EXHIBIT 99.1
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
and Supplemental Schedules
January 31, 2004 and 2003
(With Independent Auditors' Report Thereon)
HAT WORLD CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
Independent Auditors' Report 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
SUPPLEMENTARY INFORMATION:
Independent Auditors' Report on Supplementary Information 17
Consolidated Schedules of Retail Operating Expenses 18
Consolidated Schedules of General and Administrative Expenses 19
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Hat World Corporation:
We have audited the accompanying consolidated balance sheets of Hat World
Corporation and Subsidiaries (the Company) as of January 31, 2004 and 2003, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hat World
Corporation and Subsidiaries as of January 31, 2004 and 2003 and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 1(m) to the consolidated financial statements, effective
February 1, 2002, the Company adopted the provisions of EITF Issue 02-16,
Accounting by a Customer (including a Reseller) for Cash Consideration Received
from a Vendor.
/s/ KPMG LLP
March 5, 2004
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
January 31, 2004 and 2003
(Dollars in thousands)
2004 2003
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 4,579 1,466
Receivables 645 529
Inventories 30,691 27,600
Deferred income taxes 1,287 1,785
Prepaid expenses and other assets 318 427
-------- --------
Total current assets 37,520 31,807
-------- --------
Property and equipment:
Leasehold improvements 19,337 14,424
Furniture and fixtures 10,369 8,154
Office and computer equipment 9,877 7,639
Vehicles 22 22
-------- --------
39,605 30,239
Less accumulated depreciation and amortization (15,790) (10,714)
-------- --------
Property and equipment, net 23,815 19,525
Deferred income taxes -- 229
Deferred financing costs 52 66
Intangible assets 83 --
-------- --------
$ 61,470 51,627
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of notes payable and long-term debt $ 549 1,960
Accounts payable, trade 11,571 11,605
Accrued expenses 5,454 2,652
Deferred revenue 3,863 1,931
Income taxes payable 6,273 2,867
-------- --------
Total current liabilities 27,710 21,015
Accrued straight-line rent 1,450 1,134
Deferred income taxes 240 --
Notes payable and long-term debt, less current maturities 408 8,631
-------- --------
Total liabilities 29,808 30,780
-------- --------
Stockholders' equity:
Series A convertible preferred stock, no par value. Authorized
2,000,000 shares; issued and outstanding 189,724 shares 1,000 1,000
Series B redeemable convertible preferred stock, $0.0001 par value.
Authorized, issued, and outstanding 222,780 shares 10,600 10,600
Common stock, par value $0.01 per share. Authorized 10,000,000
shares; issued and outstanding 3,373,446 shares 34 34
Additional paid-in capital 5,313 5,313
Retained earnings 14,715 3,900
-------- --------
31,662 20,847
$ 61,470 51,627
======== ========
See accompanying notes to consolidated financial statements.
2
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended January 31, 2004 and 2003
(Dollars in thousands)
2004 2003
--------- ---------
Net sales $ 199,419 156,641
Cost of sales 92,738 75,432
Selling and administrative 87,734 72,414
Acquisition-related integration costs -- 266
--------- ---------
Income from operations before interest 18,947 8,529
Other income (expense):
Interest income 1 3
Interest expense (1,269) (1,569)
--------- ---------
Income before income taxes and cumulative
effect of accounting change 17,679 6,963
Income tax expense (6,865) (3,026)
--------- ---------
Income before cumulative effect of accounting
change 10,814 3,937
Cumulative effect of change in accounting principle, net of
taxes of $207 (note 1(m)) -- (310)
--------- ---------
Net income $ 10,814 3,627
========= =========
See accompanying notes to consolidated financial statements.
3
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended January 31, 2004 and 2003
(Dollars in thousands)
COMMON STOCK ADDITIONAL
------------------------- PREFERRED PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS TOTAL
--------- --------- --------- ---------- -------- ------
Balance at January 31, 2002 3,173,446 $ 32 11,600 4,237 274 16,143
Exercised warrants 200,000 2 -- 1,076 -- 1,078
Net income -- -- -- -- 3,626 3,626
--------- --------- ------ ----- ------ ------
Balance at January 31, 2003 3,373,446 34 11,600 5,313 3,900 20,847
Net income -- -- -- -- 10,815 10,815
--------- --------- ------ ----- ------ ------
Balance at January 31, 2004 3,373,446 $ 34 11,600 5,313 14,715 31,662
========= ========= ====== ===== ====== ======
See accompanying notes to consolidated financial statements.
