||||||||
($ millions) | Revenue | Revenue | Revenue | |||||||||||||||||||||
Net product revenue | $ | 189.6 | 100.0 | % | $ | 113.1 | 100.0 | % | $ | 97.8 | 100.0 | % | ||||||||||||
Cost of goods sold | 136.4 | 71.9 | % | 81.3 | 71.9 | % | 68.4 | 69.9 | % | |||||||||||||||
53.2 | 28.1 | % | 31.8 | 28.1 | % | 29.4 | 30.1 | % | ||||||||||||||||
Commission and license income | 18.1 | 9.5 | % | 13.4 | 11.8 | % | 12.2 | 12.4 | % | |||||||||||||||
Gross profit | 71.3 | 37.6 | % | 45.2 | 39.9 | % | 41.6 | 42.5 | % | |||||||||||||||
Selling and administrative expenses | 51.6 | 27.2 | % | 31.9 | 28.2 | % | 26.3 | 26.9 | % | |||||||||||||||
Operating earnings | 19.7 | 10.4 | % | 13.3 | 11.7 | % | 15.3 | 15.6 | % | |||||||||||||||
Interest expense | (2.4 | ) | (1.3 | )% | (1.2 | ) | (1.0 | )% | (1.0 | ) | (1.0 | )% | ||||||||||||
Other expense, net | (0.8 | ) | (0.4 | )% | (0.3 | ) | (0.3 | )% | — | — | ||||||||||||||
Income before income taxes | 16.5 | 8.7 | % | 11.8 | 10.4 | % | 14.3 | 14.6 | % | |||||||||||||||
Provision for income taxes | (0.7 | ) | (0.4 | )% | (0.7 | ) | (0.6 | )% | (0.6 | ) | (0.6 | )% | ||||||||||||
Net earnings | $ | 15.8 | 8.3 | % | $ | 11.1 | 9.8 | % | $ | 13.7 | 14.0 | % | ||||||||||||
Fiscal 2004 Compared to Fiscal 2003 |
22
Fiscal 2003 Compared to Fiscal 2002 |
Borrowings |
December 31, | |||||||||||||
($ millions) | 2004 | 2003 | Increase | ||||||||||
Line of credit | $ | 25.7 | $ | 14.0 | $ | 11.7 | |||||||
Long-term debt, including current maturities | 16.9 | 12.1 | 4.8 | ||||||||||
Total short and long-term debt | $ | 42.6 | $ | 26.1 | $ | 16.5 | |||||||
23
Capital contribution | $ | 9.0 million | |||
Seller note | 6.2 million | ||||
Senior term loan | 5.0 million | ||||
Revolver borrowings | 2.1 million | ||||
Total | $ | 22.3 million | |||
Cash Flow Analysis |
Fiscal years | ||||||||||||
ended | ||||||||||||
December 31, | ||||||||||||
Increase/ | ||||||||||||
($ millions) | 2004 | 2003 | (Decrease) | |||||||||
Net cash provided by operating activities | $ | 8.1 | $ | 11.9 | $ | (3.8 | ) | |||||
Net cash used in investing activities | (16.2 | ) | (9.0 | ) | (7.2 | ) | ||||||
Net cash provided by (used in) financing activities | 9.0 | (2.9 | ) | 11.9 | ||||||||
Increase in cash | $ | 0.9 | $ | — | $ | 0.9 | ||||||
24
General |
Revenue Recognition |
Inventories |
Intangible Assets |
25
Payments Due by Period | |||||||||||||||||||||
Less Than | 1-3 | 3-5 | More Than | ||||||||||||||||||
($ millions) | Total | 1 Year | Years | Years | 5 Years | ||||||||||||||||
Line of credit | $ | 25.7 | $ | 25.7 | |||||||||||||||||
Long-term debt(1) | 16.9 | 5.4 | $ | 11.4 | $ | 0.1 | |||||||||||||||
Operating lease commitments | 27.0 | 4.4 | 8.5 | 7.1 | $ | 7.0 | |||||||||||||||
Minimum license fee commitments | 22.2 | 3.1 | 7.3 | 7.8 | 4.0 | ||||||||||||||||
Purchase obligations(2) | 12.0 | 12.0 | |||||||||||||||||||
Total | $ | 103.8 | $ | 50.6 | $ | 27.2 | $ | 15.0 | $ | 11.0 | |||||||||||
(1) | Long-term debt represents principal payments exclusive of interest. |
(2) | Purchase obligations include agreements to purchase goods or services in the normal course of business that specify all significant terms, including quantity and price provisions. |
POST-TRANSACTIONS LIQUIDITY AND CAPITAL RESOURCES
26
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Page | |||||
Consolidated Financial Statements of Bennett Footwear Holdings, LLC and Subsidiaries | |||||
Independent Auditors’ Report | F-2 | ||||
