-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SUEJXo5hzwsxse+arjI0RoLIx1kT0eS9t1vIYSQsmaiKRQ22or8XoRZlUIu1EbYF Ez2cEivVJkndwPqAa79TXg== 0000950123-98-004419.txt : 19980504 0000950123-98-004419.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950123-98-004419 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980501 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UTOPIA MARKETING INC CENTRAL INDEX KEY: 0000880241 STANDARD INDUSTRIAL CLASSIFICATION: FOOTWEAR, (NO RUBBER) [3140] IRS NUMBER: 943060101 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-19616 FILM NUMBER: 98608697 BUSINESS ADDRESS: STREET 1: 212 MOUNT HOLLY ROAD CITY: KATONAH STATE: NY ZIP: 10536 BUSINESS PHONE: 9142322244 MAIL ADDRESS: STREET 1: 212 MOUNT HOLLY ROAD CITY: KATONAH STATE: NY ZIP: 10536 10-K405/A 1 AMENDMENT TO FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ FORM 10-K/A ------------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-19616 UTOPIA MARKETING, INC. (FORMERLY SAM & LIBBY, INC.) (REGISTRANT) CALIFORNIA 94-3060101 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) P.O. BOX 803 10536 KATONAH, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number: (914) 232-2244 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 Par Value ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the average of the closing sales price of the Common Stock on February 23, 1998, as reported by the National Quotation Bureau, LLC, was approximately $164,000. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 27, 1998, the registrant has 14,216,367 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ 2 PART I ITEM 1. BUSINESS Commencing in May, 1996, when the Company commenced in-depth negotiations with Maxwell shoe Company, Inc. for the sale of Utopia's trademarks, which would result in the termination of its then present business, Utopia's management began to explore new avenues of business for Utopia. The management of Utopia looked into business combination opportunities in the apparel, industrial, manufacturing, financial services and scientific fields. Additionally, in the event that the sale of the trademarks was not successfully concluded, the Company also explored various business combination opportunities in the footwear industry. The Company evaluated internally approximately fifty (50) possible business combinations, all of which were rejected for one or more of the following reasons: (i) management believed that Utopia's assets would not be sufficient to allow the merged entities to succeed without additional substantial dilution to Utopia's shareholders; (ii) Utopia's equity ownership interest would not be significant; (iii) the expected multiple of earnings for the merged entities would have diminished the Utopia's value: and/or (iv) the need for cash required a strategic partner or such heavy debt that the risk of failure of the merged entities appeared to be an unacceptable risk. None of these explorations resulted in any business combination talks being completed. The Company is continuing its search for new ventures. SALE OF TRADEMARK On July 2, 1996, Utopia Marketing, Inc. (formerly Sam & Libby, Inc.) (the "Company") entered into an agreement with Maxwell Shoe Company Inc. (the "Purchaser" or "Maxwell") to sell all worldwide rights to the Company's trademarks, trade names and intellectual property rights free and clear of all liens, mortgages, encumbrances and security interests. The Purchaser did not assume any of the Company's liabilities or obligations. In August 1996, the Company received cash of $5.3 million. The balance of $0.2 million was received in April 1997. On September 11, 1996, the Company changed its name to Utopia Marketing, Inc. The Company is undecided as to the nature of its future operations, however, management is considering various investment alternatives. PRODUCTS Utopia Marketing, Inc. has sold all of its trademarks, etc. and currently has no products under development. Prior to the sale of its trademarks, the Company marketed the following products: SAM & LIBBY WOMEN'S FOOTWEAR. The Company offered more than 100 different styles of women's casual shoes, dress shoes, boots, sandals and espadrilles in a broad range of colorful and creative designs. SAM & LIBBY brand women's footwear sold at retail prices ranging from $15 to $60 per pair. The Company introduced new shoes in each of the four footwear selling seasons-spring, summer, fall and holiday/resort. SAM & LIBBY CHILDREN'S FOOTWEAR. The children's line primarily consisted of infants and girls footwear. The children's line included both adaptations from the women's line and stand alone fashion developed exclusively for the children's line. The line encompassed all aspects of girls and infants footwear from dress to casual. The Company introduced a new line of girls' fashion athletic shoes for Fall 1996 delivery. JUST LIBBY FOOTWEAR. JUST LIBBY was an upscale women's footwear line with higher price points than the SAM & LIBBY line and targeted a more sophisticated fashion-conscious customer. JUST LIBBY brand women's footwear sold at retail prices ranging from $60 to $100 per pair. HANDBAGS. In March 1994, the Company initiated its handbag division. The product line was directed at two different customer bases. The higher priced line was marketed under the JUST LIBBY brand, whereas the lower price points were marketed under the SAM & LIBBY brand. In 1995, the Company discontinued the division. Revenue for 1995 and 1994 was not significant. 3 PRIVATE LABEL PRODUCTS. In connection with its private label business, the Company arranged for the manufacture of women's and children's footwear for selected retailers primarily under the retailer's private label. Under this arrangement, the Company received a fee for providing design expertise, acting as a sourcing agent for the retailer, managing the manufacturing process, inspecting the finished goods and arranging the sale of the finished goods by the manufacturer to the retailer. The retailer paid the manufacturer directly for the products. The private label business provided the Company with several competitive advantages, including the retention of revenues that might otherwise have been lost due to copying, increased manufacturing volume (which reduced manufacturing costs of the Company's other footwear products) and the strengthening of business relationships between the Company and its contract manufacturers. The private label business provided revenue to the Company without the inventory risk, warehousing and other carrying costs involved in the sale of its branded products. APPAREL. In the first quarter of 1993, the Company signed an agreement, effective May 1, 1993, to transfer its apparel division to AMG Apparel Ltd. ("AMG Apparel"), an apparel and licensing company located in Los Angeles. The Company received no royalty revenue in 1994 and a minimal amount of royalty revenue in 1993. During 1993, AMG Apparel stopped paying its royalty obligations. DESIGN AND DEVELOPMENT The Company no longer designs or develops any products. Prior to the sale of its trademarks, the design process typically began about nine months before the start of a season. The major influences upon the process included the design team's impression of current worldwide lifestyle and clothing trends and shoe fashions, as well as the history of a particular shoe or fashion style in the United States. Other factors included the availability of raw materials, the capabilities of the factories that will manufacture the products and the target retail cost of the product. The design team traveled extensively in Europe to discover and confirm the latest fashion trends and subscribed to various fashion and color information services to keep abreast of trends emerging in the fashion industry. Senior management was actively involved in the analysis of fashion trends and the design process for the Company's products. After the design team arrived at a consensus regarding the fashion themes for the coming season, the group manufactured designs that translated these themes into SAM & LIBBY or JUST LIBBY products. These interpretations included variations in product color, material, structure and decoration. Drawings and prototypes of the products were sent to the Company's foreign manufacturing agents, where samples were created. The Company attempted to minimize the risks relating to changing fashion trends and product acceptance by producing a large number of styles before each selling season, evaluating trade acceptance before volume manufacture, and closely monitoring retail sales trends after retail introduction. MARKETING AND PROMOTION The Company no longer markets or promotes any products. Prior to the sale of its trademarks, the Company advertised, marketed and promoted the SAM & LIBBY brand name through a variety of means, including nationwide print media, product packaging, in-store visual support and other point-of-sale materials. The Company's in-house advertising department oversaw the conception, development and implementation of most aspects of the packaging, advertising, marketing and sales promotion for the Company's products. Senior management was directly involved in shaping the Company's image and its advertising and promotional activities. The Company marketed its products in approximately 2,000 retail locations in the United States through a broad network of department and specialty retail stores. Certain of the Company's high volume accounts feature "shop-in-shop" formats in which floor space was dedicated exclusively to SAM & LIBBY products. The Company's ten largest customers represented approximately 50% and 49% of gross sales in 1996 and 1995, respectively. In 1995 Kinney Corporation (a division of Woolworth) accounted for approximately 11% of gross sales. In addition, certain of the Company's former customers are under common ownership. During 1996 and 1995, the department store groups owned by the Federated Department Stores Company 2 4 ("Federated"), as a group, accounted for approximately 9% and 11% of the Company's gross revenues. No single department store unit of either group accounted for more than 6% and 3% of gross sales in 1996 and 1995, respectively. While the Company believes that purchasing decisions were made independently by each department store unit (including stores that are part of the May and Federated groups), in some cases the trend may have been towards more centralized purchasing decisions. During 1993, the Company changed from a sales force primarily composed of Company employees to a sales force primarily composed of independent sales representatives whose compensation was based upon commissions earned. Senior management was actively involved in selling to major accounts. Sales to foreign customers were nominal. The Company opened one outlet store in Vacaville, California in September 1991. This store was located in a factory outlet shopping mall to avoid substantial competition with the Company's major retailing customers and sold factory seconds as well as excess stock merchandise. This store was closed in June 1996. In July 1992, the Company opened one retail footwear store in the Beverly Center mall in Beverly Hills, California. This store enabled the Company to display substantially all of its footwear offerings in one retail location as well as test market new footwear styles. This store was also closed in June 1996. In connection with the closing of the retail stores, the Company incurred certain expenses for the year ended December 31, 1996, representing principally the write-off of property assets no longer being used. MANUFACTURING The Company no longer manufactures any products. From inception to July 2, 1996 (the date the Company sold its trademarks), the Company's footwear products were manufactured to its specifications by independent contractors located in Brazil, Taiwan, the People's Republic of China ("China"), Spain and Italy. In 1996, most of the Company's leather footwear was manufactured in Brazil and most of its canvas and synthetic footwear was manufactured in Taiwan and China. The percentage of footwear products manufactured in each country varies from time to time depending on the particular material emphasized in the Company's product lines from season to season. The 1994 change in the Brazilian currency, which is no longer considered inflationary and has lost some of its competitive pricing, created additional opportunities in the Far East, which in 1996 was the primary source for the Company's footwear. The Company sought to develop long-term relationships with factories that met the Company's requirements for quality, volume and price. In most cases, the Company attempted to have one line within each factory dedicated solely to the manufacture of the Company's products in order to improve productivity on the line and simplify quality control procedures. Sanders-Importacao E Exportacao Ltd. ("Sam & Libby Brazil"), the Company's wholly-owned subsidiary and exclusive agent in Brazil, produced prototypes of new footwear styles, placed orders with Brazilian factories, monitored manufacturing quality on a daily basis, inspected finished goods and coordinated shipment of finished goods to the United States. In the last quarter of 1995, the Company sold the building and closed its Brazilian office operation. Sam & Libby used independent agents in the Far East to perform similar services for the Company. IMPORTS AND IMPORT RESTRICTIONS The Company no longer imports any products. In 1996, substantially all of the Company's products were manufactured in Brazil, Taiwan, China, Italy and Hong Kong. Although the Company had no long-term manufacturing agreements with its producers and competed with other companies for production facilities (including companies that are much larger than the Company), management believed that the Company's relationships with its footwear producers were satisfactory and that it had the ability to develop, over time, alternative sources in various countries for the footwear obtained from its current producers. 3 5 The Company's arrangements with its manufacturers and suppliers were subject to the usual risks of doing business abroad, including revaluation of currencies, export duties, import controls and trade barriers, tariffs, quotas, restrictions on the transfer of funds and, in certain parts of the world, political instability. The Company's products were also subject to United States customs duties. United States customs duties at the time the Company ceased importing products were 10% of factory cost on footwear made principally of leather, 6% of factory cost on synthetic footwear and up to 48% of factory cost on canvas and fabric shoes. DISTRIBUTION The Company no longer distributes any products. The Company had a contract (the "RML Agreement") with RML Limited ("RML"), an independent warehouse facility located in Harrisburg, Pennsylvania pursuant to which RML provides the Company with warehouse, distribution, inspection and other services for a fee based upon gross shipping dollars, which is calculated on a declining percentage as various sales plateaus are achieved. The agreement expired by its term in April 1995 but was renewed until February 1997. The renewed agreement expired in February 1997. BACKLOG At the end of 1997, the Company had no unfilled customer orders. EMPLOYEES As of January 3, 1998, the Company had no full-time employees. ITEM 2. PROPERTIES The company will shortly be occupying temporary space in the State of Florida. Presently the Company's mailing address is P.O. Box 803, Katonah, New York 10536. The company terminated the lease on its Corporate office space at 58 West 40th on June 30, 1997. In 1996, the Company cancelled its lease for approximately 1,200 square feet in a showroom in Dallas. The Company forfeited its security deposit in connection with the cancellation of this lease. The Company had two lease agreements for terms not exceeding five years for an outlet store in Vacaville, California (approximately 2,200 square feet) and a full price retail footwear store located in Beverly Hills, California (approximately 1,000 square feet). During 1996 these leaseholds were canceled. Sam & Libby Brazil sold the office building in Novo Hamburgo, Brazil during the fourth quarter of 1995. The Company currently rents, on a month-to-month basis, space at a commercial warehouse facility for the storage of Utopia's business records. ITEM 3. LEGAL PROCEEDINGS An action entitled Paul F. Ostrynski, et al. V. Sam Edelman, et al. Was commenced in or about March 1997 In the U.S. District Court, Southern District of Florida, Miami Division, Case No. 97-0531, alleging that the defendants Sam Edelman, Ralph Braha, Braha Industries Inc. and Utopia Marketing, Inc. failed to pay for goods ordered, and expenses related thereto, demanding money damages of $770,202.78. Each of the defendants moved to dismiss the Complaint and, while such motions were pending, in or about September 1997, a Stipulation of Settlement was signed by the parties, pursuant to which Utopia paid $27,000 and Braha Industries, Inc. paid $15,000 for an aggregate settlement of $42,000 to the plaintiff. On April 27, 1992, a class action lawsuit was filed against the Company and certain of its directors and officers and the managing underwriters of the Company's initial public offering for alleged violations of federal securities laws and state common law. The complaint sought unspecified actual and punitive damages, costs and attorney's fees on behalf of purchasers of the Company's Common Stock during the period from December 4, 1991 through April 24, 1992. Similar follow-on suits, containing virtually identical allegations, were filed by six other plaintiffs. The district court ordered consolidation of all of the complaints into one class action. 4 6 On August 1, 1994, the district court entered final judgment approving the settlement and dismissing the lawsuit. Under the terms of the settlement, the claims against the Company and other defendants were dismissed without any admission or presumption of liability or wrongdoing. A settlement fund consisting of $6.25 million in cash and 595,000 shares of the Company's Common Stock was established. The Company contributed $2.15 million in cash into the fund in March 1994 and the Company's director's and officer's liability insurance carrier contributed $4.1 million into the fund in August 1994. In October 1995 the Company contributed the 595,000 shares of Common Stock into the fund and the escrow agent distributed the shares to the claimants. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 5 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Prior to the sale of its trademarks, the Company's Common Stock was traded on the Nasdaq National Market under the symbol "SAML". On September 11, 1996, the Company changed its name to Utopia Marketing, Inc. Its stock is traded over-the-counter under the symbol "UTPM." The Company's Common Stock has been sporadically trading in the over-the-counter market. The following table sets forth the high and low closing sales prices of the Company's Common Stock for the years ended January 3, 1998 ("1997") and December 28, 1996 ("1996"), as reported by the Nasdaq National Market for the period that the Company's Common Stock was traded on Nasdaq and the high and low sales prices as reported by the National Quotation Bureau, LLC for the period that the Company's Common Stock has been trading in the over-the-counter market (no high and low bid quotations were available to registrant from the aforesaid quotation service).