4
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended January 31, 2004 and 2003
(Dollars in thousands)
2004 2003
-------- ------
Cash flows from operating activities:
Net income $ 10,814 3,626
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 5,300 3,927
Other amortization 67 152
Cumulative effect of change in accounting principle, net of tax -- 310
Deferred income taxes 967 (625)
Loss on sale of property and equipment 223 123
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Receivables (116) 1,812
Inventories (2,941) (1,378)
Prepaid expenses and other assets 109 (17)
Accounts payable, trade (34) (1,636)
Accrued expenses 2,802 181
Deferred revenue 1,932 865
Accrued straight-line rent 316 470
Income taxes payable 3,406 2,174
-------- ------
Net cash provided by operating activities 22,845 9,984
-------- ------
Cash flows from investing activities:
Property and equipment purchases (9,398) (4,476)
Proceeds from sale of property and equipment 30 55
Acquisitions, net of cash acquired (695) (774)
-------- ------
Net cash used in investing activities (10,063) (5,195)
-------- ------
Cash flows from financing activities:
Payment of loan fees (25) (20)
Net repayments on line of credit (7,674) (1,901)
Proceeds from issuance of notes payable -- 446
Principal payments on debt, including capital lease obligations (1,970) (4,563)
Proceeds from warrants exercised -- 1,079
-------- ------
Net cash used in financing activities (9,669) (4,959)
-------- ------
Net change in cash and cash equivalents 3,113 (170)
Cash and cash equivalents at beginning of year 1,466 1,636
-------- ------
Cash and cash equivalents at end of year $ 4,579 1,466
======== ======
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest $ 670 1,152
Income taxes 2,491 1,328
Supplemental schedule of noncash investing and financing activities:
Note payable issued for acquisition $ -- 388
Capital lease obligations incurred for equipment -- 1,642
See accompanying notes to consolidated financial statements.
5
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
(1) PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPAL BUSINESS ACTIVITY
Hat World Corporation through its wholly owned subsidiaries, Hat
World, Inc. and HATWORLD.COM, Inc., operates specialty retail stores
and an e-commerce web site, primarily to sell licensed and branded
headwear and apparel. The first store was opened November 3, 1995
and at January 31, 2004, 481 stores were operating in forty-four
states. Hat World, Inc. stores operate under the following names:
Hat World, Lids, Hat Zone, and Cap Factory.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Hat
World Corporation and its wholly owned subsidiaries, Hat World, Inc.
and HATWORLD.COM, Inc. (collectively the Company). All significant
intercompany balances and transactions have been eliminated in
consolidation.
(c) USE OF ESTIMATES
The preparation of consolidated 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
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(d) CASH EQUIVALENTS
The Company considers all highly liquid instruments with original
maturities of three months or less to be cash equivalents.
(e) TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount and do
not bear interest. The allowance for doubtful accounts is the
Company's best estimate of the amount of probable credit losses in
the Company's existing accounts receivable. The Company determines
the allowance, if any, based on historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. Past
due balances over 90 days and a specified amount are reviewed
individually for collectibility. All other balances are reviewed on
a pooled basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The Company does not
have any off-balance-sheet credit exposure related to its customers.
(f) INVENTORIES
Inventories are valued at the lower of average cost or market.
(g) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment held under
capital leases is stated at the present value of the minimum lease
payments. Depreciation is computed on a straight-line basis over the
(Continued)
6
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
estimated useful lives of the respective assets. Amortization of
equipment under capital leases and leasehold improvements is
computed on a straight-line basis over the shorter of the lease term
or estimated useful life of the asset and amortization is included
in depreciation expense. The useful lives of property and equipment
are as follows:
Furniture and fixtures 5 - 7 years
Office and computer equipment 3 - 5 years
Vehicles 5 years
Leasehold improvements 1 - 11 years
The carrying value of property and equipment is assessed when
factors indicating an impairment are present. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of the asset to future undiscounted cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. If an impairment is present, an impairment loss
is recognized and the assets are reported at recoverable fair value.
No impairment loss was recognized in 2004 or 2003.
Certain costs incurred to develop the Company's e-commerce site and
the costs associated with developing software related to the
services offered to customers of the site are capitalized in
accordance with Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,
and EITF 00-2, Accounting for Web Site Development Costs.
