EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tilia International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Tilia
International, Inc. (a Cook Islands Corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December
31, 2001, 2000 and 1999. 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 auditing standards generally
accepted in the United States. 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 Tilia International, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for the years ended December 31, 2001, 2000 and
1999 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
San Francisco, California
January 30, 2002
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- --------------
Net sales ..................................... $183,825,138 $132,079,478 $ 79,996,637
Cost of goods sold ............................ 89,668,207 59,896,104 32,655,501
------------ ------------ ------------
Gross profit .................................. 94,156,931 72,183,374 47,341,136
------------ ------------ ------------
Operating expenses
Sales and marketing .......................... 43,567,390 34,111,543 20,763,454
Product development and engineering .......... 2,267,751 1,860,911 994,116
General and administrative ................... 15,196,506 10,217,678 6,137,069
Depreciation and amortization ................ 1,361,526 872,760 744,304
Bad debts (reserve reversal) expense ......... (427,041) 771,380 254,127
Noncash stock compensation expense ........... 198,501 157,342 --
------------ ------------ ------------
Total operating expenses ................... 62,164,633 47,991,614 28,893,070
------------ ------------ ------------
Income from operations ........................ 31,992,298 24,191,760 18,448,066
Other (expense) income ........................ (700,767) 226,653 428,869
------------ ------------ ------------
Net income before income tax .................. 31,291,531 24,418,413 18,876,935
Provision for income tax ...................... 8,512,529 7,385,799 4,998,982
------------ ------------ ------------
Net income .................................... $ 22,779,002 $ 17,032,614 $ 13,877,953
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------------
2001 2000
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents ................................ $ 18,914,934 $ 374,989
Accounts receivable, net ................................. 22,981,731 20,193,828
Inventory, net ........................................... 22,088,654 22,733,265
Prepaid inventory ........................................ 2,363,965 1,663,197
Prepaid income taxes ..................................... -- 726,438
Prepaid media and other expenses ......................... 1,675,540 1,178,216
Deferred tax asset ....................................... 5,632,150 4,654,389
Deposits and other current assets ........................ 212,387 106,273
------------ -----------
Total current assets ................................... 73,869,361 51,630,595
------------ -----------
Property and equipment, net ............................... 3,266,982 2,606,797
Long-term note receivable, net ............................ 546,000 --
Long-term deferred tax asset .............................. 122,084 --
Intellectual property, net ................................ 600,000 800,000
------------ -----------
Total assets ............................................. $ 78,404,427 $55,037,392
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ......................................... $ 3,535,528 $ 6,170,601
Accrued liabilities ...................................... 13,761,415 10,086,977
Income taxes payable ..................................... 3,543,120 --
Bank loan payable ........................................ -- 4,335,000
------------ -----------
Total current liabilities .............................. 20,840,063 20,592,578
------------ -----------
Shareholders' Equity
Series A preferred stock, no par value, 2,860,000 shares
authorized, issued and outstanding ..................... 4,468,058 4,468,058
Common stock, no par value, 30,000,000 shares authorized,
6,041,734 and 5,845,355 shares issued and outstanding in
2001 and 2000, respectively ............................ 3,305,902 2,911,022
Stock subscriptions receivable ........................... (237,000) (182,668)
Retained earnings ........................................ 50,027,404 27,248,402
------------ -----------
Total shareholders' equity ................................ 57,564,364 34,444,814
------------ -----------
Total liabilities and shareholders' equity ............. $ 78,404,427 $55,037,392
============ ===========