HIGH LOW ---- --- 1996 First Quarter............................................... 1 5/8 3/4 Second Quarter.............................................. 2 1/16 1/4 Third Quarter............................................... 7/8 1/8 Fourth Quarter.............................................. 5/16 .05 1997 First Quarter............................................... 3/16 .02 Second Quarter.............................................. 1/4 .05 Third Quarter............................................... 1/4 .01 Fourth Quarter.............................................. 1/4 .01
As of February 27, 1998, the Company had 1,075 shareholders of record. The Company has no shares of any other class of capital stock outstanding other than its Common Stock. The Company has not paid any cash dividends on its Common Stock since its inception, other than distributions to Samuel L. Edelman, Louise B. Edelman and Stuart L. Kreisler (the "Principal Shareholders") during the period that the Company was an S Corporation and in connection with the termination of the Company's status as an S Corporation. The Company currently anticipates that any future earnings will be retained for development of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. 6 8 ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below for the years ended January 1, 1994, December 31, 1994, December 30, 1995, December 28, 1996 and January 3, 1998 has been derived from the Company's Consolidated Financial Statements, and should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations. See Notes 1, 12 and 13 of Notes to Consolidated Financial Statements regarding change in fiscal year, discontinued operations and extraordinary gain, respectively.
YEAR ENDED -------------------------------------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 30, DECEMBER 31, JANUARY 1, 1998 1996 1995 1994 1994 ---------- ------------ ------------ ------------ ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net revenue............................ $ 129 $23,637 $38,755 $36,540 $ 33,217 Gross profit........................... 71 2,771 9,269 7,654 3,132 Net loss from continuing Operations.... (786) (2,675) (3,773) (3,789) (16,174) Net loss from discontinued Operations including applicable tax effect...... (648) Extraordinary gain..................... 1,288 ------- ------- ------- ------- -------- Net loss............................... ($ 786) ($1,387) ($3,773) ($3,789) ($16,822) ======= ======= ======= ======= ======== Net loss per share from Continuing operations........................... ($ 0.06) ($ 0.22) ($ 0.35) ($ 0.35) ($ 1.60) Net loss per share from Discontinued operations........................... (0.06) Extraordinary income per share......... 0.11 ------- ------- ------- ------- -------- Net loss per share..................... ($ 0.06) ($ 0.11) ($ 0.35) ($ 0.35) ($ 1.66) ======= ======= ======= ======= ======== Weighted average shares Outstanding.... 13,866 12,136 10,878 10,800 10,163 ======= ======= ======= ======= ======== BALANCE SHEET DATA (AT PERIOD END): Working capital........................ $ 2,373 $ 3,162 $ 989 $ 3,391 $ 6,558 Total assets........................... 2,428 3,344 9,475 7,849 14,836 Long-term obligations.................. 0 7 91 99 195 Shareholders' equity................... 2,373 3,180 1,746 5,019 8,454 Shareholders' equity per share......... 0.17 0.23 0.16 0.46 0.78
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion of the Company's consolidated results of operations for the years ended January 3, 1998, December 28, 1996, and December 30, 1995 includes the results of operations of Sam & Libby Brazil, Sam & Libby Hong Kong and Sam & Libby Outlets, Inc. ("Sam & Libby Outlets"), wholly-owned subsidiaries of the Company. Sale of Trademark On July 2, 1996, the Company entered into an agreement (the "Agreement") with Maxwell Shoe Company Inc. (the "Purchaser" or "Maxwell") to sell all worldwide rights to the Company's trademarks, trade names and intellectual property rights free and clear of all liens, mortgages, encumbrances and security interests for $5.5 million in cash. In August 1996, the Company received $5.3 million. The balance of $.2 million was received in April 1997. The Purchaser did not assume any of the Company's liabilities or obligations. 7 9 RESULTS OF OPERATIONS Net Revenue The Company's net revenue for 1997 consisted primarily of selling off the remaining inventory. Due to this low sales volume net revenue decreased by approximately 99% from 1996. (See the Company's December 28, 1996 financial statements for a discussion of the sale of all the Company's trademarks to Maxwell Shoe Company, Inc. in July 1996). Net revenue for 1996 decreased approximately 36% from 1995. Under the terms of the Agreement, the Company was precluded from designing, selling or producing any products using the name SAM & LIBBY and associated trademarks, trade names, etc. other than products in production or in inventory as of July 2, 1996 (date of agreement). In attempting to collect the amounts due to the Company, the Company was forced to grant greater than normal markdowns. Also, due to the time pressures imposed by the Agreement, the Company sold the remaining inventory at close-out prices. Net revenue for 1995 increased approximately 6% from 1994. Before returns and allowances, sales actually were higher by approximately 9% but significant returns and allowances especially in the fourth quarter of 1995 negatively impacted the net sales line for 1995. One of the reasons for the excessive returns in the fourth quarter of 1995 was related to quality problems for certain styles of Fall 1995 shoes. In an attempt to remedy the traditional low sales volume in the 1995 fourth quarter, the Company planned a fourth quarter business based on a suede sneaker program which would be a natural evolution of its strong canvas sneaker program during the preceding nine months. The very soft retail market for back-to-school reduced the department stores' ability to buy fourth quarter merchandise which resulted in a poor selling fourth quarter and a higher than anticipated inventory level (see Gross Profit discussion). Further adversely impacting net revenue were additional markdowns in the fourth quarter given to customers because of the weak sales at retail during for the fall selling season. Net revenue for 1994 increased approximately 10.0% from 1993. Sales of branded footwear increased 14.7% while private label commission revenue decreased 82.6%. The increase in sales of branded footwear is principally attributable to increased sales of units closer to the list price of SAM & LIBBY brand women's and children's footwear due to better end customer acceptance of the Company's products and decreased returns and customer allowances. The reduction in private label revenue was a result of management's decision to focus its energies towards the branded label business. Despite the improved performance of 1994 compared to 1993, fourth quarter 1994 revenue was negatively affected by the Company's decision to not design and produce a holiday/resort line of shoes, additional customer allowances given in the fourth quarter of 1994 as well as the decision by the Company to curtail buying inventory without significant customer orders. In addition, the loss of fourth quarter revenue reflected the continued weak economic and retailing environment and competitive pressures. Gross Profit Gross profit as a percentage of net revenue ("Profit Margin") declined to 11.7% in 1996 from 23.9% in 1995. The same causes that impacted net revenue affected the gross profit, namely, higher than normal markdown allowances and disposal of inventory at close-out prices due to the sale of the SAM & LIBBY trademarks (see Net Revenue discussion). The Profit Margin improved to 23.9% in 1995 from 20.9% in 1994. Profit margin before customer allowances and markdowns improved approximately 6% from 1994 since the Company was able to sell more of its merchandise closer to the list price. Negatively impacting the Profit Margin were additional allowances given to customers as well as higher inventory markdowns necessitated by the excessive level of Fall 1995 8 10 inventory as stated above. The effect of customer allowances as well as inventory markdown was especially affected in the fourth quarter of 1995 which resulted in a negative gross margin for the reasons stated. The Profit Margin improved to 20.9% in 1994 from 9.4% in 1993. The increase is principally a result of the factors mentioned above (reduced allowances and a greater proportion of units sold closer to the list price) combined with lower 1994 inventory reserves which are a function of a reduced level of prior season inventory. In addition, during the third quarter of 1994, the Company recovered approximately $500,000 of chargebacks (net of expenses) fully reserved in prior periods. The negative profit margin in the fourth quarter of 1994 is a function of the items mentioned above. The decline in private label revenue negatively affected the Profit Margin in 1994 when compared to 1993. Selling, General and Administrative Expenses Selling general and administrative expenses ("SG&A") as a percentage of net revenues increased from 37.1% in 1996 to approximately 750% in 1997 due to the minimal sales volume and the continuing contractual obligations and other fixed expenses. These contractual obligations had substantially been completed by the third quarter of 1997. Selling general and administrative expenses ("SG&A") increased as a percentage of net revenues from 29.8% in 1995 to 37.1% in 1996. The percent increase was the result of the substantial decrease in net revenue discussed above. The expenses decreased from $11,539,000 in 1995 to $8,773,000 in 1996 and decreased again in 1997 to $966,000. The decrease in expenses was the result of the Company's ending of its design, production and sales efforts, all as a result of the sales of its trademark, partially offset by certain termination expenses. SG&A as a percentage of net revenue slightly increased from $10,978,000 (30.0% of net revenues) in 1994 to $11,539,000 (29.8% of net revenues) in 1995. The increase is principally a result of additional advertising expenses in 1995. SG&A as a percentage of net revenue decreased from $13,946,000 (42.0% of net revenues) in 1993 to $10,978,000 (30.0% of net revenues) in 1994. The reduction in both percentage and absolute dollars is principally due to reductions in advertising, staffing, commissions and overall administrative expense control. Composition and Conversion Agreement At June 26, 1996, the Company had approximately $4.9 million of accounts payable with two of its major vendors. On that date, the Company entered into an agreement with those vendors whereby the vendors agreed to forgive approximately $1.3 million of indebtedness and convert approximately $2.0 million of indebtedness to 2.6 million shares of common stock, $.001 par value, at a conversion debt purchase price of $.75 per share. The forgiveness of the debt is shown as an extraordinary item in the accompanying consolidated statement of operations. Settlement of Shareholder Lawsuit On April 27, 1992, a class action lawsuit was filed against the Company and certain of its directors and officers and the managing underwriters of the Company's initial public offering for alleged violations of federal securities laws and state common law. The complaint sought unspecified actual and punitive damages, costs and attorney's fees on behalf of purchasers of the Company's Common Stock during the period from December 4, 1991 to April 24, 1992. Similar follow-on suits, containing virtually identical allegations, were filed by six other plaintiffs. The district court ordered consolidation of the complaints into one class action lawsuit. On August 1, 1994, the district court entered final judgment approving the settlement and dismissing the lawsuit. Under the terms of the settlement, the claims against the Company and other defendants were dismissed without any admission or presumption of liability or wrongdoing. A settlement fund consisting of $6.25 million in cash and 595,000 shares of the Company's Common Stock was established. The Company contributed $2.15 million in cash into the fund in March 1994 and the Company's director's and officer's liability insurance carrier contributed $4.1 million into the fund in August 1994. In October 1995 the 9 11 Company contributed the 595,000 shares of Common Stock into the fund and the escrow agent distributed the shares to the claimants. RML Agreement The Company had a contract (the "RML Agreement") with RML Limited ("RML"), an independent warehouse facility located in Harrisburg, Pennsylvania pursuant to which RML provided the Company with warehouse, distribution, inspection and other services for a fee based upon gross shipping dollars, which was calculated on a declining percentage as various sales plateaus were achieved. The agreement expired by its term in April 1995 but was renewed until February 1997. The RML Agreement terminated on February 28, 1997. Interest Revenue/Expense Interest revenue for 1997 was revenue associated with the interest earned from amounts due from the factor. The amount due from the factor at January 3, 1998 was $2,389,270 included in the balance sheet caption "Cash and cash equivalents". In 1997 net interest income