Approximately $19 and $173 was capitalized during the fiscal years
ended January 31, 2004 and 2003, respectively, and is included in
office and computer equipment. These costs will be amortized over
the expected useful life, generally three years.
(h) DEFERRED FINANCING COSTS
Loan origination fees and financing costs are amortized to interest
expense using the straight-line method over the terms of the related
financing.
(i) RENT EXPENSE
Rent expense charged to operations differs from rent paid because of
the effect of free rent periods and scheduled rent increases.
Accrued straight-line rent represents the accumulated difference
between rent payments and rent expense calculated by allocating
total rental payments over the respective lease terms.
(j) INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which these temporary differences
are expected to be recovered or settled. The effect on deferred tax
(Continued)
7
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(k) REVENUE RECOGNITION
The Company records revenue at the point of sale for retail stores
and at the time of shipment for catalog and e-commerce sales. The
Company also sells memberships which entitle purchasers to
additional discounts. The Company defers recognition of membership
fee revenue, net of incremental direct costs associated with the
membership sale, over the term of the membership.
(l) STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying
stock exceeded the exercise price. All options are issued at the
current market price on the date of issuance and, accordingly, no
stock-based employee compensation cost has been recognized for its
stock options in the financial statements.
The per share weighted average fair value of stock options granted
during fiscal 2003 was $.525 on the date of grant using the
Black-Scholes option-pricing model with the following weighted
average assumptions: expected dividend yield of 0%, risk-free
interest rate of 2.23%, and an expected life of 5 years. As
permitted by SFAS 123, no volatility assumption is included in the
calculation of fair value because the Company is privately owned.
There were no stock options granted during fiscal 2004.
Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net earnings
would have been reduced to the pro forma amounts indicated below:
2004 2003
-------- -----
Net income:
As reported $ 10,814 3,626
Total stock-based employee compensation
expense determined under fair value based
method for all awards (119) (409)
-------- -----
Pro forma $ 10,695 3,217
======== =====
(m) CASH CONSIDERATION RECEIVED FROM VENDORS
In fiscal 2003, the Emerging Issues Task Force of the FASB reached a
consensus on Issue 02-16, Accounting by a Customer (including a
Reseller) for Cash Consideration Received from a Vendor. Issue 02-16
provides guidance on the income statement classification and timing
of recognition of cash consideration received from vendors,
including rebates and reimbursements for expenses such as
cooperative advertising. In accordance with Issue 02-16,
reimbursements for cooperative
(Continued)
8
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
advertising expenses are recorded as a reduction of advertising
expense to the extent of the specific, incremental, identifiable
costs incurred to promote the vendor's products. Any amounts
received in excess of costs reimbursed are considered a reduction in
the cost of the related inventory. The Company adopted Issue 02-16
effective February 1, 2002, and has recorded a cumulative effect
adjustment of $310, net of tax of $207. The cumulative effect
adjustment results from vendor consideration initially recognized in
fiscal 2002 that is recorded as a reduction of inventory costs under
Issue 02-16. The effect of the change in fiscal 2003 was to decrease
net income before cumulative effect of accounting change by $43.
(n) ADVERTISING
Advertising costs are expensed as incurred. These costs are net of
cooperative advertising reimbursements. The Company incurred $86 and
$48 of net advertising costs in 2004 and 2003, respectively.
(o) RECLASSIFICATIONS
Certain amounts in the 2003 consolidated financial statements have
been reclassified to conform with the 2004 presentation.
(2) ACQUISITIONS
In February 2003, Hat World acquired substantially all the assets of Cap
Factory including 2 stores. The purchase price was $275. The acquisition
was accounted for as a purchase and the entire cost was allocated to the
net assets acquired. The acquired operations are included in the
Consolidated Statement of Operations commencing on February 13, 2003.
In March 2003, Hat World acquired the Hat Zone franchise business (9
stores) and purchased 2 stores previously operated as Hat Zone franchises.
The purchase price for the Hat Zone franchise business was $100. The
acquisition was accounted for as a purchase and the entire cost was
allocated to intangible assets. The purchase price for the 2 Hat Zone
franchisee stores was $320, net of cash acquired, and the entire cost was
allocated to the net assets acquired. Both acquired operations are
included in the Consolidated Statement of Operations commencing on April
1, 2003.