All shares and amounts, except for Series A preferred stock, have been restated
to retroactively reflect the five for one stock split in October 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999
--------------- --------------- --------------
OPERATING ACTIVITIES:
Net income .............................................. $ 22,779,002 $ 17,032,614 $ 13,877,953
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................ 1,611,900 872,760 744,304
Gain on sale of property and equipment ............... (4,241) (673) (376)
Bad debts (reserve reversal) expense ................. (427,041) 771,380 254,127
Noncash stock compensation expense ................... 198,501 157,342 --
Deferred income taxes ................................ (1,099,845) (2,155,009) (2,499,380)
Utilization of prior years' net operating losses ..... -- -- 1,226,425
Changes in current assets and liabilities:
Accounts receivable .................................... (2,360,862) (11,673,037) (6,351,239)
Inventory .............................................. 644,611 (13,384,628) (7,159,527)
Prepaid inventory ...................................... (700,768) 105,025 (1,581,861)
Prepaid income taxes ................................... 726,438 (726,438) --
Prepaid media and other expenses ....................... (497,324) (160,177) (485,725)
Deposits and other current assets ...................... (106,114) 1,022,160 (1,077,815)
Accounts payable and accrued liabilities ............... 1,039,365 8,592,276 5,750,799
Income taxes payable ................................... 3,543,120 (1,596,685) 1,253,701
------------ ------------- ------------
Net cash provided by (used in) operating activities ..... 25,346,742 (1,143,090) 3,951,386
------------ ------------- ------------
INVESTING ACTIVITIES:
Net payments for purchase of
property and equipment ............................... (1,983,980) (2,535,966) (622,932)
Issuance of long-term note receivable .................. (629,864) -- --
------------ ------------- ------------
Net cash used in investing activities ................... (2,613,844) (2,535,966) (622,932)
------------ ------------- ------------
FINANCING ACTIVITIES:
Dividend payment ....................................... -- (1,436,775) (1,993,940)
Net (payment of) proceeds from bank loan ............... (4,335,000) 4,335,000 (459,536)
Purchase of treasury stock ............................. -- (200,000) --
Net proceeds from issuance of common stock ............. 96,379 100 64,487
Proceeds from payment of subscriptions receivable....... 45,668 -- --
------------ ------------- ------------
Net cash (used in) provided by financing activities ..... (4,192,953) 2,698,325 (2,388,989)
------------ ------------- ------------
Net change in cash ...................................... 18,539,945 (980,731) 939,465
Cash and cash equivalents at beginning of year .......... 374,989 1,355,720 416,255
------------ ------------- ------------
Cash and cash equivalents at end of year ................ $ 18,914,934 $ 374,989 $ 1,355,720
============ ============= ============
Supplemental cash flow information
Cash paid during the year for
Interest ............................................. $ 370,327 $ 105,980 $ 15,727
Income taxes, net of refund .......................... $ 5,342,816 $ 11,863,931 $ 5,018,235
Non-cash
Dividends declared, not paid ......................... $ -- $ -- $ 908,398
The accompanying notes are an integral part of these consolidated financial
statements.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NUMBER OF SHARES
----------------------------------------
SERIES A SERIES B SERIES A
PREFERRED PREFERRED COMMON PREFERRED
STOCK STOCK STOCK STOCK
----------- --------------- ------------ --------------
Balance at
January 1, 1999 ...... 2,860,000 3,700,000 -- $ 4,468,058
Net income ............
Utilization of prior
years' net
operating losses
and realization of
deferred tax
assets ...............
Exercise of stock
options .............. 1,612,185
Dividends declared.....
Balance at
December 31,
1999 ................. 2,860,000 3,700,000 1,612,185 $ 4,468,058
Net income ............
Exercise of stock
options .............. 2,500
Additional shares
issued ............... 730,670
Noncash stock
compensation
expense ..............
Conversion to
common ............... (3,700,000) 3,700,000
Purchase of
treasury stock ....... (200,000)
Dividends declared.....
Balance at
December 31,
2000 ................. 2,860,000 -- 5,845,355 $ 4,468,058
Net income ............
Exercise of stock
options .............. 196,379
Noncash stock
compensation
expense ..............
Payment of
subscriptions
receivable ...........