increased from a net interest expense in 1996 of $641,000 to a net interest income of $109,000. Interest expense decreased from $1,045,000 in 1995 to $641,000 in 1996. Interest expense increased from $500,000 in 1994 to $1,045,000 in 1995. The decrease from 1995 to 1996 was the result of the receipt of $5.3 million in August 1996 on account of the sale of the trademarks, discussed above. Subsequent to the sale of the trademarks, the requirements for cash advances and overadvances from its factor against unmatured factored receivables decreased. The increase from 1994 to 1995 was the result of increasing needs of cash advances from its factor. Conversely, the decrease in interest expense observed in 1996 is principally the reflection of positive cash positions with the Factor during the last quarter of 1996. Other Expense In the fourth quarter of 1995, management made the decision to close the Company's operations in Brazil, as the Company's buying strategy shifted from Brazil to China. As a result, the Company took a charge of $427,000 for closing the operations. Other expense in 1995 includes the loss in the sale of the building in Brazil and certain expenses related to the liquidation of the Company's Hong Kong subsidiary. Liquidity and Capital Resources In June 1996, two major creditors of the Company were owed approximately $4,900,000. Such creditors agreed to restructure the debt by forgiving approximately $1,288,000 (reflected as an extraordinary item on the accompanying consolidated statement of operations), the acceptance of 2,698,000 shares of the Company's common stock valued at $.75 a share ($2,027,000). The balance of the debt (approximately $1,600,000) was paid in August 1996. During 1996, the Company experienced continuing losses from operations. The ability to fund its operating losses and cash required for operations was uncertain. An opportunity to sell its trademarks to Maxwell Shoe Co. Inc. for a total of $5,500,000 plus certain other expenses was offered in conjunction with the restructuring of its debt to two major creditors. The Company accepted the offer in July 1996 and ceased designing, producing and selling of its product under the terms of such agreement. During 1995, the Company was able to fund its operating losses and cash used in operations through advances from its factor based on the collateral borrowing formula as well as an overadvance line. In order for the Company to avail itself of this overadvance line, a principal shareholder and executive officer of the 10 12 Company, executed a personal guarantee up to $500,000 of the overadvance facility in the form of collateral assigned to the factor. In January 1997 the collateral was returned. During 1996, the Company was able to repay its overadvance facility with the factor as a result of the normal collection process of factored receivables and the sale of the trademarks discussed above. The Company also had a letter of credit agreement from its factor. Letter of credit financing, which reduces the advance availability under the borrowing base formula, was insignificant in 1996 and in 1995. There were no outstanding letters of credit on December 28, 1996, and at January 3, 1998. The Company's business does not require significant capital expenditures. There were no capital expenditures for 1996, nor in the year ended January 3, 1998. Other than those incurred in seeking new business opportunities, the main activities of the Company since July 1996 have been the collecting of the amount due to the Company or its factor and the sale of the merchandise inventory under the terms of the agreement with Maxwell. As of September 26, 1997 these activities were substantially complete. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Registrant believes that it falls within the scope of the definition of a Small Business Issuer and therefore is exempt from the requirements of this Item 7A, even though for the fiscal year ended January 3, 1998, it did not file on forms designated as small business issuers forms. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements as of January 3, 1998 and December 28, 1996 and for each of the three years in the period ended January 3, 1998 are included in this report as listed on the Index to Financial Statements appearing in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 26, 1998 Registrant filed a Current Report on Form 8-K, regarding a change in Registrant's Certifying Accountant. The information regarding the change from such Current Report on Form 8-K is set forth below: "ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT Registrant hereby reports the termination of Deloitte & Touche, LLP, its certifying accountant, as a cost saving measure because of the reduction of its business activities and the hiring of Michael, Adest & Blumenkrantz, with offices at 7 Penn Plaza, Room 316, New York, New York 10001 1. Deloitte & Touche, LLP has been terminated and the Registrant has engaged Michael, Adest & Blumenkrantz on March 20, 1998 to perform an audit of the Registrant for its fiscal year ended January 3, 1998. 2. Deloitte & Touche, LLP's report on the financial statements of the Registrant for the fiscal year ended December 28, 1996 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles and the report on the financial statements of the Registrant for the fiscal year ended December 30, 1995, was qualified as to the substantial doubt about the Registrant's ability to continue as a going concern. 3. The decision to change accountants was approved by Registrant's Board of Directors. 4. During the Registrant's fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998, and during the period January 4, 1998 through March 20, 1998, there were no disagreements between Registrant and its former accountant on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure that if not resolved to the satisfaction of the former 11 13 accountant would have caused the former accountant to refer to the subject matter of the disagreement in connection with the report. 5. During the Registrant's fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998, and during the period January 4, 1998 through March 20, 1998: (i) The accountant did not advise Registrant of the lack of internal controls necessary to develop reliable financial statements; (ii) The accountant did not advise Registrant that it could no longer rely on representations of Registrant's management or that it was unwilling to be associated with the financial statements prepared by Registrant's management; (iii) The accountant did not advise Registrant of the need to significantly expand the scope of its audit or of the existence of information that if further investigated could materially impact the fairness or reliability of audited reports or financial statements or cause the accountant to be unable to rely on management's representation; and (iv) The accountant did not advise Registrant of information that, in the opinion of the accountant, materially impacted the fairness or reliability or a previously issued audit report or underlying financial statement. Registrant, Utopia Marketing, Inc. hereby reports the engagement of a new accountant, Michael, Adest & Blumenkrantz. The below information is provided pursuant to Item 304(a) of Regulation S-K, Section 229.304(a). 1. Michael, Adest & Blumenkrantz was engaged by Registrant on March 20, 1998. 2. During the fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998, and during the period January 4, 1998 to the date of engagement of Michael, Adest & Blumenkrantz, Registrant did not consult the new firm of Michael, Adest & Blumenkrantz regarding (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on Registrant's financial statements; or (iii) any matter that was the subject of a disagreement with Registrant's former accountant as defined in 304(a)(l)(iv) of Regulation S-K or any other matter that was a reportable event as defined in 304(a)(l)(v) of Regulation S-K. ITEM 7. EXHIBITS. A letter from Deloitte & Touche, LLP addressed to the Securities Exchange Commission, shall be filed by an amendment to this Current Report on Form 8-K." The letter from Deloitte & Touche, LLP to the Securities Exchange Commission referred to in the preceding paragraph, also appears as Exhibit 16.1 to this Annual Report on Form 10-K. 12 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of the Company, who are elected to serve until the next Annual Meeting of Stockholders and until their successors are duly elected and shall qualify, and the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, and their ages as of March 30, 1998, are as follows:
OFFICER/DIRECTOR NAME AGE POSITION SINCE ---- --- -------- ---------------- Samuel L. Edelman.................... 46 Chairman of the Board, President, Chief 1987 Executive Officer, Treasurer and Director Louise B. Edelman.................... 44 Secretary and Director 1987 Bruce D. Oberfest.................... 51 Director 1997 Joel N. Solomon...................... 51 Director 1998
Samuel L. (Sam) Edelman co-founded the Company with his wife, Louise B. Edelman, in October 1987. Since the Company's inception, Mr. Edelman has served as the Chairman of the Board, President and Chief Executive Officer. From April 1983 to July 1987, Mr. Edelman served as the President of the Esprit Footwear Division of Esprit De Corp., an apparel and footwear company ("Esprit"). Prior to April 1983, Mr. Edelman occupied various executive positions, including Executive Vice President of Kenneth Cole Productions, a footwear company. Louise B. (Libby) Edelman, a co-founder of the Company, served as Senior Vice President -- Image from the Company's founding until the second quarter of 1992. At the time, Ms. Edelman was promoted to Executive Vice President -- Corporate Development which position was eliminated in the first quarter of 1998. In 1997 Ms. Edelman was elected to the additional office of Secretary of the Company. Prior to October 1987, Ms. Edelman held various positions, including National Sales Manager for Esprit Kids Shoes, Director of Public Relations for Calvin Klein Ltd., a fashion company, and Senior Fashion Editor of Seventeen, Mademoiselle and Harper's Bazaar magazines. Ms. Edelman has served as a Director of the Company since its founding. Bruce D. Oberfest has been a Certified Public Accountant and principal owner of the accounting and consulting firm of Bruce D. Oberfest & Associates for more than the past five years. Mr. Oberfest was elected as a director of the Company on October 6, 1997. Joel N. Solomon is a retired businessman since September, 1996. For more than five years prior to his retirement Mr. Solomon was the President, a director and principal shareholder of San Francisco Shoe Works, Inc., an importer of lady's and children's footwear and accessories to the United States for Esprit Shoes & Accessories Far East, Ltd., of which he was a managing director for more than five years prior to his retirement. Mr. Solomon was elected as a director of the Company on March 20, 1998. With the exception of Sam Edelman and Libby Edelman, who are married to each other, there is no family relationship among directors or executive officers of the Company. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires the Company's officers and directors and persons who own more than ten percent of a registered class of the Company's equity securities to file certain reports of ownership with the Securities and Exchange Commission (the "SEC") and with the National Association of Securities Dealers, Inc. Such officers, directors and shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms that they file. 13 15 Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons, the Company believes that, during the fiscal year ended January 3, 1998, all Section 16(a) filing requirements applicable to its officers, directors and 10% Shareholders were complied with. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth all compensation awarded to, earned by or paid for services rendered to the Company in all capacities during 1995, 1996 and 1997 by the Chief Executive Officer and the one other highly paid executive officer (determined as of January 3, 1998). This information includes the dollar value of base salaries, commissions and bonus awards, the number of shares of the Company's Common Stock subject to stock options granted and certain other compensation, whether paid or deferred. The Company does not grant SARs and has no long-term compensation benefits other than options, for the fiscal years ended January 3, 1998 (FY 1997), December 30, 1996 (FY 1996) and December 31, 1995 (FY 1995): SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ------------------------- RESTRICTED SECURITIES ALL OTHER FISCAL OTHER ANNUAL STOCK UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS($) OPTIONS(#) ($)(2) - --------------------------- ------ -------- -------- ------------ ---------- ------------ ------------ Samuel L. Edelman 1997 0 -- -- -- -- -- Chairman of the Board, 1996 $198,077 -- -- -- -- -- President and Chief 1995 $250,000 -- -- -- -- -- Executive Officer Kenneth M. Sitomer(3) 1997 $239,656 -- -- -- 400,000(4) Chief Operating Officer 1996 $322,433 -- -- -- -- $18,000 and Chief Financial Officer 1995 $316,755 -- -- 91,666 -- $18,000