In November 2002, the Company acquired substantially all of the assets of
Hat Zone Corporation, a specialty retail store selling primarily
baseball-style caps with stores primarily in the Midwestern United States.
The Hat Zone franchise stores were not purchased at that time. The total
purchase price was $774 of cash and $1,047 of liabilities assumed.
Additional payments were made in fiscal 2004 related to contingencies in
the purchase agreement totaling $100. The acquisition was accounted for as
a purchase and the entire cost was allocated to the net assets acquired.
The acquired operations are included in the Consolidated Statement of
Operations commencing on November 15, 2002.
(Continued)
9
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
(3) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of:
2004 2003
------- ------
Variable rate line of credit with a bank of $25,000 at January 31, 2004 and $20
million at January 31, 2003, due April 30, 2006, interest at prime rate
(4.00% at January 31,
2004 and 4.25% at January 31, 2003) $ -- 7,674
Subordinated loan with a venture capital firm, which is a major
shareholder of the Company. Principal payments of
$500,000 due July of 2003 plus interest at 12%, net of
unamortized discount of $10,342 at January 2003 -- 490
Subordinated loan with a venture capital firm, which is a major
shareholder of the Company, due July 2003. Varying
principal payments and quarterly interest payments at 6.00%
above prime rate (10.25% at January 31, 2003) -- 750
Various notes payable -- 58
Capital lease obligations, at varying rates of imputed interest
from 7% to 12.9% secured by property and equipment 957 1,619
------- ------
957 10,591
Less current maturities 549 1,960
------- ------
$ 408 8,631
======= ======
Substantially all assets of the Company are pledged as collateral for the
loans with the venture capital firm and bank. In addition, the loan
agreement with the bank contains restrictive covenants requiring minimum
levels of net worth, interest coverage, and limiting additional
indebtedness and distributions.
Notes payable and long-term debt maturities are as follows:
AMOUNT
------------
Years ending January 31:
2005 $ 549
2006 408
------------
$ 957
============
(Continued)
10
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
(4) ACCRUED EXPENSES
Accrued expenses include the following at January 31, 2004 and 2003:
2004 2003
------ -----
Compensation, related withholdings and benefits $3,812 1,305
Sales taxes 599 630
Gift certificates 891 693
Other 152 24
------ -----
$5,454 2,652
====== =====
(5) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) retirement plan which covers all employees who
meet eligibility requirements. Employees may defer a maximum of 15% of
their salary. The Company will match 50% of the first 5% of the employee's
elective deferral. The Company may also make additional contributions to
the plan at the discretion of the board of directors. The Company's
contributions for 2004 and 2003 were $86 and $82, respectively.
(6) INCOME TAXES
Total income tax expense (benefit) for the years ended January 31, 2004
and 2003 was allocated as follows:
2004 2003
------ -----
Income tax before cumulative effect of accounting change $6,865 3,026
Cumulative effect of accounting change -- (207)
------ -----
$6,865 2,819
====== =====
(Continued)
11
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
Income tax expense (benefit) for the years ended January 31, 2004 and 2003
follows:
2004 2003
------ -----
Federal:
Current $4,417 3,014
Deferred 845 (547)
------ -----
5,262 2,467
------ -----
State:
Current 1,481 637
Deferred 122 (78)
------ -----
1,603 559
------ -----
$6,865 3,026
====== =====
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate of 34% to income before
income taxes and cumulative effect of accounting change for the years
ended January 31, 2004 and 2003 due to the following:
2004 2003
------- -----
Computed "expected" tax expense $ 6,010 2,367
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit 1,058 369
Other (203) 290
------- -----
$ 6,865 3,026
======= =====
(Continued)
12
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
The components of deferred tax assets (liabilities) as of January 31, 2004
and 2003 follow:
2004 2003
------- ------
Deferred tax assets attributable to:
Inventory reserves $ -- 281
Deferred revenue 1,530 765
Accrued straight-line rent 574 449
Net operating loss and credit carryforwards -- 739
Other 40 119
------- ------
Deferred tax assets 2,144 2,353
------- ------
Deferred tax liabilities attributable to:
Inventory reserves 283 --
Property and equipment depreciation 814 339
------- ------
Deferred tax liabilities 1,097 339
------- ------
Net deferred tax assets 1,047 2,014
Less current portion (1,287) (1,785)
------- ------
Non current portion $ (240) 229
======= ======
(7) LEASE COMMITMENTS
The Company leases all of its store locations and a warehouse under
noncancelable lease agreements with terms ranging from less than one year
to eleven years. In most cases, management expects that in the normal
course of business, leases will be renewed or replaced by other leases.