Consolidated Financial Statements as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 | |||||
Consolidated Balance Sheets | F-3 | ||||
Consolidated Statements of Income | F-4 | ||||
Consolidated Statements of Changes in Members’ Equity | F-5 | ||||
Consolidated Statements of Cash Flows | F-6 | ||||
Notes to Consolidated Financial Statements | F-7 |
F-1
The Members
/s/ Ernst & Young LLP |
F-2
CONSOLIDATED BALANCE SHEETS
December 31 | |||||||||
2004 | 2003 | ||||||||
Assets | |||||||||
Current assets: | |||||||||
Cash | $ | 863,331 | $ | 600 | |||||
Accounts receivable, net of allowance for doubtful accounts of $601,704 and $489,900 in 2004 and 2003, respectively | 29,229,865 | 16,748,916 | |||||||
Inventories, net | 33,443,364 | 19,848,108 | |||||||
Prepaid royalties | — | 2,123,822 | |||||||
Prepaid expenses and other current assets | 1,027,799 | 381,157 | |||||||
Total current assets | 64,564,359 | 39,102,603 | |||||||
Property, plant and equipment, net | 2,994,911 | 1,037,732 | |||||||
Licenses, net | 2,723,435 | 2,771,031 | |||||||
Trademark | 6,614,738 | — | |||||||
Other assets, net | 1,116,616 | 855,621 | |||||||
Total assets | $ | 78,014,059 | $ | 43,766,987 | |||||
Liabilities and members’ equity | |||||||||
Current liabilities: | |||||||||
Line of credit | $ | 25,742,809 | $ | 13,973,119 | |||||
Accounts payable | 9,055,407 | 8,643,888 | |||||||
Accounts payable to Pentland | 629,267 | 439,702 | |||||||
Accrued expenses | 1,737,887 | 498,774 | |||||||
Accrued compensation | 2,812,087 | 1,965,487 | |||||||
Accrued state income taxes | 136,106 | — | |||||||
Current portion of notes payable | 5,408,204 | 2,041,856 | |||||||
Current portion of lease obligation | 292,061 | — | |||||||
Current portion of amount due to Aigner | — | 3,034,075 | |||||||
Total current liabilities | 45,813,828 | 30,596,901 | |||||||
Notes payable, net of current portion | 11,491,185 | 10,058,721 | |||||||
Long-term lease obligation, net of current portion | 431,377 | — | |||||||
Due to Aigner, net of current portion | — | 413,385 | |||||||
Members’ equity: | |||||||||
Preferred units 24,625 and 20,819 issued and outstanding at 2004 and 2003, respectively ($27,179,685 liquidation preference) | 3,805,982 | — | |||||||
Common A units 1,182,816 and 1,000,000 issued and outstanding at 2004 and 2003, respectively | 5,194,019 | — | |||||||
Common B units 24,140 and 20,408 issued and outstanding at 2004 and 2003, respectively | 1,871,951 | — | |||||||
Unit subscription receivable | (530,207 | ) | — | ||||||
Members’ equity/retained earnings | 9,935,924 | 2,697,980 | |||||||
20,277,669 | 2,697,980 | ||||||||
Total liabilities and members’ equity | $ | 78,014,059 | $ | 43,766,987 | |||||
F-3
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 | |||||||||||||
2004 | 2003 | 2002 | |||||||||||
Net product revenue | $ | 189,577,072 | $ | 113,077,461 | $ | 97,837,418 | |||||||
Cost of product revenue | 136,415,713 | 81,326,756 | 68,403,680 | ||||||||||
53,161,359 | 31,750,705 | 29,433,738 | |||||||||||
Commission and license income | 18,113,496 | 13,389,846 | 12,169,056 | ||||||||||
Gross profit | 71,274,855 | 45,140,551 | 41,602,794 | ||||||||||
Operating expenses: | |||||||||||||
Selling and marketing | 22,842,614 | 12,160,106 | 10,834,290 | ||||||||||
General and administrative | 28,726,328 | 19,693,205 | 15,426,697 | ||||||||||
51,568,942 | 31,853,311 | 26,260,987 | |||||||||||
Income from operations | 19,705,913 | 13,287,240 | 15,341,807 | ||||||||||