Balance at
December 31,
2001 ................. 2,860,000 -- 6,041,734 $ 4,468,058
========= ========== ========= ===========
SERIES B STOCK
PREFERRED COMMON SUBSCRIPTIONS RETAINED TOTAL
STOCK STOCK RECEIVABLE EARNINGS EQUITY
-------------- -------------- --------------- ---------------- ----------------
Balance at
January 1, 1999 ...... $ 1,480,000 $ -- $ -- $ (459,617) $ 5,488,441
Net income ............ 13,877,953 13,877,953
Utilization of prior
years' net
operating losses
and realization of
deferred tax
assets ............... 1,226,425 1,226,425
Exercise of stock
options .............. 64,487 64,487
Dividends declared..... (2,674,171) (2,674,171)
------------ ------------
Balance at
December 31,
1999 ................. $ 1,480,000 $ 1,290,912 $ -- $ 10,744,165 $ 17,983,135
Net income ............ 17,032,614 17,032,614
Exercise of stock
options .............. 100 100
Additional shares
issued ............... 182,668 (182,668) --
Noncash stock
compensation
expense .............. 157,342 157,342
Conversion to
common ............... (1,480,000) 1,480,000 --
Purchase of
treasury stock ....... (200,000) (200,000)
Dividends declared..... (528,377) (528,377)
------------ ------------
Balance at
December 31,
2000 ................. $ -- $ 2,911,022 $ (182,668) $ 27,248,402 $ 34,444,814
Net income ............ 22,779,002 22,779,002
Exercise of stock
options .............. 196,379 (100,000) 96,379
Noncash stock
compensation
expense .............. 198,501 198,501
Payment of
subscriptions
receivable ........... 45,668 45,668
----------- ------------
Balance at
December 31,
2001 ................. $ -- $ 3,305,902 $ (237,000) $ 50,027,404 $ 57,564,364
============ =========== =========== ============ ============
All shares and amounts, except for Series A preferred stock, have been
restated to retroactively reflect the five for one stock split in October 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
1. BUSINESS AND BASIS OF PRESENTATION:
Tilia International, Inc., a Cook Islands Corporation, develops and
markets patented vacuum packaging systems for home use, primarily for food
storage. The accompanying consolidated financial statements include the
accounts of Tilia International, Inc. and its wholly owned subsidiaries, Tilia
Cyprus, Tilia Hungary, Tilia Canada, Inc. and Tilia, Inc. (collectively, the
"Company"). All intercompany transactions have been eliminated in
consolidation.
A Tilia vacuum packaging system employs a patented vacuum-sealing
appliance combined with a patented, technologically advanced plastic bag or
with an array of accessories such as canisters, lids and bottle stoppers. The
appliance removes air from the bag or other container before creating an
airtight seal, resulting in protection unlike other household food storage bags
and containers on the market. The Company's patented bags are also sold as
separate, replaceable supplies, resulting in a recurring stream of revenue. The
systems are sold under the FoodSaver trademark.
Tilia, Inc., the U.S. subsidiary, manages operations and sales worldwide.
Product manufacturing is concentrated in the Far East using third party
manufacturers. Sales are concentrated in the United States, representing 96% of
2001 revenue.
Tilia's products are sold through independent sales representatives to
national and regional retail chains. The Company also sells directly to the
consumer through television infomercials, the Internet and other direct to
consumer promotions. In addition to generating direct sales, the infomercial
serves as an advertising tool creating awareness and demand at retail for the
product line.
Sales fall into two distinct categories. These are the retail business and
the direct-to-consumer business. In 2001, retail revenue was $138.1 million, up
from $86.9 million in 2000 and $39.8 million in 1999. Bag revenue (excluding
bags in kits) was 25%, 24% and 27% of retail revenue in 2001, 2000 and 1999,
respectively. Retail sales accounted for 75%, 66% and 50% of the Company's
revenues in 2001, 2000 and 1999, respectively.
In the direct-to-consumer category, the Company sells a significant volume
through television infomercials. In 2001, infomercial revenue was $40.9
million, compared to $43.3 million and $38.3 million in 2000 and 1999,
respectively, accounting for 22%, 33% and 48% of the Company's revenues in
2001, 2000 and 1999, respectively. Bag revenue was 10%, 12% and 12% of
infomercial revenue in 2001, 2000 and 1999, respectively. For the infomercial
business, the Company receives the revenue for the full consumer price
(including shipping and handling charges), ships directly to the end-user and
pays variable fees for third party services and airtime. In addition, the
Company recognized $4.8 million in other direct-to-consumer (phone and internet
orders) revenue or 3% of total 2001 revenue.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The Company is subject to risks associated with dependence on a single
type of product, dependence on key individuals, dependence on a select few
third party manufacturers, competition from other companies and products, the
reliance on a few key customers, the high number of bankruptcies in the retail
market, the requirement for continued successful development and marketing of
its products and the availability of supplies. Currently, each appliance has
either one or two manufacturing sources and all are manufactured in the Far
East. The Company has two bag suppliers, one in Korea and one in the United
States. Third parties in the Far East and the United States manufacture
accessories such as canisters, universal lids and bottle stoppers. The Company
has various patents due to expire in the years 2005 to 2018, making the Company
subject to risks associated with competition from other companies and products.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
CASH AND CASH EQUIVALENTS
The Company invests excess cash in investments with original maturities of
less than three months. The investments consist of time deposits and money
market funds and are stated at cost, which approximates market value. The
Company considers such investments to be cash equivalents for purposes of the
financial statements.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of reserves for doubtful accounts and
returns and discounts of $2.9 million and $2.7 million as of December 31, 2001
and 2000, respectively. Amounts due from four customers accounted for 66% of
the Company's receivables as of December 31, 2001.