Generally, under these leases, the Company is obligated for certain
minimum rentals, real estate taxes, utilities, insurance and contingent
rentals based upon sales volume. Rent expense under these leases was
$26,845 and $22,914 for the years ended January 31, 2004 and 2003,
respectively. Included in the total rent expense for the years ended
January 31, 2004 and 2003 was $557 and $171, respectively, representing
contingent rent based upon sales volume. The Company also leases equipment
under long-term capital lease agreements that expire in various years
through November 2005. The Company is required to pay executory costs such
as insurance and maintenance.
2004 2003
------- -----
Capitalized leased assets consist of:
Equipment $ 2,170 2,856
Less accumulated depreciation (642) (436)
------- -----
$ 1,528 2,420
======= =====
(Continued)
13
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
Minimum lease payments for capital and operating leases in future years
are as follows:
CAPITAL OPERATING
LEASES LEASES
---------------- ------------
Years ending January 31:
2005 $ 603 19,016
2006 422 16,944
2007 -- 14,516
2008 -- 11,540
2009 -- 8,615
Thereafter -- 15,984
---------------- ------------
Total minimum lease payments 1,025 $ 86,615
============
Less interest (67)
----------------
Present value of minimum lease
payments (note 3) $ 958
================
???
(8) STOCK OPTIONS AND WARRANTS
EMPLOYEE-BASED STOCK OPTIONS
During 2001, the Company amended the 1998 stock option plan to fix the
number of stock options that may be granted to not more than 18,000 shares
so that no new options may be granted from this plan. In addition, the
Board approved the adoption of the 2001 Stock Option Plan (Plan), which
provides for the issuance of both incentive and nonqualified stock options
to employees, officer, directors, and consultants of the Company. The 2001
plan provides for the issuance of up to 862,000 shares of common stock,
with all options vesting and becoming fully exercisable based on the terms
included in the individual participant's option agreement. The maximum
number of shares which may be issued in any one year is 400,000 to any one
optionee.
The per share fair value of the options granted during 2003 was
approximately $1.865 on the dates of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
expected dividend yield of 0%; risk-free interest rate of 3.65%; expected
lives of 10 years; and volatility of 44.95%.
(Continued)
14
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
A summary of the status of the Company's stock options and warrants as of
January 31, 2004 and 2003, and changes during the years then ended is
presented below:
2004 2003
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
Outstanding at beginning of year 1,342,780 $ 5.22 740,569 $ 5.70
Granted -- -- 846,211 5.00
Exercised -- -- (200,000) 5.39
Forfeited (3,000) 5.00 (44,000) 8.14
--------- ---------
Outstanding at end of year 1,339,780 5.19 1,342,780 5.19
========= =========
Exercisable at year-end 1,174,843 5.20 890,906 5.22
A summary of the Company's options and warrants outstanding and
exercisable as of January 31, 2004 is as follows:
2004
----------------------------------------------------------------------------------------------------
OUTSTANDING EXERCISABLE
--------------------------------------------------- -----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 1/31/03 LIFE PRICE AT 1/31/03 PRICE
- ------------------------- ----------- ----------- -------- ----------- --------
Fixed options/ warrants:
$ 4.00 - 7.00 1,299,780 7.43 $ 5.04 1,134,843 $ 5.03
7.00 - 10.00 40,000 7.40 10.00 40,000 10.00
--------- -------- --------- --------
1,339,780 $ 5.19 1,174,843 $ 5.20
========= ======== ========= ========
(9) STOCKHOLDERS' EQUITY
(a) CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock is convertible to shares of common stock at
a rate of one-to-one, has a liquidation preference equal to its
original issue price and has no redemption features.
(Continued)
15
HAT WORLD CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2004 and 2003
(Dollars in thousands)
(b) REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 12, 2001, Hat World Corporation issued 2,227,800 shares of
Series B Redeemable Convertible Preferred Stock (Series B preferred
stock) at $4.76 per share. The holders of the preferred stock have
special voting powers and preferences. Specifically, the Series B
Preferred Stock has a liquidation preference of $4.76 per share
increased at a rate of 13.5%, compounded annually commencing on the
closing date.