Interest expense | (2,376,497 | ) | (1,205,611 | ) | (1,024,520 | ) | |||||||
Other expense, net | (764,029 | ) | (324,838 | ) | (6,543 | ) | |||||||
Income before income taxes | 16,565,387 | 11,756,791 | 14,310,744 | ||||||||||
Provision for income taxes | 749,355 | 648,779 | 605,408 | ||||||||||
Net income | $ | 15,816,032 | $ | 11,108,012 | $ | 13,705,336 | |||||||
F-4
Preferred | Common A | Common B | Unit | |||||||||||||||||||||||||||||||||||||
Members’ | Subscription | Retained | ||||||||||||||||||||||||||||||||||||||
Equity | Units | $ | Units | $ | Units | $ | Receivable | Earnings | Totals | |||||||||||||||||||||||||||||||
January 1, 2002 | $ | 6,861,933 | $ | 6,861,933 | ||||||||||||||||||||||||||||||||||||
— | ||||||||||||||||||||||||||||||||||||||||
Distributions | (7,338,082 | ) | (7,338,082 | ) | ||||||||||||||||||||||||||||||||||||
Net income | 13,705,336 | 13,705,336 | ||||||||||||||||||||||||||||||||||||||
December 31, 2002 | 13,229,187 | 13,229,187 | ||||||||||||||||||||||||||||||||||||||
Distributions through May 19, 2003 | (3,912,358 | ) | (3,912,358 | ) | ||||||||||||||||||||||||||||||||||||
Net income through May 19, 2003 | 2,945,439 | 2,945,439 | ||||||||||||||||||||||||||||||||||||||
Exchange of ownership interests at formation of Holdings | (12,262,268 | ) | 20,819 | $ | — | 1,455,288 | $ | — | $ | 12,262,268 | — | |||||||||||||||||||||||||||||
Repurchase and retirement of units | (455,288 | ) | (15,714,043 | ) | (15,714,043 | ) | ||||||||||||||||||||||||||||||||||
Grant of Common B Units | 20,408 | $ | — | — | ||||||||||||||||||||||||||||||||||||
Distributions after May 19, 2003 | (2,012,818 | ) | (2,012,818 | ) | ||||||||||||||||||||||||||||||||||||
Net income after May 19, 2003 | 8,162,573 | 8,162,573 | ||||||||||||||||||||||||||||||||||||||
December 31, 2003 | — | 20,819 | — | 1,000,000 | — | 20,408 | — | 2,697,980 | 2,697,980 | |||||||||||||||||||||||||||||||
Distributions | (8,578,088 | ) | (8,578,088 | ) | ||||||||||||||||||||||||||||||||||||
Equity contributions | 3,806 | 3,805,982 | 182,816 | 5,194,019 | $ | (530,207 | ) | 8,469,794 | ||||||||||||||||||||||||||||||||
Grant of Common B Units | 3,732 | — | — | |||||||||||||||||||||||||||||||||||||
Incentive compensation expense | 1,871,951 | 1,871,951 | ||||||||||||||||||||||||||||||||||||||
Net income | 15,816,032 | 15,816,032 | ||||||||||||||||||||||||||||||||||||||
December 31, 2004 | $ | — | 24,625 | $ | 3,805,982 | 1,182,816 | $ | 5,194,019 | 24,140 | $ | 1,871,951 | $ | (530,207 | ) | $ | 9,935,924 | $ | 20,277,669 | ||||||||||||||||||||||
F-5
Year Ended December 31 | ||||||||||||||
2004 | 2003 | 2002 | ||||||||||||
Operating activities | ||||||||||||||
Net income | $ | 15,816,032 | $ | 11,108,012 | $ | 13,705,336 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation | 598,829 | 371,903 | 349,235 | |||||||||||
Amortization | 856,473 | 234,478 | 121,901 | |||||||||||
Incentive compensation expense | 1,871,951 | |||||||||||||
Impairment of fixed assets | — | 400,000 | — | |||||||||||
Amortization of debt discount | 195,622 | — | — | |||||||||||
Provision for losses on accounts receivable | 111,804 | 44,900 | (215,000 | ) | ||||||||||
(Gain) loss on disposal of property, plant and equipment | 93,909 | (36,795 | ) | 13,304 | ||||||||||
Change in operating assets and liabilities, net of effects of business acquisition: | ||||||||||||||
Accounts receivable | (7,399,105 | ) | (8,069,436 | ) | 292,599 | |||||||||