INVENTORIES
Inventories are stated at the lower of average cost (which approximates
first-in first-out cost) or market. Inventories consist of the following:
In thousands 2001 2000
- ------------ ---- ----
Appliance and system kits .......... $11,144 $12,380
Supplies and accessories ........... 11,344 11,026
------- -------
Subtotal ........................... 22,488 23,406
Inventory reserve .................. (399) (673)
------- -------
Net inventory ...................... $22,089 $22,733
======= =======
PREPAID INVENTORY
The Company has agreements with certain suppliers to pay deposits in
advance of shipment for purchase orders. These deposits range from 20 to 100
percent of purchases that are expected to be received within a timeframe that
ranges from a week to a month. As of December 31, 2001, the Company has prepaid
for $2.4 million of inventory.
PREPAID MEDIA AND OTHER EXPENSES
Direct advertising costs (primarily media expenses) related to infomercial
sales are recorded as prepaid assets when paid in advance. The expense is
recognized at the time that the corresponding infomercial revenues are booked,
which is normally within a week after the costs are incurred. The amount of
prepaid media was $0.6 million and $0.8 million as of December 31, 2001 and
2000, respectively. Total media expenses incurred amounted to $20.9 million,
$18.2 million and $11.9 million for the years ended December 31, 2001, 2000 and
1999, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from two to five years. Molds and tooling owned by the Company and used by
third party manufacturers are amortized on a straight-line basis over a
three-year period. Leasehold improvements are amortized over the lesser of five
years or the life of the lease. Computer equipment is depreciated over two
years.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Property and equipment consists of the following:
In thousands 2001 2000
- ------------ ---- ----
Computer equipment ...................... $ 1,711 $ 1,415
Equipment and furniture ................. 1,724 897
Leasehold improvements .................. 211 129
Molds and tooling ....................... 3,022 2,351
-------- --------
Total ................................... 6,668 4,792
Less: accumulated depreciation .......... (3,401) (2,185)
-------- --------
Net property and equipment .............. $ 3,267 $ 2,607
======== ========
INTELLECTUAL PROPERTY
Intellectual property was recorded when the Company was reorganized in
1994 and relates to the business of developing, manufacturing, producing,
distributing and selling vacuum products and consists of patents, plans,
prototypes, and trademarks. Amortization is computed using the straight-line
method over the estimated useful life of the asset (ten years). Intellectual
property consists of the following:
In thousands 2001 2000
- ------------ ---- ----
Intellectual property ............. $ 2,000 $ 2,000
Accumulated amortization .......... (1,400) (1,200)
-------- --------
Net ............................... $ 600 $ 800
======== ========
The realization of these assets is dependent upon continued successful
operations of the Company. The Company periodically reviews the realizability
of its intangible assets.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board (APB) No.
25, "Accounting for Stock Issued to Employees", and related interpretations to
account for employee stock options and restricted stock. Under APB 25, when the
market price of the underlying stock on the date of grant is greater than the
exercise price of employee stock options, stock compensation expense is
recorded as the difference between the market price of the underlying stock and
the exercise price. The Company has adopted the disclosure only provision of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation".
CUSTOMER WARRANTIES
The Company has warranties associated with its appliances. The standard
warranty period is one year. The Company has recorded a reserve for these
warranties.
ACCRUED RETAIL ALLOWANCES
The Company has agreements with customers to reimburse them for
advertising costs. The Company also provides volume incentive rebates to
certain customers. Included in accrued liabilities are reserves for expected
advertising costs and volume incentive rebates totaling $1.4 million and $0.9
million as of December 31, 2001 and 2000, respectively.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
REVENUE RECOGNITION
Revenues from sales are recognized upon shipment. Revenues for sales made
on consignment are recognized when the products are sold by the third party
distributor to an end-user. Approximately $176.8 million, $126.6 million, and
$77.3 million, or 96% for each year of the Company's revenues were recognized
from sales in the United States for the years 2001, 2000 and 1999,
respectively. Direct infomercial sales amounted to 22%, 33% and 48% of total
sales in 2001, 2000 and 1999, respectively. Sales to the three largest retail
customers accounted for 39%, 36% and 26% of consolidated revenues in 2001, 2000
and 1999, respectively. Reserves are established for anticipated returns and
discounts based on past experience.