The Series B Preferred Stock may be redeemed at the option of the
holder in whole or in part at any time after June 12, 2006 at the
greater of $4.76 per share in cash, plus 13.5% compounded annually,
or the fair market value of the Common Stock, as determined by an
appraiser selected by the Board. The Series B Preferred Stock is
convertible at the option of the holder into shares of the Company's
Common Stock on a one-for-one basis at any time prior to redemption,
subject to certain anti-dilution adjustments and EBITDA adjustment
provisions. Holders of the Series B Preferred Stock vote together as
a single class and shall vote as a single class with all other
classes and series of capital stock of the Company and not as a
separate class.
(10) RELATED PARTY TRANSACTIONS
The Company had two subordinated loans outstanding at January 31, 2003
with a major shareholder as discussed in note 3. The Company also incurs a
monthly monitoring fee in connection with the Series B preferred stock
which totaled $175 for each of the years ended January 31, 2004 and 2003.
Amounts payable to this related party totaled $31 and $29 at January 31,
2004 and 2003, respectively.
(11) SUBSEQUENT EVENT
On February 5, 2004, the Company entered into an agreement to be acquired
by Genesco Inc. ("Genesco"), a leading retailer and marketer of branded
footwear.
Under the terms of the agreement, the total sales price will be $165
million, subject to adjustment for changes in net debt and working capital
and for certain tax benefits. The transaction has been approved by the
boards of directors of Genesco and the Company, and closing, which is
subject to customary conditions including regulatory approvals, is
expected in the first quarter of fiscal 2005.
16
SUPPLEMENTARY INFORMATION
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION
The Stockholders and Board of Directors
Hat World Corporation:
We have audited and reported separately herein on the consolidated financial
statements of Hat World Corporation as of and for the years ended January 31,
2004 and 2003.
Our audits for the years ended January 31, 2004 and 2003 were made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The supplementary information included in schedules 1 and 2
for the years ended January 31, 2004 and 2003, is presented for purposes of
additional analysis and is not a required part of the basic consolidated
financial statements. Such information has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic consolidated financial statements taken as a whole.
March 5, 2004
17
SCHEDULE 1
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Schedules of Retail Operating Expenses
Years ended January 31, 2004 and 2003
2004 2003
--------------------- ----------
Compensation $ 29,394,521 24,318,879
Store rent 26,085,061 22,435,219
Depreciation and amortization 4,381,087 3,188,821
Payroll taxes 2,615,264 2,165,793
Utilities 1,949,302 1,848,121
Bank and credit card service fees 2,031,205 1,624,425
Advertising 86,418 48,633
Office supplies 953,077 839,146
Business insurance 225,616 168,675
Telephone 523,988 545,081
Employee benefits 1,159,234 593,061
Payroll processing fees 127,663 122,604
Maintenance and repairs 614,721 531,205
Bad debts 142,312 110,037
Miscellaneous 150,059 140,143
Straight-line rent 316,459 470,119
Special events 219,426 --
--------------------- ----------
$ 70,975,413 59,149,962
===================== ==========
See accompanying independent auditors' report on supplementary information.
18
SCHEDULE 2
HAT WORLD CORPORATION AND SUBSIDIARIES
Consolidated Schedules of General and Administrative Expenses
Years ended January 31, 2004 and 2003
2004 2003
--------------------- ----------
Compensation $ 8,894,421 7,447,676
Store opening 127,977 35,089
Travel and entertainment 1,164,828 996,083
Depreciation and amortization 774,591 680,765
Payroll taxes 640,257 564,180
Office supplies 213,578 260,756
Telephone 298,961 313,369
Rent 64,550 49,984
Employment related expenses 107,846 108,995
Professional fees 609,021 605,114
Promotions and contests 47,732 44,501
Meetings 107,940 90,214
Bank and credit card service fees 64,906 70,601
Licenses and taxes 536,892 474,529
Maintenance and repairs 26,758 34,177
Dues and subscriptions 26,642 31,645
Utilities 16,755 31,308
Insurance 51,012 39,462
Franchise fees 18,549 --
--------------------- ----------
$ 13,793,216 11,878,448
===================== ==========
See accompanying independent auditors' report on supplementary information.
19