- --------------- (1) The Company pays bonuses to executive officers on the officer's base salary, other compensation and an evaluation of the Company's financial performance and the individual's performance during the fiscal year. (2) Includes the allocated amount of personal use of company automobiles and premium payments paid by the Company for life insurance for named executive officer and health insurance for dependents of the named executive officer. (3) Mr. Sitomer resigned from all positions with the Company in November, 1997. (4) In 1997 400,000 stock options previously granted to Mr. Sitomer had the exercise price per share adjusted from $0.25 per share to $0.01 per share. OPTION GRANTS IN LAST FISCAL YEAR There were no stock options granted during 1997 to any named Executive Officers. However, during 1997 the company repriced the exercise price of 400,000 stock options previously granted to Mr. Sitomer, a named Executive Officer from $0.25 per share to $0.01 per share. 14 16 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE TABLE The following table provides information on option exercises in 1997 by the named Executive Officers and the value of such officers' unexercised options at January 3, 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISABLE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS HELD NUMBER OF OPTIONS OF FISCAL YEAR END AT FISCAL YEAR END(1) SHARES ACQUIRED VALUE --------------------------- --------------------------- NAME IN EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- -------- ----------- ------------- ----------- ------------- Samuel L. Edelman..... -- -- -- -- -- -- Kenneth H. Sitomer.... 400,000 $0.0 -- -- -- --
COMPENSATION OF DIRECTORS Each director who is not an employee of or a consultant to the Company (an "Outside Director") receives $10,000 per year, in addition to $500 for each meeting of the Board of Directors attended. All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with meetings of the Board of Directors. During the fiscal year ended January 3, 1998 such compensation was waived by the outside directors. Outside Directors also participate in the Company's 1991 Stock Option Plan. The 1991 Stock Option Plan was originally approved by the Board of Directors and shareholders of the Company in September 1991. An amendment to the 1991 Stock Option Plan to increase the total number of shares reserved for issuance thereunder from 500,000 to 1,500,000 was approved by the Board of Directors in February 1993 and by the shareholders in May 1993. The 1991 Stock Option Plan provides that each Outside Director automatically is granted an option to purchase 5,000 shares of Common Stock annually thereafter so long as he or she remains an Outside Director. The options granted to Outside Directors are for five year terms and vest at the rate of 25% per year. The exercise price of options granted to Outside Directors must equal 100% of the fair market value of the Company's Common Stock on the date of the grant. Outside Directors may not be granted any option pursuant to the 1991 Stock Option Plan other than those options granted automatically as described herein. All Outside Directors entitled to such options during the fiscal year ended January 3, 1998, waived the grant thereof as permitted under the 1991 Stock Option Plan. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company held three meetings during the fiscal year ended January 3, 1998. The Audit Committee of the Board of Directors currently consists of director Oberfest and did not meet during the last fiscal year. The Audit committee reviews the Company's annual audit and meets with the Company's independent accountants to review the Company's internal controls and financial management practices. The Compensation Committee of the Board of Directors currently consists of directors Samuel L. Edelman and Louise B. Edelman and held one meeting during the last fiscal year. The Compensation Committee recommends compensation for the Company's key employees and administers the 1991 Stock Option Plan and the 1991 Employee Stock Purchase Plan. There is no nominating committee or any committee performing those functions. During the fiscal year ended January 3, 1998, each director attended all meetings of the Board and the committees upon which such director served. 15 17 EMPLOYMENT CONTRACTS AND CHANGE-IN-CONTROL ARRANGEMENTS On January 3, 1998 there were no employment contracts in effect between the Company and any of the named executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Committee presently consists of Directors Samuel L. Edelman and Louise B. Edelman, who were elected in 1997 upon the resignation of the Company's Outside Directors. No executive officer of the Company served on the compensation committee of another entity or any other committee of the board of directors of another entity performing similar functions during the last fiscal year. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The information contained in the following report shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the "Securities Act") or the Exchange Act, except to the extent that the Company specifically incorporates it by reference into such filing. Introduction. Decisions on compensation of the Company's executive officers are made by the Compensation Committee of the Board of Directors (the "Committee"). The members of the Committee are presently Directors Samuel L. Edelman and Louise B. Edelman, who were elected after all of the Company's outside directors resigned. The Board of Directors intends to request Messrs. Oberfest and/or Solomon to agree to accept appointment as the sole members of said Committee. Decisions by the Committee relating to the compensation of the Company's executive officers are reviewed by the full Board, except for decisions about awards under the 1991 Stock Option Plan which, when the Committee is composed solely of outside directors, must be made solely by the Committee in order for the grants under such Plan to satisfy Rule 16b-3 promulgated under the Exchange Act. With respect to the compensation of the Chief Executive Officer, the Committee reviews and approves the various elements of the Chief Executive Officer's compensation and makes a recommendation to the full Board. With respect to executive officers other than Mr. Edelman the Committee reviews the recommendations for such individuals presented by the Chief Executive Officer and the bases therefore and approves or modifies the compensation packages for such individuals. Base salary levels for executive officers are generally established at the end of each fiscal year based upon such individual's performance and the performance of the Company. During the fiscal year ended January 3, 1998, the Chief Executive Officer was not paid any Executive Compensation or other salary. Executive Compensation. The Company's Executive Compensation Program is designed to link corporate performance and returns to shareholders. The overall objectives of this strategy are to attract and retain the best possible executive talent, to motivate the executives to achieve the goals in the Company's business strategy, to link executive and shareholder interests and to provide a compensation package that recognizes individual contributions as well as overall business results. The Company's compensation program has two principal components: cash-based compensation, both fixed and variable, and equity-based compensation. The salaries for each of the executive officers for the fiscal year ended January 3, 1998 were based upon the following factor: the scope of the executive responsibilities; prior experience and salary history, salaries for similar positions at comparable companies; and, in the case of persons other than the Chief Executive Officer, the recommendation of the Chief Executive Officer. However, in light of the Company's current business difficulties during such fiscal year Mr. Sitomer was the only Executive Officer to be compensated and effective with his resignation in November 1997, no Executive Officer received compensation. Stock options are periodically granted to provide additional incentive to executives and other key employees to work to maximize long-term total return to the Company's shareholders. Options generally vest over a five year period to encourage optionholders to continue in the employ of the Company. The exercise price of options is generally the market price on the date of the grant, ensuring that the option will acquire value only to the extent that the price of the Company's Common Stock increases relative to the market price at the time of the grant. Factors considered by the Committee in granting stock options include: the recipient's 16 18 position and responsibility within the Company; prior performance and expected contribution to future performance; the size of previous stock option grants; and the number of options held by the recipient (if any); and other relevant factors. The terms of Mr. Sitomer's former Employment Agreement (including the November 1994 amendment thereto) were approved by the Committee upon the recommendation of the Chief Executive Officer. Mr. Sitomer brings extensive operating experience to the Company. The Chief Executive Officer, the Committee and the full Board believed it was in the best interest of the Company and the shareholders for Mr. Sitomer to have an Employment Agreement that included significant cash-based and equity-based incentives tied to the Company's future stock and operating performance. Mr. Sitomer is no longer an officer, director or employee of the Company. On May 20, 1997, the Compensation Committee voted to reduce the exercise price of Mr. Sitomer's remaining 400,000 Stock Options granted under the Company's 1991 Stock Option Plan as set forth in the following table:
(A) (B) (C) (D) (E) (F) (G) NUMBER OF LENGTH OF SECURITIES ORIGINAL UNDERLYING MARKET PRICE OPTION TERMS OPTIONS/SARS OF STOCK EXERCISE PRICE REMAINING AT REPRICED OR AT TIME OF AT TIME OF NEW DATE OF AMENDED REPRICING OR REPRICING OR EXERCISE REPRICING OR NAME(1)(2) DATE (#) AMENDMENT($) AMENDMENT($) PRICE($) AMENDMENT ---------- ---- ------------ ------------ -------------- -------- ------------ Kenneth B. Sitomer... May 20, 1997 400,000 $0.01 $0.25 $0.01 May 3, 2003
- --------------- (1) The Compensation Committee of the Board of Directors, whose action was ratified by the entire Board of Directors following the election of an outside director to the Board of Directors, reduced the exercise price of the Stock Options previously granted to Mr. Sitomer to the then current market value of the Company's Common Stock pursuant to Section 4(b)(viii) of the Company's 1991 Stock Option Plan, which permits the reduction of the exercise price of Stock Options to the current fair market value if the fair market value of the Common Stock covered by such Stock Options shall have declined since the date the options were granted. (2) There were no other option repricings and the Company does not grant Stock Appreciation Rights. It was felt that this action was necessary in light of the significant reduction in the fair market value price of the Company's Stock since its de-listing from the NASDAQ National Market List. Chief Executive Officer Compensation. The salary of Mr. Edelman was originally set at $600,000 per year in 1991 based on the unique contribution of Mr. Edelman to the Company's business not only as Chief Executive Officer, but also as a principal designer of footwear and apparel and a principal salesperson. In July 1992 and February 1993, Mr. Edelman voluntarily reduced his annual salary to $480,000 and $250,000, respectively. Mr. Edelman's annual salary for the fiscal year ended December 31, 1995 was $250,000, $192,306 for the fiscal year ended December 28, 1996 and Mr. Edelman did not receive a salary for the fiscal year ended January 3, 1998. Tax Deductibility of Executive Compensation. Section 162 of the Internal Revenue Code of 1986, as amended (the "Code"), limits the federal income tax deductibility of compensation paid to the Company's Chief Executive Officer and to each of the other four most highly compensated executive officers. The Company may deduct such compensation only to the extent that during any fiscal year the compensation paid to any such individual does not exceed $1 million or meets certain specified conditions (including shareholder approval). Based on the Company's current compensation plans and policies and recently released regulations interpreting this provision of the Code, the Company and the Committee believe that, for the near future, there is little risk that the Company will lose any significant tax deduction for executive compensation. 17 19 Summary. The Committee believes that its compensation program to date has been fair and motivating, and has been successful in attracting and retaining qualified employees and in linking compensation directly to the Company's performance. The Committee intends to review this program on an ongoing basis to evaluate its continued effectiveness. THE COMPENSATION COMMITTEE Samuel L. Edelman Louise B. Edelman As to the portion of the above report relating to the repricing of Stock Options, BOARD OF DIRECTORS Samuel L. Edelman, Chairman Louise B. Edelman Bruce D. Oberfest Joel N. Solomon COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS* Performance Graph for Utopia Marketing, Inc.
