EX-99.1 3 g89626exv99w1.txt EX-99.1 HISTORICAL CONSOLIDATED FINANCIALS 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