SHIPPING AND HANDLING FEES AND COSTS
Amounts billed to a customer for shipping and handling are classified as
revenue. Costs incurred by the Company for shipping and handling are classified
in cost of goods sold.
VOLUME INCENTIVE REBATE COSTS
Costs related to volume incentive rebates are recorded as a reduction of
revenue at the time the sale is recorded.
FREE PRODUCT COSTS
Costs associated with free products (gifts with purchase) shipped to
certain customers are included in sales and marketing expenses. The Company
does not record revenue related to these items.
INCOME TAXES
The Company follows SFAS No. 109 "Accounting for Income Taxes". SFAS No.
109 requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between carrying
amounts and the tax bases of assets and liabilities. A valuation allowance is
provided against deferred tax assets that are not likely to be realizable.
OTHER (EXPENSE) INCOME
Other (expense) income consists of the following:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
(Payments for) proceeds from legal settlement .......... ($ 266) $ 140 $ 300
Foreign exchange loss .................................. (129) (50) 11
Interest income ........................................ 26 193 60
Interest expense ....................................... (370) (106) (17)
Rental income .......................................... -- 7 68
Miscellaneous .......................................... 39 43 7
----- ------ -----
Net (expense) income ................................... ($ 700) $ 227 $ 429
===== ====== =====
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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 those estimates.
RECLASSIFICATIONS
Certain 2000 and 1999 balances have been reclassified to conform to the
2001 financial statement presentation.
3. INCOME TAXES:
The Company files tax returns in Hong Kong, Canada, Cyprus and Hungary
based on the earnings of Tilia International, Tilia Canada, Inc., Tilia Cyprus,
and Tilia Hungary, respectively, and in the United States for federal and state
purposes. Taxable income in Hungary is the result of an intercompany royalty of
$11.0 million, $7.9 million and $4.8 million paid to Tilia Hungary during the
years 2001, 2000 and 1999, respectively, for licensing of marketing and
manufacturing intangibles. This revenue is offset by the amortization of
intangible assets held by Tilia Hungary, which for tax purposes have a basis of
$34.5 million and are being amortized over eight years. Additionally, there is
no tax liability in either Hong Kong or Cyprus due to tax losses in these
jurisdictions.
The provision for income taxes consists of the following:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
Federal:
Current ........................... $7,098 $ 7,445 $4,697
Deferred .......................... (872) (1,626) (900)
------ -------- ------
Subtotal .......................... 6,226 5,819 3,797
------ -------- ------
State:
Current ........................... 2,005 2,135 1,575
Deferred .......................... (228) (568) (373)
------ -------- ------
Subtotal .......................... 1,777 1,567 1,202
------ -------- ------
International ...................... 510 -- --
------ -------- ------
Provision for income taxes ......... $8,513 $ 7,386 $4,999
====== ======== ======
The federal statutory rate is reconciled to the effective rate as follows:
2001 2000 1999
---- ---- ----
Income tax provision at federal statutory rate .......... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit ................................................ 3.7 4.1 4.2
Utilization of net operating losses generated
subsequent to reorganization ........................... -- -- (3.5)
Foreign taxes at rates other than U.S. .................. (10.8) (10.4) (7.3)
Reversal of valuation allowance on deferred tax
assets created subsequent to reorganization ............ -- -- (1.4)
Other ................................................... (0.7) 1.6 (0.5)
----- ----- ----
Provision for income taxes .............................. 27.2% 30.3% 26.5%
===== ===== ====
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
The components of the net deferred tax asset of the Company as of December
31, 2001 and 2000 were as follows:
In thousands 2001 2000
- ------------ ---- ----
Depreciation and amortization .......... $ 122 $ 7
Inventory reserve ...................... 163 275
Bad debt reserve ....................... 242 562
Warranty reserve ....................... 98 103
Sales returns reserve .................. 921 547
Accrued retail allowance ............... 557 364
Unicap ................................. 902 1,373
Accrued vacation ....................... 85 54
Other accrued liabilities .............. 1,845 1,108
Other .................................. 819 261
------ ------
Deferred tax asset ..................... $5,754 $4,654
====== ======
4. RELATED PARTY TRANSACTIONS:
As of December 31, 2001 and 2000, subscriptions receivable of $237,000 and
$182,668, respectively (included in Shareholders' Equity) are due from officers
of the Company (See Note 10).