CRSP Total Returns Index for: 12/31/92 12/31/93 12/30/94 12/29/95 06/26/96 Utopia Marketing, Inc 100.0 44.7 19.7 21.1 8.6 Nasdaq Stock Market (US Companies) 100.0 114.8 112.2 158.7 174.7 NASDAQ Stocks (SIC 5100-5199 US Companies) Wholesale trade-nondurable goods 100.0 121.8 93.7 134.8 161.0
*No stock price performance is reflected for the period after 6/26/96, the date upon which the Company ceased to be traded on the National Market List. Management believes that no such price performance is obtainable as the Company is not engaged in a line of business. Notes: A. The lines represent monthly index levels derived from compounded daily returns that include all dividends. B. The indexes are reweighted daily, using the market capitalization on the previous trading day. C. If the monthly interval, based on the fiscal year-end in not a trading day, the precedding trading day is used. D. The index level for all series was set to $100.0 on 12/31/92. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of February 28, 1998, with respect to the beneficial ownership of Utopia's Common Stock by (i) each Utopia shareholder known by Utopia to be the beneficial owner of more than five percent (5%) of the outstanding shares of Utopia Common Stock, (ii) each Utopia director, (iii) each of the two most highly compensated officers of Utopia for the 1997 fiscal year, and (iv) all current executive officers and directors of Utopia as a group.
SHARES PERCENTAGE NAME AND ADDRESS BENEFICIALLY OWNED OF TOTAL ---------------- ------------------ ---------- Samuel L. Edelman(2)................................... 6,260,822 44.0% 70 East 55th Street New York, New York 10022 Louise B. Edelman(3)................................... 5,102,822 35.9% 70 East 55th Street New York, New York 10022 Braha Industries, Inc.(4).............................. 1,369,260 9.6% 10 West 33rd Street New York, New York 10001 Lane International Trading, Inc........................ 1,358,608 9.6% 31284 San Antonio Street, Suite 7 Hayward, California 94544 Stuart L. Kreisler..................................... 1,158,000 8.2% 160 Rocksimmon Road Stamford, Connecticut 06903 Bruce D. Oberfest...................................... 0 *% 287 King Street Chappaqua, New York 10514 Joel N. Solomon........................................ 0 *% 38 Spring Street Kentfield, California 94904 Kenneth M. Sitomer (5)................................. 535,002 *% 150 E 58th Street -- 23rd Floor New York, New York 10155 All directors and officers as a group (4 persons in group) (6)............................................. 6,260,822 44.0%
18 20 - --------------- * Represents less than one percent (1%) of the outstanding shares of Utopia Common Stock. (1) Based upon information supplied by Utopia officers, directors and principal shareholders, beneficial ownership is determined in accordance with the rules of the Commission that deem shares to be beneficially owned by any person who has or shares voting power or investment power with respect to such shares. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. (2) Includes 5,102,822 shares owned directly by Mr. and Mrs. Edelman as community property and 1,158,000 shares owned by Mr. Kreisler, which Mr. Edelman may be deemed to beneficially own as a result of certain voting rights pursuant to a shareholders agreement among the Company, Mr. Edelman, Ms. Edelman and Mr. Kreisler (the "Shareholders Agreement"). See "Item 13 Certain Relationships and Related Transactions" -- "Shareholders Agreement". (3) Includes 5,102,822 shares owned directly by Mr. and Mrs. Edelman as community property. (4) Includes 38,000 shares owned by the Brake Industries, Inc. Profit Sharing Trust. (5) Resigned as an officer and director in November, 1997. (6) See footnote (2) above for 1,158,000 included shares which may be deemed to be owned by Mr. Edelman and which are included herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS S Corporation Termination, Tax Allocation and Indemnification Agreement. The Company and Mr. Edelman, Ms. Edelman and Mr. Kreisler (collectively, the "Principal Shareholders") are parties to an S Corporation Termination, Tax Allocation and Indemnification Agreement (the "Tax Agreement") relating to their respective income tax liabilities. Because the Company has been fully subject to corporate income taxation since the date of the termination of its status as an S Corporation on December 3, 1991 (the "Termination Date"), the reallocation of income and deductions between the period during which the Company was treated as an S Corporation and the period during which the Company is subject to corporate income taxation may increase the taxable income of one party while decreasing that of another party. Accordingly, the Tax Agreement is intended to assure that taxes are born by the Company on the one hand and the Principal Shareholders on the other only to the extent that such parties received the related income. Subject to certain limitations, the Tax Agreement generally provides that the Principal Shareholders will be indemnified by the Company with respect to federal and state income taxes (plus interest and penalties) shifted from a Company taxable year subsequent to the Termination Date to a taxable year in which the Company was an S Corporation, and the Company will be indemnified by the Principal Shareholders with respect to federal and state income taxes (plus interest and penalties) shifted from an S Corporation taxable year to a Company taxable year subsequent to the Termination Date. The Tax Agreement also provides that the Principal Shareholders will indemnify the Company against any claims arising out of or based upon any material liabilities of the Company that were not reflected (or subject to adequate reserves) in the Company's financial statements as of December 4, 1991. Any payment made by the Company to the Principal Shareholders pursuant to the Tax Agreement may be considered by the Internal Revenue Service or state taxing authorities to be non-deductible by the Company for income tax purposes. Shareholders Agreement. The Company and the Principal Shareholders are parties to the Shareholders Agreement, which contains standstill provisions, transfer restrictions and voting restrictions applicable to Mr. Kreisler and Ms. Edelman and transfer restrictions applicable to Mr. Edelman. The Shareholders Agreement provides that Mr. Kreisler may not, subject to certain exceptions, acquire additional shares of the Company's voting stock without Mr. Edelman's prior consent, if after such acquisition Mr. Kreisler would own more than 20% of the outstanding voting stock of the Company. Mr. Edelman has a right of first refusal on all proposed transfers of shares by Mr. Kreisler, except transfers made directly to the Company, sales pursuant to a registered underwritten public offering, sales pursuant to Rule 144 ("Rule 144") under the Securities Act of 1933, as amended (the "Securities Act"), sales made in response to a tender offer 19 21 which is not opposed by the Board of Directors of the Company, inter vivos gifts, including charitable donations, and transfers to and from Mr. Kreisler's estate in the event of his death. Mr. Kreisler has a parallel right of first refusal on all proposed transfers of shares by Mr. Edelman. Pursuant to the Shareholders Agreement, Mr. Kreisler must vote his shares on matters submitted to the Company's shareholders in the same proportion that Mr. Edelman votes his shares; provided, however, that with respect to the election of directors only, Mr. Kreisler is allowed to vote for himself as director any shares owned by him, except that if he owns more shares than necessary to ensure his own election, he is allowed to vote for himself as director only the minimum number of shares necessary to ensure his election. The Shareholders Agreement provides that Mr. Kreisler will not solicit proxies or actively participate in any contested election without the prior consent of Mr. Edelman. Mr. Kreisler and, in the event of Mr. Kreisler's death, Mr. Kreisler's estate, have certain demand and piggyback registration rights. Mr. Kreisler's restrictions expire upon the earliest to occur (i) such time as Mr. Edelman is no longer an officer or director of the Company, (ii) such time as Mr. Edelman no longer owns at least 20% of the Company's voting stock and (iii) December 11, 1996. Mr. Kreisler's right of first refusal on proposed transfers by Mr. Edelman expires upon the earliest to occur (i) such time as Mr. Kreisler is no longer a director of the Company, (ii) such time as Mr. Kreisler owns less than 10% of the Company's voting stock and (iii) December 11, 1996. The Shareholders Agreement addresses the voting control and ownership of Ms. Edelman's shares in the event that the Edelmans are divorced, as follows. First, Ms. Edelman will be prohibited, subject to certain exceptions, from acquiring additional shares of the Company's voting stock without Mr. Edelman's prior consent, if after such acquisition Ms. Edelman would own more than 20% of the outstanding voting stock of the Company. Second, Mr. Edelman, initially, and then Mr. Kreisler will have a right of first refusal on all proposed transfers by Ms. Edelman, subject to the same exceptions as Mr. Kreisler's and Mr. Edelman's transfer restrictions. Third, Ms. Edelman will have the right during the two year period after the date the divorce becomes final to require Mr. Edelman to purchase her shares at the then prevailing market value. Fourth, Ms. Edelman will agree to vote her shares on all matters submitted to the Company's shareholders (including the election of directors) in the same proportion that Mr. Edelman votes his shares. Ms. Edelman's standstill, transfer and voting restrictions terminate, whether or not the Edelmans are divorced, upon the earliest to occur of (i) such time as Mr. Edelman is no longer an officer or director of the Company, (ii) such time as Mr. Edelman owns less than 20% of the Company's voting stock and (iii) December 11, 1996. Ms. Edelman and her estate will have registration rights similar to those of Mr. Kreisler. CERTAIN TRANSACTIONS In early 1997, prior to the time Mr. Oberfest was elected as a director, Bruce D. Oberfest & Associates was paid a consulting fee of $1,000 for analysis services performed in connection with a business opportunity being investigated by the Company. On April 30, 1997, Mr. Sitomer's Employment Contract, which included a Change of Control Arrangement, expired and Mr. Sitomer agreed with the Company to serve in the same capacity on a month-to-month basis at a salary of $12,500 per month and the continuation of all employee benefits he had been receiving at the time of expiration of his employment contract. On August 19, 1997, Samuel L. Edelman and Louise B. Edelman were named to the Compensation Committee of the Board, inasmuch as the Company no longer had any independent directors. On August 20, 1997, the Compensation Committee voted to reduce the exercise price of Mr. Sitomer's remaining option to purchase 400,000 shares of the Company's Common Stock from $.25 per share to $0.01 per share, which the Committee determined was the then-current fair market value of the Common Stock on such date, based upon the trading price of Utopia shares of Common Stock at that time. On November 12, 1997, the Board of Directors (Mr. Sitomer abstaining) ratified the actions of the Compensation Committee in reducing the exercise price. On September 30, 1997, Samuel L. Edelman and Louise B. Edelman (together the "Edelmans") entered into a Hold Harmless and Indemnification Agreement with Bruce D. Oberfest, as an inducement to 20 22 Mr. Oberfest to agree to serve as a Director to fill a vacancy on the Board of Directors. The Agreement provides that the Edelmans will indemnify Mr. Oberfest for all liabilities, obligations, costs and/or expenses in connection with any action taken or refrained from being taken by Mr. Oberfest, provided that Mr. Oberfest will first look to the Directors and Officers liability insurance policy and the Company before asserting any claim against the Edelmans. Mr. Oberfest shall not be entitled to be indemnified thereunder if the indemnification by the insurance carrier for such policy or by the Company is found by a court of law or governmental agency to be in violation of public policy or the action or failure to act for which indemnification is sought if found to be fraudulent or criminal or constituting the receipt by Mr. Oberfest of a personal benefit or advantage not lawfully available to all the directors as a whole. In asserting any such claim, Mr. Oberfest must certify that such action or inaction was taken by him in the reasonable belief that was in the best of interest of the Company and its Shareholders at not at the direction or control of the Edelmans. The Edelmans must comply with certain notice requirements to Mr. Oberfest prior to the time they may choose to resign from the Board of Utopia in order to terminate the Agreement. Mr. Oberfest does and may continue to render professional advice on accounting, financial and tax matters to the Edelmans. On October 6, 1997, the Board of Directors approved the Indemnification Agreements between each of the Directors and expressed its non-objection to the foregoing Hold Harmless and Personal Indemnification Agreement by and among the Edelmans and Mr. Oberfest. 21 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: 1. Financial Statements. The following Consolidated Financial Statements of the Company and Independent Auditors' Report are filed as a part of this Report:
PAGE ---- Independent Auditors' Report................................ F-1 Consolidated Balance Sheets -- January 3, 1998 and December 28, 1996.................................................. F-2 Consolidated Statements of Operations -- Years Ended January 3, 1998, December 28, 1996 and December 30, 1995.......... F-3 Consolidated Statements of Shareholders' Equity -- Years Ended January 3, 1998, December 28, 1996 and December 30, 1995...................................................... F-4 Consolidated Statements of Cash Flows -- Years Ended January 3, 1998, December 28, 1996 and December 30, 1995.......... F-5 Notes to Consolidated Financial Statements.................. F-6 to F-12
2. Financial Statement Schedules. The following financial statement schedules of the Company for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto:
PAGE ---- Schedule II -- Valuation and Qualifying Accounts............ S-1
Schedules other than those listed above have been omitted because they are not applicable, not required, or the required information has been given in the Consolidated Financial Statements of the Company and Notes thereto. 3. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report: 3.1 Restated Articles of Incorporation.(1) 3.2 Restated Bylaws.(1) 4.1 Article III of Restated Articles of Incorporation (see Exhibit 3.1).(1) 4.2 Form of Common Stock Certificate.(1) 10.1 1991 Stock Plan and forms of Incentive Stock Option agreement and Nonstatutory Stock Option Agreement.(1) 10.2 1991 Employee Stock Purchase Plan.(1) 10.3 Shareholders Agreement, as amended and restated.(1) 10.4 Factoring Agreement between Registrant and Republic Factors Corp.(1) 10.5 Form of Indemnification Agreement.(1) 10.6 S Corporation Termination, Tax Allocation and Indemnification Agreement.(1) 10.7 Merchandise License Agreement between Sam & Libby, Inc. and AMG Apparel Ltd. dated as of May 1, 1993.(4) 10.8 Facilities and Service Contract dated April 22, 1993 between Sam & Libby Inc. and RML Limited.(2) 10.9 Employment Agreement dated as of May 3, 1993 between Kenneth Sitomer and Sam & Libby, Inc.(3)
22 24 10.10 Agreement, dated as of August 12, 1993, between Lane International Trading, Inc., Sam & Libby Taiwan and Sam & Libby, Inc.(4) 10.11 Promissory Note dated August 12, 1993 from Sam & Libby, Inc. to Sam & Libby Taiwan.(4) 10.12 Hold Harmless and Indemnification Agreement dated September 30, 1997 by and among Samuel L. Edelman, Louise B. Edelman and Bruce D. Oberfest. 11.1 Calculation of Earnings Per Share. 16.1 Letter Regarding Change in Certifying Accountant 21.1 List of Subsidiaries. 23.1 Independent Auditors' Consent and Report on Schedules.