Inventories | 1,104,230 | (117,820 | ) | 1,317,648 | ||||||||||
Due from related party | — | 780,948 | (780,948 | ) | ||||||||||
Prepaid royalties | 2,123,822 | (2,123,822 | ) | — | ||||||||||
Prepaid expenses and other current assets | 193,010 | (140,039 | ) | 18,267 | ||||||||||
Other assets | (112,365 | ) | (64,306 | ) | (186,786 | ) | ||||||||
Accounts payable | (8,342,822 | ) | 5,441,587 | (722,883 | ) | |||||||||
Accounts payable to Pentland | 189,565 | 102,851 | 147,873 | |||||||||||
Due to Aigner | (2,450,071 | ) | 3,447,460 | — | ||||||||||
Accrued expenses | 2,213,530 | (325,431 | ) | 498,494 | ||||||||||
Accrued compensation | 846,600 | 907,322 | 532,105 | |||||||||||
Accrued/prepaid state income taxes | 159,475 | (70,769 | ) | (34,620 | ) | |||||||||
Total adjustments | (7,745,543 | ) | 783,031 | 1,351,189 | ||||||||||
Net cash provided by operating activities | 8,070,489 | 11,891,043 | 15,056,525 | |||||||||||
Investing activities | ||||||||||||||
Acquisition, net of cash acquired | (15,071,237 | ) | — | — | ||||||||||
Purchases of property, plant and equipment | (1,097,007 | ) | (164,663 | ) | (765,619 | ) | ||||||||
License acquisition costs | — | (2,771,031 | ) | — | ||||||||||
Purchase of Aigner assets | — | (6,069,118 | ) | — | ||||||||||
Net proceeds from the sale of property, plant and equipment | — | 42,918 | — | |||||||||||
Net cash used in investing activities | (16,168,244 | ) | (8,961,894 | ) | (765,619 | ) | ||||||||
Financing activities | ||||||||||||||
Net (payments) advances on line of credit | 11,769,690 | 12,439,918 | (3,679,830 | ) | ||||||||||
Net (payments) advances on bank term loan | 5,000,000 | — | — | |||||||||||
Proceeds from related-party notes payable | 5,000,000 | — | — | |||||||||||
Payments on related-party notes payable | (5,041,856 | ) | (1,374,951 | ) | (1,874,107 | ) | ||||||||
Proceeds from notes payable | — | 10,000,000 | — | |||||||||||
Debt issuance costs | (152,179 | ) | (399,533 | ) | (20,797 | ) | ||||||||
Payments on notes payable | (6,891,304 | ) | (4,955,364 | ) | (1,500,000 | ) | ||||||||
Payments of lease obligations | (615,571 | ) | — | — | ||||||||||
Equity contributions | 8,469,794 | — | — | |||||||||||
Repurchase of Common A Units | — | (12,714,043 | ) | — | ||||||||||
Distributions to members | (8,578,088 | ) | (5,925,176 | ) | (7,338,082 | ) | ||||||||
Net cash provided by (used in) financing activities | 8,960,486 | (2,929,149 | ) | (14,412,816 | ) | |||||||||
Net increase (decrease) in cash | 862,731 | — | (121,910 | ) | ||||||||||
Cash at beginning of year | 600 | 600 | 122,510 | |||||||||||
Cash at end of year | $ | 863,331 | $ | 600 | $ | 600 | ||||||||
Noncash investing and financing activities | ||||||||||||||
Issuance of note receivable | $ | — | $ | 160,000 | $ | — | ||||||||
Issuance of related party debt | — | 3,000,000 | — | |||||||||||
Issuance of debt — Intershoe | 6,173,292 | — | — | |||||||||||
Stock subscription receivable | 530,207 | — | — | |||||||||||
Issuance of debt — lease | 463,118 | — | — | |||||||||||
License acquisition costs | 341,620 |
F-6
1. | Nature of Business and Basis of Presentation |
2. | Summary of Significant Accounting Policies |
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Building and improvements | 40 years | |||
Machinery and equipment | 5-10 years | |||
Office furniture and equipment | 5-7 years | |||
Computer software | 3 years | |||
Equipment under capital leases | Lease term | |||
Leasehold improvements | Lease term |