5. LONG-TERM NOTE RECEIVABLE:
In May 2001, the Company entered into a loan agreement with one of its bag
suppliers. The Company loaned amounts totaling $0.63 million, the proceeds of
which were used by the supplier to purchase certain machines and equipment to
improve the processing of the products. In accordance with the agreement, the
supplier is to repay the loan in increments, based on the volume of orders
received from the Company, and therefore, not specifying an exact date. The
loan is secured by the equipment.
As of December 31, 2001, the Company is carrying the Note Receivable as a
long-term asset on its balance sheet for a net amount of $0.55 million. This
amount represents the original loan amount of $0.63 million net of amortization
of $0.08 million. The Company is reserving the loan receivable on a
straight-line basis over a five-year period (the useful life of the equipment
purchased) due to the uncertainty of the timeframe of the repayment of the
loan. The amortization cost is classified as Cost of Goods Sold in the
consolidated statement of operations.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company has operating lease commitments for facilities and certain
equipment. At December 31, 2001, future minimum annual rental payments under
operating leases are as follows:
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
In thousands
- ----------------
2002 ........... $1,789
2003 ........... 1,748
2004 ........... 1,682
2005 ........... 1,620
2006 ........... 1,487
2007 ........... 114
------
Totals ......... $8,440
======
During 2001, 2000 and 1999, rent expense was $2.4 million, $0.88 million,
and $0.46 million respectively. The Company has committed to vacate certain
buildings in February 2002 and has signed a lease agreement for new office
space prior to the expiration of the lease. The 2001 rent expense includes
$0.31 million of rent due on office buildings in 2002 after the space is
vacated.
EMPLOYMENT CONTRACTS
The President and Chief Executive Officer of Tilia, Inc., who is also a
Director and shareholder of the Company, is employed under a contract with
Tilia, Inc. Severance payments for termination without cause are equal to nine
months of compensation. Under continued employment, the President and CEO is
also entitled to specific mandatory annual bonuses from 2001 through 2004 up to
a total of $110,231.
The Vice President of International Sales and Marketing and the Senior
Vice President of Finance and Administration are also employed under contracts
with Tilia, Inc. Severance payments for termination without cause for each are
equal to six months of compensation. Under continued employment, the Senior
Vice President of Finance and Administration is entitled to specific mandatory
annual bonuses from 2001 through 2004 up to a total of $101,815.
PURCHASE COMMITMENTS
As of December 31, 2001, the Company has committed to purchase $15 million
of inventory from various vendors in the year 2002.
LETTERS OF CREDIT
As of December 31, 2001, the Company had $1.57 million of outstanding
letters of credit issued. Of this amount, $0.57 million represents outstanding
standby letters of credit issued to three vendors to guarantee payment of its
obligations. The Company also had an outstanding commercial letter of credit
issued to two suppliers totaling $1.0 million for inventory purchases. These
amounts outstanding reduced the credit line availability as of December 31,
2001.
LEGAL ACTIONS
From time to time and in the normal course of business, the Company is
involved in legal actions relating to its operations. In management's opinion,
the liabilities, if any, that may ultimately result from such legal actions are
not expected to have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
7. CAPITAL STOCK:
STOCK SPLIT
In October 2000, the Company approved a five-for-one split of the
outstanding common stock. All shares, except for Series A preferred stock, have
been retroactively restated in the financial statements to reflect the stock
split.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK
In 1999, the Company had authorized 20 million shares of Common Stock, of
which 18 million shares were reserved for conversion of Series A and B
Preferred Stock. As discussed below, all Series B Preferred Stock converted to
3.7 million shares of Common Stock in 2000. The remaining 2 million shares of
Common Stock were held for issuance in accordance with the employee and
management stock option and incentive programs (See Note 10). Of these
available shares, 1.6 million option shares had been exercised and converted to
Common Stock as of December 31, 2001 and 2000.
In 2000 the Company increased the authorized shares of common stock to 30
million shares, of which 2.5 million shares of Common Stock were held for
additional issuance of stock options pursuant to the terms of the 2000 Stock
Incentive Plan (See Note 10).