- --------------- (1) Exhibits 3.1, 3.2, 4.1, 4.2, 10.1, 10.2, 10.3, 10.4, 10.5 and 10.6 are incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (No. 33-43424) filed October 18, 1991, Amendment No. 1 thereto filed November 7, 1991, Amendment No. 2 thereto filed November 25, 1991 and Amendment No. 3 thereto filed December 4, 1991, which Registration Statement became effective December 4, 1991. (2) Exhibit 10.8 is incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. (3) Exhibit 10.9 is incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. (4) Exhibits 10.7, 10.10 and 10.11 are incorporated by reference to such Exhibits to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. (b) Reports on Form 8-K. There were no Reports on form 8-K during the quarter ended January 3, 1998. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933 (the "Act"), the Company hereby undertakes as follows, which undertaking shall be incorporated by reference into the Company's Registration Statement on Form S-8 No. 33-45671. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 23 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K/A to be signed on its behalf by the undersigned, thereunto duly authorized. UTOPIA MARKETING INC. (formerly SAM & LIBBY, Inc. SAMUEL L. EDELMAN By: -------------------------------------- Samuel L. Edelman Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report of Form 10-K/A has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ SAMUEL L. EDELMAN President and Chief Executive May 1, 1998 - --------------------------------------------- Officer (Principal Executive Samuel L. Edelman Officer), Treasurer and Chairman of the Board /s/ LOUISE B. EDELMAN Executive Vice President -- May 1, 1998 - --------------------------------------------- Corporate Development and Director Louise B. Edelman /s/ BRUCE D. OBERFEST Director May 1, 1998 - --------------------------------------------- Bruce D. Oberfest /s/ JOEL N. SOLOMON Director May 1, 1998 - --------------------------------------------- Joel N. Solomon
24 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Utopia Marketing, Inc. (formerly Sam & Libby, Inc.): We have audited the accompanying consolidated balance sheet of Utopia Marketing, Inc. (formerly Sam & Libby, Inc.), and subsidiaries as of January 3, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year 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. The consolidated balance sheet of Utopia Marketing, Inc. (Formerly Sam & Libby, Inc.), and subsidiaries as of December 26, 1996 and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the two-year period ended December 28, 1996, were audited by other auditors whose report thereon dated February 7, 1997, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. 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 the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the January 3, 1998 consolidated statements referred to above present fairly, in all material aspects, the financial position of Utopia Marketing, Inc. (Formerly Sam & Libby, Inc.) and subsidiaries at January 3, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. New York, New York March 31, 1998 F-1 27 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. CONSOLIDATED BALANCE SHEETS
JANUARY 3, DECEMBER 28, 1998 1996 ---------- ------------ (IN THOUSANDS EXCEPT SHARE DATA) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,389 $ 2,852 Due from factor (Less allowance of $75 as of December 28, 1996).................................................. 0 107 Account receivable........................................ 0 293 Miscellaneous receivable.................................. 39 0 Merchandise inventories................................... 0 36 Prepaid expenses.......................................... 0 31 -------- -------- TOTAL CURRENT ASSETS................................... $ 2,428 $ 3,319 Property and equipment, net................................. 0 0 Other assets................................................ 0 25 -------- -------- TOTAL ASSETS........................................... $ 2,428 $ 3,344 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $ 30 $ 58 Accrued expenses.......................................... 25 99 -------- -------- TOTAL CURRENT LIABILITIES.............................. $ 55 $ 157 -------- -------- LONG-TERM OBLIGATIONS....................................... 0 7 -------- -------- SHAREHOLDERS' EQUITY: Preferred stock, $.001 par value; 5,000,000 shares Authorized, none issued Common stock, $.001 par value; 45,000,000 shares Authorized, 14,216,367 and 13,741,367 shares Outstanding............................................... 14 14 Additional paid-in capital................................ 32,947 32,943 Accumulated deficit....................................... (30,588) (29,777) -------- -------- TOTAL SHAREHOLDERS' EQUITY............................. 2,373 3,180 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $ 2,428 $ 3,344 ======== ========
See notes to Consolidated Financial Statements. F-2 28 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED ---------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 30 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) Net revenue................................................. $ 129 $ 23,637 $ 38,755 Cost of sales............................................... 58 20,866 29,486 ------- -------- -------- Gross profit.............................................. 71 2,771 9,269 Selling, general and administrative expenses................ (966) (8,833) (11,539) Gain on sale of trademark................................... 4,100 ------- -------- -------- Operating loss before extraordinary item, interest and taxes..................................................... (895) (1,952) (2,270) Interest income (expense) -- net............................ 109 (723) (1,503) ------- -------- -------- Loss before extraordinary item.............................. (786) (2,675) (3,773) Extraordinary gain.......................................... 1,288 ------- -------- -------- Net income.................................................. $ (786) $ (1,387) $ (3,773) ======= ======== ======== Loss per share before extraordinary income.................. $ (0.06) $ (0.22) $ (0.35) Extraordinary income per share.............................. 0.11 0.00 ------- -------- -------- Net loss per share.......................................... $ (0.06) $ (0.11) $ (0.35) ======= ======== ======== Weighted average shares outstanding......................... 13,866 12,136 10,878 ======= ======== ========
See notes to Consolidated Financial Statements F-3 29 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
RETAINED ADDITIONAL EARNINGS PAID-IN (ACCUMULATED DEFERRED SHARES AMOUNT CAPITAL DEFICIT) COMPENSATION TOTAL ------ ------ ---------- ------------ ------------ ------- BALANCE AT JANUARY 1, 1995.......... 10,802 $11 $30,742 $ (24,617) $ (1,117) $ 5,019 Common stock issued under stock plans............................. 34 13 13 Exercise of employee stock options........................... 100 25 25 Amortization of deferred compensation...................... 462 462 Net loss............................ (3,773) (3,773) ------ --- ------- --------- -------- ------- BALANCE AT DECEMBER 30, 1995........ 10,936 11 30,780 (28,390) (655) 1,746 Common stock issued under stock plans............................. 18 32 32 Exercise of employee stock options........................... 78 80 80 Common stock issued in connection with debt forgiveness....................... 2,698 3 2,024 2,027 Common stock issued in exchange of Services.......................... 11 27 27 Amortization of deferred compensation...................... 655 655 Net loss............................ (1,387) (1,387) ------ --- ------- --------- -------- ------- BALANCE AT DECEMBER 28, 1996........ 13,741 14 32,943 (29,777) 0 3,180 Write off of foreign subsidiary..... (25) (25) Exercise of employee stock options........................... 400 4 4 Common stock issued in exchange of Services.......................... 75 Net loss............................ (786) (786) ------ --- ------- --------- -------- ------- Balance at January 3, 1998.......... $14,216 $14 $32,947 $ (30,588) $ 0 $ 2,373 ====== === ======= ========= ======== =======
See notes to Consolidated Financial Statements F-4 30 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 30, 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $ (786) $(1,387) $(3,773) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............................. 302 461 Loss on disposal of fixed assets.......................... 279 Gain on debt forgiveness.................................. (1,288) Deferred compensation expense............................. 655 462 Gain on sale of assets.................................... 246 Provision for allowances against accounts receivable...... (157) 7 Changes in operating assets and liabilities: Accounts receivable.................................... 254 2,291 (747) Due (from) to factor................................... 107 (1,791) 1,168 Due from shareholders.................................. 168 Merchandise inventories................................ 36 5,656 (2,545) Prepaid expenses and other assets...................... 31 423 217 Accounts payable, accrued expenses and other current liabilities.......................................... (102) (2,455) 3,739 ------ ------- ------- Net cash provided by (used in) operating activities......... (460) 2,696 (765) ------ ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment........................ (182) Proceeds from sale of property and equipment.............. 362 ------ ------- ------- Net cash provided by (used in) investing activities......... 0 0 180 ------ ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term obligations........................ (7) (84) (8) Proceeds from issuance of common stock, net............... 4 112 38 ------ ------- ------- Net cash provided by (used in) financing activities......... (3) 28 30 ------ ------- ------- Net increase (decrease) in cash and cash equivalents........ (463) 2,724 (555) Cash and cash equivalents: Beginning of period....................................... 2,852 128 683 ------ ------- ------- End of period............................................. $2,389 $ 2,852 $ 128 ====== ======= =======
See Notes to Consolidated Financial Statements F-5 31 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business. The Company no longer designs, develops and markets women's and children's footwear. On July 2, 1996, the Company entered into an agreement (the "Agreement") with Maxwell Shoe Company Inc. (the "Purchaser" or "Maxwell") to sell all worldwide rights to the Company's trademarks, trade names and intellectual property rights free and clear of all liens, mortgages, encumbrances and security interests for $5.5 million in cash. In August 1996, the Company received cash of $5.3 million. The balance of $0.2 million was paid in April 1997. The Purchaser did not assume any of the Company's liabilities or obligations. In connection with such sale, the Company changed its name to Utopia Marketing, Inc. The Company had a contract (the "RML Agreement") with RML Limited ("RML"), an independent warehouse facility located in Harrisburg, Pennsylvania pursuant to which RML provides the Company with warehouse, distribution, inspection and other services for a fee based upon gross shipping dollars, which is calculated on a declining percentage as various sales plateaus are achieved. The agreement expires by its term in April 1995 but was automatically renewable from year to year unless either party gives notice of non-renewal. The agreement terminated on February 28, 1997. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Sanders-Importacao E Exportacao Ltd. ("Sam & Libby Brazil"), Sam & Libby (HK) Limited ("Sam & Libby Hong Kong") and Sam & Libby Outlets, Inc. ("Sam & Libby Outlets"). All material intercompany transactions and balances have been eliminated. In the fourth quarter of 1995, the Company closed the operations in Brazil. As a result, the Company took a charge of $427,000 for the closing of those operations. Fiscal Year. The Company has a 52/53-week fiscal year ending on the Saturday closest to December 31. The fiscal years ended December 28, 1996 and December 30, 1995 contained 52 weeks. The fiscal year ended January 3, 1998 had 53 weeks. Cash Equivalents. Cash equivalents are highly liquid investments with an original maturity of three months or less. They include funds of $2,389,270 held by the factor as of January 3, 1998. Merchandise Inventories. The Company has no merchandise inventories as of year end. Property and Equipment. The Company currently has no Property and Equipment. In past years Property and equipment had been stated at cost. Depreciation was calculated using the straight line method over the estimated useful life of the respective assets, which range from five to seven years. The cost of leasehold improvements was amortized over the estimated useful life of the asset or the applicable lease term, whichever is less (see Note 3). Revenue Recognition. Revenue from the sale of merchandise and private label commissions is recognized upon shipment to the customer, sales are recognized net of returns and allowances. Net Income (Loss) Per Share. Net income (loss) per share is based on the weighted average number of shares of common stock and common stock equivalents outstanding during the year as calculated under the treasury stock method. Financial Instruments. The fair value of the Company's financial instruments approximates their carrying values. Reclassifications. Certain 1995 financial statement amounts have been reclassified to conform with the 1996 presentation. F-6 32 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 1 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Long-Lived Assets - In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement is effective for fiscal years beginning after December 15, 1995. The adoption by the Company of such standard in 1996 had no material effect on the financial statements. Stock-Based Compensation -- In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for the Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures in annual financial statements of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board (APB) Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB Opinion No. 25 to its stock based compensation awards to employees and will make the required disclosure of the pro forma effect on net income and earnings per share in its notes to the annual consolidated financial statements. The Company has not granted any stock options during 1997, 1996 and 1995 and the pro forma disclosure is not required at January 3, 1998. NOTE 2 -- FACTORING AGREEMENT In March 1994, the Company entered into a new factoring and financing arrangement (the "Agreement") with a bank (the "factor") which provides factoring services, advances and letters of credit to support on-going operations. Under the terms of the Agreement, the Company could borrow up to the lesser of $10 million or the sum of (i) up to 80% of eligible credit approved receivables plus (ii) the lesser of (a) the sum of (1) up to 30% of eligible inventory in the United States plus (2) 30% of the first cost of eligible finished goods being imported under letters of credit and eligible in transit finished goods inventory imported on open account and consigned to the financial corporation or (b) $9.5 million, less certain reserves. Subsequent to December 31, 1994, the percentage of eligible credit approved receivables against which the Company could borrow was reduced from 80% to 75% subject to a monthly valuation of a three month moving average computation whereby the percentage could be increased to 80%. In addition, eligible recourse receivables added to the borrowing base formula. The Company assigned all of its trade receivables under the Agreement. Approximately 85% of trade receivables were sold on a non-recourse basis. For those receivables sold on recourse basis, the Company either obtained credit insurance, required cash deposits or received letters of credit payable to the Company. The borrowing rate was prime plus 1.25% unless the Company is in an overadvance position, when the borrowing rate was prime plus 2.25% (prime rate at December 28, 1996 was 8%). The factor commission rate was 0.75%. Overadvances under the Agreement were available at the sole discretion of the factor. In order to enable the Company to use such overadvance availability, a principal shareholder and executive officer executed a personal guaranty for up to $500,000 of the overadvance facility in the form of collateral assigned to the factor. If the Company was not in an overadvance position for 90 consecutive days commencing March 13, 1995, the factor would cancel and return the guaranty and collateral at the request of such principal shareholder and executive officer. In January 1997, the personal F-7 33 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 2 -- FACTORING AGREEMENT (continued) collateral was returned to this principal shareholder and executive officer. The factor had a security interest in substantially all of the Company's tangible and intangible assets. The Agreement which was payable on demand expired March 7, 1997. The Company now has only an interest bearing account of approximately $2,389,270 earning approximately 4 to 5% per year with the factor. NOTE 3 -- PROPERTY AND EQUIPMENT The company currently has no property or equipment. NOTE 4 -- LONG-TERM OBLIGATIONS, COMMITMENTS AND CONTINGENCIES The Company currently has no long-term obligations and commitments. The Internal Revenue Service has notified the Company it will be making an Employment Tax Compliance Review for 1995 and 1996. A review is not an audit, but may result in an audit. NOTE 5 -- OTHER INCOME (EXPENSE) Other income (expense) consists of the following:
JANUARY 3, DECEMBER 28, DECEMBER 30, 1998 1996 1995 ---------- ------------- ------------- (IN THOUSANDS) Interest income................................... $ 109 -- -- Interest expense.................................. -- (641) $ (1045) Other............................................. -- (82) (458) ----- ------------- ------------- Other Income/(expense)............................ $ 109 (723) (1503) ===== ============= =============
NOTE 6 -- INCOME TAXES The provision (benefit) for income taxes for financial reporting purposes differs from the tax provision (benefit) computed by applying the statutory Federal income tax rate of 34% as follows:
YEAR ENDED ------------------------------------------ JANUARY 3, DECEMBER 28, DECEMBER 30, 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS) Federal income tax benefit at the statutory rate.............................. $(267) $ (472) $(1,283) State income taxes, net of federal benefit........ (47) (83) (302) Foreign subsidiary activity....................... 22 117 Deferred tax assets not utilized.................. 314 533 1,468 ----- ------- ------- Provision (benefit) for income taxes.............. $ 0 $ 0 $ 0 ===== ======= =======
F-8 34 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 6 -- INCOME TAXES (Continued) The components of the net deferred tax benefit are as follows:
JANUARY 3, DECEMBER 28, DECEMBER 30, 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS) Fixed assets...................................... $ 0 $ 418 $ 393 Inventory......................................... 0 91 658 Allowance for doubtful accounts................... 0 455 401 Net operating loss carryforward................... 0 8,267 7,442 Accrued expenses.................................. 0 10 Other............................................. 2 336 ----- ------- ------- 0 9,233 9,240 Valuation allowance............................... 0 (9,233) (9,240) ----- ------- ------- Net deferred tax benefit.......................... $ 0 $ 0 $ 0 ===== ======= =======
The Company has net operating loss carryforwards of approximately $21.3 million for Federal income tax purposes expiring between 2007 and 2017. As a result of an examination by the Internal Revenue Service (the "Service"), the Company was assessed an additional federal income tax liability for the 1989 fiscal year relating to the reclassification of certain executive compensation as a non-deductible dividend. In 1996, the Company has paid approximately $168,000 for federal and state income taxes plus interest and penalties. This amount was previously accrued. NOTE 7 -- SHAREHOLDERS' EQUITY 1991 Stock Option Plan. In September 1991, the Board of Directors approved the 1991 Stock Option Plan (the "1991 Plan"), which allows for the grant of incentive stock options (as defined in Section 422 of the Internal Revenue Code) to employees and nonstatutory stock options to both employees and outside Directors. The Board of Directors had reserved 500,000 shares of Common Stock for issuance under the 1991 Plan. In May 1993, the Board of Directors reserved an additional 1,000,000 for issuances of shares under the 1991 Plan. Stock options intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code are granted to employees at prices not less than the fair market value of the common stock on the date of grant. The 1991 Plan permits and the Company has granted, from time to time, non-statutory stock options at exercise prices less than the fair market value of the common stock on the date of grant. The 1991 Plan specifies that the Company's outside Directors are to receive a stock option grant of 5,000 shares on the date first elected to the Board and an additional 5,000 shares each year thereafter. Such options are granted at the fair market value of the common stock on the date of grant, vest over four years, and are exercisable only while the outside Director remains a Director. The 1991 Plan also permits the Company to grant rights to purchase common stock at a price which is at least 50% of the fair market value of the common stock on the date of grant. The offer of a right must be accepted within six months of its grant by the execution of a restricted stock purchase agreement between the Company and the offeree and the payment of the purchase price of the shares. As of January 3, 1998, no rights have been granted. On February 24, 1993, the Compensation Committee of the Board of Directors (the "Committee") authorized a stock option exchange program covering 224,000 stock options with exercise prices of $5.25 to $9.375 per share. Under the terms of F-9 35 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 7 -- SHAREHOLDERS' EQUITY (Continued) the stock option exchange program, 224,000 new options were issued at an exercise price of $3.25 per share, the fair market value of the Company's shares on the date of the grant. On November 9, 1994, the Committee authorized a stock option exchange program covering 215,000 stock options with exercise prices of $2.63 per share. Under the terms of the stock option exchange program, 215,000 new stock options were issued at an exercise price of $1.00 per share, the fair market value of the Company's shares on the date of the grant. As of January 3, 1998 no rights have been granted. Total activity for the 1991 Stock Option Plan for the years ended January 3, 1998, December 28, 1996 and December 30, 1995 was as follows:
SHARES PRICES --------- ----------- Outstanding, January 1, 1995................................ 772,500 $.25--22.50 Options exercised........................................... (100,000) $ .25--2.65 --------- Outstanding, December 30, 1995.............................. 672,500 $.25--22.25 Options exercised........................................... (78,000) $1.00--2.42 --------- Outstanding, December 28, 1996.............................. 594,500 $.25--22.25 Options exercised........................................... (400,000) $ .01--.25 Options cancelled........................................... (194,500) $ .01 --.25 --------- Outstanding, January 3, 1998................................ 0
Employee Stock Purchase Plan. In September 1991, the Board of Directors approved the 1991 Employee Stock Purchase Plan and reserved 150,000 shares of common stock for issuance under this plan. During 1996, 1995 and 1994, employees purchased 17,686, 34,654 and 7,998 shares, respectively, of common stock through payroll deductions. Through January 3, 1998, 88,915 shares had been issued under this plan. NOTE 8 -- MAJOR CUSTOMERS Not applicable in 1997. One customer accounted for approximately 11% of gross sales during 1996 and 11% of gross sales during 1995 (a different customer than 1996). In addition, certain of the Company's customers are under common ownership. During 1996 and 1995, one department store group accounted for approximately 9% and 11% of the Company's net revenue. NOTE 9 -- RELATED PARTY TRANSACTIONS In August 1993, the Company signed a one-year promissory note to its former joint venture partner in the amount of $1.8 million, plus interest at six percent, for payment of such obligation. At January 1, 1994, the balance of the note payable was $1.189 million. During 1994, the Company repaid $999,000 of the note payable and recognized income related to forgiveness of the remaining of $190,000. During 1995, a principal shareholder and executive officer guaranteed a portion of the Company's overadvance facility with its factor (Note 2). In January 1997 the guaranty of the principal shareholder and executive officer guaranteeing a portion of the Company's over advance facility with its factor was terminated. F-10 36 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 10 -- ADDITIONAL STATEMENTS OF CASH FLOWS INFORMATION Total cash paid for interest is as follows:
YEAR ENDED ---------------------------------------- JANUARY 3, DECEMBER 28 DECEMBER 30, 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS) Interest................................................ $0 $641 $945 == ==== ==== Non cash financing activities: Conversion of $2 million indebtedness into shares of Common Stock in 1996 (see note 13).