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. | Financial Instruments |
4. | Business Combinations |
Current assets | $ | 21,298,932 | ||
Trademarks | 6,614,738 | |||
Property, plant and equipment | 1,552,910 | |||
License contracts | 359,019 | |||
Deferred financing fees | 152,179 | |||
Current liabilities | (7,679,864 | ) | ||
Total | $ | 22,297,914 | ||
5. | Acquisition of Etienne Aigner License |
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Licensee | ||||||||||||
Year Ending December 31, | Royalties | Advertising | Advertising | |||||||||
2004 | $ | 2,500,000 | $ | 250,000 | $ | 250,000 | ||||||
2005 | 2,337,500 | 233,750 | 233,750 | |||||||||
2006 | 2,615,500 | 261,550 | 261,550 | |||||||||
2007 | 2,844,025 | 284,402 | 284,402 | |||||||||
2008 | 3,232,575 | 323,257 | 323,257 | |||||||||
2009 | 3,276,700 | 327,670 | 327,670 | |||||||||
2010 | 3,315,700 | 331,570 | 331,570 | |||||||||
Total | $ | 20,122,000 | $ | 2,012,199 | $ | 2,012,199 | ||||||
6. | Related-Party Transactions |
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. | Property, Plant and Equipment |
2004 | 2003 | |||||||
Office furniture and equipment | $ | 1,233,786 | $ | 1,181,930 | ||||
Machinery and equipment | 580,095 | 400,284 | ||||||
Computer software | 354,190 | 285,182 | ||||||
Leasehold improvements | 2,437,141 | 868,522 | ||||||
4,605,212 | 2,735,918 | |||||||
Less accumulated depreciation | 1,610,301 | 1,698,186 | ||||||
Property, plant and equipment net | $ | 2,994,911 | $ | 1,037,732 | ||||
8. | Notes Payable |
2004 | 2003 | |||||||
Bank term loan | $ | 7,697,207 | $ | 8,833,333 | ||||
Note payable to Intershoe | 5,976,794 | — | ||||||
Notes payable to BICO | 3,000,000 | 3,000,000 | ||||||
Other notes payable | 225,388 | 267,244 | ||||||
16,899,389 | 12,100,577 | |||||||
Less current portion | 5,408,204 | 2,041,856 | ||||||
$ | 11,491,185 | $ | 10,058,721 | |||||
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note Payable to Intershoe |
Notes Payable to BICO |
Other Notes Payable |
2005 | $ | 5,408,000 | ||
2006 | 10,071,000 | |||
2007 | 1,342,000 | |||
2008 | 58,000 | |||
2009 | 20,000 | |||
$ | 16,899,000 | |||
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. | Line of Credit |
10. | Members’ Equity |
Preferred Units | 20,819 | ||||
Common A Units | |||||
A-1 | 121,562 | ||||
A-2 | 1,188,038 | ||||
A-3 | 145,688 |
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common B Units
11. | Retirement Plan |
12. | Cash Flow Information |
2004 | 2003 | 2002 | ||||||||||
Interest | $ | 2,066,000 | $ | 967,000 | $ | 935,000 | ||||||
Income taxes | 745,000 | 782,000 | 829,000 |
13. | Commitments |
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operating leases that expire at various times through 2013. Most of the facilities leases contain renewal options and provide for payments of minimum annual rentals plus additional payments for taxes, utilities and maintenance. The most significant leases are those for showroom facilities, which is a 16-year lease with no renewal option, one of the retail locations, which is a ten-year lease with an option to renew for another five years and the corporate headquarters lease, which is a seven-year lease with an option to renew for another five years.
2005 | $ | 4,361,000 | ||
2006 | 4,323,000 | |||
2007 | 4,185,000 | |||
2008 | 3,927,000 | |||
2009 | 3,162,000 | |||
Thereafter | 7,068,000 | |||
$ | 27,026,000 | |||
14. | Subsequent Event |
F-16