SERIES A PREFERRED STOCK
The Company has 2.86 million shares of Series A Preferred Stock authorized
and outstanding. All shares of Series A Preferred Stock are convertible into
Common Stock on a one to one basis, adjusted for any stock splits including the
stock split in October 2000 mentioned above, and shall be entitled to vote on a
fully converted basis. Series A Preferred Stock has a liquidation preference on
all of the Company's assets other than the intellectual property.
SERIES B PREFERRED STOCK
At the end of 1999, the Company had 3.7 million shares of Series B
Preferred Stock authorized and outstanding. On a quarterly basis, holders of
Series B Preferred Stock were entitled to receive cumulative dividends,
calculated as 3.5% of the Company's consolidated quarterly net revenue. The
aggregate of all dividends to be paid to Series B Preferred Stockholders was
not to exceed $4.95 million (Dividend Limit), which was reached during the
first quarter of 2000. All Series B Preferred Stock (recorded at $1.48 million)
converted to common stock upon full payment of the Dividend Limit in 2000.
Dividends paid during 2000, which were declared in 1999, amounted to $1.4
million. Cumulative dividends paid through the end of 2000 amounted to $4.95
million. No dividends were paid in 2001.
8. RETIREMENT PLAN:
Tilia, Inc. has established a defined contribution retirement plan
qualified under the Internal Revenue Code 401(k) for all full time employees.
Under the 401(k) plan, Tilia, Inc. makes matching contributions equal to 50% of
the contributions of the employee, not exceeding 3% of the employee's earnings.
Contributions to the 401(k) plan by Tilia, Inc. were $191,239, $79,446 and
$24,042 for 2001, 2000 and 1999, respectively. Additionally, Tilia, Inc. made a
payment under the profit sharing provisions of the 401(k) plan, contributing a
minimum of 3% of every qualifying employee's income. This contribution was
$157,403, $84,785 and $0 in 2001, 2000 and 1999, respectively.
9. LINE OF CREDIT:
In 2000, the Company had a loan agreement with United California Bank
(formerly Sanwa Bank) that provided a revolving credit facility not to exceed
$7.0 million. As of December 31, 2000, the outstanding loan amount was $4.3
million. In January 2001, the credit facility was increased from $7.0 million
to $10.0 million. The minimum effective tangible net worth requirement was
increased from $13.75 million to $26.8 million. All other terms and conditions
of the original credit agreement remain unchanged.
F-39
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
In March 2001, the credit facility was further increased to $12 million.
The loan expired in June 2001 but was extended to November 2001.
After the United California Bank loan agreement expired, the Company
obtained an $18 million credit facility with Union Bank of California. The new
loan expiration date is September 30, 2003.
The loan is secured by virtually all of the Company's assets and includes
covenants and restrictions under which the Company is required to comply with
certain financial ratios and submit periodic financial statements and reports.
These include maintaining a minimum effective tangible net worth of $36
million; a minimum quick ratio of 1.00:1.00; and an annual minimum net positive
profit before tax at each quarter and fiscal year end. As of December 31, 2001,
the Company was in compliance with all covenants.
Interest on this line of credit is calculated at a variable rate per annum
of 0.625% below Reference rate, or London InterBank Offering Rate (LIBOR) plus
1.7% per annum. A commitment fee of 0.125% per year is charged quarterly on the
unused portion of the revolving loan. The fee will be waived if average usage
for the quarter exceeds 34% of the line of credit.
The loan agreement includes a Letter of Credit Sub-Facility wherein the
bank agrees to issue commercial and/or standby letters of credit on behalf of
the Company of up to $5 million. At no time, however, shall the total principal
amount of the advances outstanding under the line of credit, together with the
total face amount of all letters of credit outstanding, less any partial draws
paid by the bank, exceed the line of credit. As of December 31, 2001, no loan
amount was outstanding while the outstanding commercial and standby letters of
credit totaled $1.57 million (see Note 6 above).
10. RESTRICTED STOCK AND STOCK OPTION PLANS:
Effective March 2000, the Company issued 0.73 million shares of common
stock to two officers. The shares vest ratably over a four-year period. This
agreement granted the Company the right, exercisable at any time during the
ninety day period following the date that the shareholder fails to be employed
by the Company, for any reason or no reason at all, to repurchase all or any
portion of the shares that are not vested at their fair market value but not
less than $0.25 per share (the purchase price of the shares). In connection
with the issuance of these restricted shares, the Company issued four-year full
recourse promissory notes to the officers for a total of $0.18 million (the
purchase price of the restricted shares). The notes bear interest at 6.21%.
Each holder is required to make principal and interest payments annually on the
anniversary date of the stock issuance.
In January 2001, an officer exercised 0.1 million of stock options in
exchange for a secured promissory note for $0.1 million. The note bears
interest at 5.9%.
The Company had originally reserved 2 million shares of Common Stock for
issuance to employees under an employee stock option plan. In August 1996, the
Company implemented the 1996 Executive Stock Option Plan and the 1996 Employee
Stock Option Plan and awarded 1.87 million Common Stock options under these
plans. In October 2000, the Company reserved an additional 2.5 million shares
of common stock for issuance to employees under a second employee stock option
plan, and implemented the 2000 Stock Option plan, under which an additional 1.5
million common stock options were awarded. The Company does not intend to grant
any additional options under the 1996 plans.
Under the terms of the Option Plans, options granted may be either
nonqualified or incentive stock options and the exercise price is determined by
the Board of Directors of the Company. Options may be exercised in
installments, however no options may be exercised within one year from the
vesting commencement or later than ten years from the date of grant. The
options fully vest in 48 months from the vesting commencement date. Vesting
commencement on options granted in
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
August 1996 was retroactive to the hire date of the employee while those
granted in October 2000 was retroactive to August 1, 1999 for employees hired
before that date and on actual hire dates for employees hired thereafter. The
options granted under the October 2000 plan are subject to repurchase by the
Company at the Company's option, exercisable at any time during the ninety day
period following the date that the shareholder fails to be employed by the
Company for any reason or no reason at all, at the fair market value.
In October 2000, the Company repurchased 0.2 million common shares from an
employee who had exercised his options in 1999 and left the Company in 2000, at
a price of $1 per share or $0.2 million.
Activity under the plan is summarized as follows:
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
------- -----
IN THOUSANDS
Outstanding at January 1, 2000 ........... 29 $ 0.04
Exercised ................................ (3) 0.04
Expired .................................. (10) 0.04
Granted .................................. 1,252 1.00
------ -------
Outstanding December 31, 2000 ............ 1,268 $ 0.99
Exercised ................................ (196) 1.00
Expired .................................. (81) 1.09
Granted .................................. 235 1.64
------ -------
Outstanding at December 31, 2001 ......... 1,226 $ 1.10
Exercisable at December 31, 2001 ......... 576 $ 1.10
====== =======
The following summarizes information about stock options outstanding at
December 31, 2001:
OPTIONS WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING
PRICE DECEMBER 31, 2001 CONTRACTUAL LIFE
----- ----------------- ----------------
IN THOUSANDS
$ .04 13 4.8
1.00 996 8.2
1.56 110 8.9
1.70 68 8.9
1.79 39 9.0
------ ----- ---
$ 1.10 1,226 8.0
====== ===== ===
The Company accounts for these plans in accordance with APB Opinion No. 25
under which compensation cost is recorded as the difference between the fair
value and the exercise price of the shares at the date of grant and is recorded
on a straight-line basis over the vesting period of four years for both the
options and the restricted stock. The Board of Directors estimated the fair
value of the shares at the date of grant and compensation expense of $198,501,
$157,342 and $0 was recognized during 2001, 2000 and 1999, respectively,
related to the issuance of stock options and restricted stock issued below this
price.
TILIA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Had compensation cost for the stock options and restricted stock granted
been based on the estimated fair value at the award dates, as prescribed by
SFAS No. 123, the Company's proforma net income would have been as follows:
In thousands 2001 2000 1999
- ------------ ---- ---- ----
As reported .......... $22,779 $17,033 $13,878
Pro-forma ............ 22,702 16,951 13,878
======= ======= =======
The fair value determination under SFAS 123 was calculated using the
Black-Scholes option pricing model to value all restricted stock and stock
options granted in 2000 and 2001, using the following range of assumptions, and
assuming no dividends:
RISK FREE EXPECTED EXPECTED
INTEREST RATE VOLATILITY LIFE OF OPTIONS
- --------------------- ------------ ----------------
5.75% -- 6.55% 0% 5 years
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