NOTE 11 -- SETTLEMENT OF SHAREHOLDER LAWSUIT On April 27, 1992, a class action lawsuit was filed against the Company and certain of its present directors and officers and the managing underwriters of the Company's initial public offering for alleged violations of federal securities laws and state common law. The complaint sought unspecified actual and punitive damages, costs and attorney's fees on behalf of purchasers of the Company's common stock during the period from December 4, 1991 through April 24, 1992. Similar follow-on suits, containing virtually identical allegations, were filed by six other plaintiffs. The district court ordered consolidation of all of the complaints into one class action. On August 1, 1994, the district court entered final judgment approving the settlement and dismissing the lawsuit. Under the terms of the settlement, the claims against the Company and other defendants were dismissed without any admission or presumption of liability or wrongdoing. A settlement fund consisting of $6.25 million in cash and 595,000 shares of the Company's Common Stock was established. The Company contributed $2.15 million in cash into the fund in March 1994 and the Company's director's and officer's liability insurance carrier contributed $4.1 million into the fund in August 1994. In October 1995, the Company contributed 595,000 shares of Common Stock into the fund and the escrow agent distributed the shares to the claimants. NOTE 12 -- DISCONTINUED OPERATIONS In the first quarter of 1993, the Company signed an agreement, effective May 1, 1993, to transfer its apparel division to AMG Apparel Ltd. ("AMG"), an apparel and licensing company located in Los Angeles. In exchange for the use of the SAM & LIBBY name, the Company was to receive a royalty based on AMG's sales of Sam & Libby apparel. The Company received no royalty revenue in 1994. During 1994, AMG stopped paying its royalty obligations. The Company has commenced legal action to regain the rights to its apparel merchandise. In connection with the transfer of the apparel division to AMG, the Company closed its Hong Kong office in 1993. The Company incurred certain personnel and other expenses in connection with the discontinuance of the apparel business. F-11 37 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANAURY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (Continued) NOTE 13 -- COMPOSITION AND CONVERSION AGREEMENT As of June 26, 1996, the Company had approximately $4.9 million of accounts payable with two of its major vendors. On that date, the Company entered into an agreement with those vendors whereby the vendors agreed to forgive approximately $1.3 million of indebtedness and convert approximately $2.0 million of indebtedness to 2.6 million shares of common stock, $.001 par value, at a conversion debt purchase price of $.75 per share. The remaining aggregate debt due to these vendors of approximately $1.6 million was paid in the quarter ended September 28, 1996. NOTE 14 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 26, JANUARY 3, 1997 1997 1997 1998 --------- -------- ------------- ------------ (IN THOUSANDS) Net revenue.................................... $ 72 $ 25 $ 22 $ 10 Gross profit (loss)............................ 41 8 22 10 Net income (loss) from continuing Operations before income taxes............... (337) (318) (62) (69) Net income (loss).............................. $ (337) $ (318) $ (62) $ (69) ------- ------- ------- ------- Net income (loss) per share.................... $ (0.02) $ (0.03) $ 0.00 $ (0.01) ======= ======= ======= =======
THREE MONTHS ENDED --------------------------------------------------- MARCH 30, JUNE 29, SEPTEMBER 28, DECEMBER 28, 1996 1996 1996 1996 --------- -------- ------------- ------------ (IN THOUSANDS) Net revenue.................................... $11,957 $ 5,353 $ 7,034 $ (707) Gross profit (loss)............................ 3,643 (111) 24 (785) Net income (loss) from continuing Operations before income taxes............... 606 (2,767) 2,448 (1,674) Net income (loss).............................. $ 606 $(2,767) $ 2,948 $(1,674) ------- ------- ------- ------- Net income (loss) per share.................... $ 0.05 $ (0.24) $ 0.18 $ (0.10) ======= ======= ======= =======
THREE MONTHS ENDED --------------------------------------------------- APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 30, 1995 1995 1995 1995 --------- -------- ------------- ------------ (IN THOUSANDS) Net revenue.................................... $10,459 $11,772 $12,688 $ 3,836 Gross profit (loss)............................ 3,132 3,562 4,675 (2,100) Net income (loss) from continuing Operations before income taxes............... 356 505 662 (5,296) Net income (loss).............................. $ 356 $ 505 $ 632 $(4,966) ------- ------- ------- ------- Net income (loss) per share.................... $ 0.03 $ 0.04 $ 0.06 $ 0.46 ======= ======= ======= =======
F-12 38 SCHEDULE II UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT YEAR ENDED OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD ---------- ---------- ---------- ------------- ------------- (IN THOUSANDS) YEAR ENDED DECEMBER 30, 1995 Provision for doubtful accounts................ $781 $2,825 $3,065 $541 YEAR ENDED DECEMBER 28, 1996 Provision for doubtful accounts................ $541 $2,250 $2,716 $ 75 YEAR ENDED JANUARY 3, 1998 Provision for doubtful accounts................ $ 75 $ 0 $ 75 $ 0
- --------------- (1) Write-off of doubtful accounts against reserve S-1 39 Exhibit Index ------------- Exhibit No. Description ------- ----------- 3.1 Restated Articles of Incorporation.(1) 3.2 Restated Bylaws.(1) 4.1 Article III of Restated Articles of Incorporation (see Exhibit 3.1).(1) 4.2 Form of Common Stock Certificate.(1) 10.1 1991 Stock Plan and forms of Incentive Stock Option agreement and Nonstatutory Stock Option Agreement.(1) 10.2 1991 Employee Stock Purchase Plan.(1) 10.3 Shareholders Agreement, as amended and restated.(1) 10.4 Factoring Agreement between Registrant and Republic Factors Corp.(1) 10.5 Form of Indemnification Agreement.(1) 10.6 S Corporation Termination, Tax Allocation and Indemnification Agreement.(1) 10.7 Merchandise License Agreement between Sam & Libby, Inc. and AMG Apparel Ltd. dated as of May 1, 1993.(4) 10.8 Facilities and Service Contract dated April 22, 1993 between Sam & Libby Inc. and RML Limited.(2) 10.9 Employment Agreement dated as of May 3, 1993 between Kenneth Sitomer and Sam & Libby, Inc.(3) 10.10 Agreement, dated as of August 12, 1993, between Lane International Trading, Inc., Sam & Libby Taiwan and Sam & Libby, Inc.(4) 10.11 Promissory Note dated August 12, 1993 from Sam & Libby, Inc. to Sam & Libby Taiwan.(4) 10.12 Hold Harmless and Indemnification Agreement dated September 30, 1997 by and among Samuel L. Edelman, Louise B. Edelman and Bruce D. Oberfest. 11.1 Calculation of Earnings Per Share. 16.1 Letter Regarding Change in Certifying Accountant 21.1 List of Subsidiaries. 23.1 Independent Auditors' Consent and Report on Schedules. - --------------- (1) Exhibits 3.1, 3.2, 4.1, 4.2, 10.1, 10.2, 10.3, 10.4, 10.5 and 10.6 are incorporated by reference to exhibits filed with the Company's Registration Statement on Form S-1 (No. 33-43424) filed October 18, 1991, Amendment No. 1 thereto filed November 7, 1991, Amendment No. 2 thereto filed November 25, 1991 and Amendment No. 3 thereto filed December 4, 1991, which Registration Statement became effective December 4, 1991. (2) Exhibit 10.8 is incorporated by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. (3) Exhibit 10.9 is incorporated by reference to Exhibit 10.10 of the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1993. (4) Exhibits 10.7, 10.10 and 10.11 are incorporated by reference to such Exhibits to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. EX-10.12 2 HOLD HARMLESS AND INDEMNIFICATION AGREEMENT 1 HOLD HARMLESS AND INDEMNIFICATION FOR GOOD AND VALUABLE CONSIDERATION, the receipt of which is hereby acknowledged, it is agreed among Samuel L. Edelman and Louise B. Edelman (collectively the "Edelmans") on the one hand and Bruce D. Oberfest ("Oberfest") on the other hand, as follows: 1. The Edelmans shall, subject to the conditions hereinafter set forth, hold harmless and indemnify Oberfest from any and all liabilities, obligations, costs and/or expenses, in connection with Oberfest's taking or refraining from taking any action as a director of Utopia Marketing, Inc. ("Utopia"), including but not limited to the cost of enforcing this Agreement and the reasonable and necessary attorney's fees of Oberfest in connection with such enforcement. If any claim is made against Oberfest which may call for indemnification hereunder. Oberfest shall forthwith advise Utopia and the Edelmans thereof as soon as he has knowledge of such claim. Oberfest shall be provided with legal representation without cost to Oberfest, the attorney to be approved by Oberfest, with such approval not to be unreasonably withheld. If for any reason there shall be a failure to provide such defense. Oberfest shall be entitled to engage an attorney of his own choosing whose reasonable and necessary legal fees shall be reimbursed to Oberfest. Oberfest shall have no right to settle any legal proceeding against him which is the subject of indemnification hereunder, without the prior written approval of the Edelmans, which shall be a condition of any indemnification hereunder. 2. For so long as Oberfest is a director of Utopia and one or more of the Edelmans is or are directors of Utopia, the Edelmans shall take all steps necessary to require Utopia to obtain and maintain in full force and effect Directors' and Officers' Liability Insurance which insurance policy shall be applicable to Oberfest as an insured. The said insurance shall be for an amount of no less than One Million Dollars ($1,000,000) per occurrence and on such other terms and provisions as shall be set forth in such Directors' and Officers' Liability Insurance Policy and to the extent required by the carrier, in any applicable Errors and Omissions Type Insurance Policy. Utopia shall provide Oberfest with prior notification of the expiration or termination of any such Directors' and Officers' Liability Insurance Policy. 3. The Edelmans represent and Oberfest acknowledges that he has been advised that Utopia is required pursuant to its Certificate of Incorporation and By-laws to indemnify officers and directors to the maximum extent permitted by law. Copies of the relevant provisions of such By-laws and Certificate of Incorporation are annexed hereto. 4. The indemnification hereunder by the Edelmans is conditioned upon and is subject to all of the following: (a) Oberfest shall look first to the Directors' and Officers' Liability Insurance Policy of Utopia and then to Utopia for indemnification payment, and shall only 2 be paid by the Edelmans for indemnification hereunder if indemnification payments from such insurance policy and from Utopia have not been made following settlement or judgment on the claim. (b) Oberfest shall not be entitled to indemnification hereunder if indemnification of Oberfest pursuant to such insurance policy or by Utopia is found by a court of law or governmental agency to be in violation of public policy or the action or failure to act for which Oberfest seeks indemnification is found to be fraudulent or criminal or constituting the receipt by Oberfest from Utopia of a personal benefit or advantage not lawfully available to all of the directors of Utopia as a whole. (c) In order for Oberfest to be entitled to indemnification hereunder as a director as to any action taken by Oberfest or any decision by Oberfest not to take action, Oberfest must reasonably believe at the time of taking such action or refraining from taking such action, and must so certify at the time indemnification hereunder is requested, that such action or decision not to act was taken by Oberfest in the reasonable belief that it was in the best interests of Utopia and its shareholders and not at the direction or control of the Edelmans. (d) The Edelmans each agree that they will give written notice of their intention to resign sent to Oberfest at his office, 287 King Street, Chappaqua, New York 10514, by Federal Express to be received by Oberfest's office not later than 10:30 AM Eastern Time on a weekday for a resignation to be effective not earlier than 5:01 PM Eastern Time on such date or on a specific date and time thereafter. (e) The indemnification hereunder by the Edelmans shall be effective with respect to actions taken by Oberfest or for which Oberfest has refrained from taking action until the time that there has been timely compliance with Subparagraph 4(d) and written notice sent to Oberfest at his office, 287 King Street, Chappaqua, New York 10514, stating that both of the Edelmans have resigned as Members of the Board of Directors of Utopia, is received by Oberfest's office during its business hours on a weekday. (f) It is specifically understood by Utopia and each of its Directors that Oberfest has and may continue to render professional services for the Edelmans with regard to accounting, financial and tax matters, and the performance of such services shall not cause this indemnify to fail. -2- 3 5. Each of the Edelmans shall be jointly and severally liable for all obligations hereunder. Dated: September 20, 1997 Samuel L. Edelman ------------------------------------- Samuel L. Edelman Louise B. Edelman ------------------------------------- Louise B. Edelman Bruce D. Oberfest ------------------------------------- Bruce D. Oberfest Received and understood: By: Kenneth M. Sitomer -------------------------------- Kenneth M. Sitomer, Director -3- EX-11.1 3 CALCULATION OF EARNINGS PER SHARE 1 EXHIBIT 11.1 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
YEAR ENDED ------------------------------------------ JANUARY 3, DECEMBER 28, DECEMBER 30, 1998 1996 1995 ---------- ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) Loss from continuing operations................... $ (786) $(2,675) $(3,773) Extraordinary gain................................ 1,288 ------- ------- ------- Net (loss) income................................. $ (786) $(1,387) $(3,773) ======= ======= ======= Computation of common and common equivalent shares outstanding: Common stock...................................... 13,866 12,136 10,878 ------- ------- ------- Common and common equivalent shares used in computing per share amounts..................... 13,866 12,136 10,878 ======= ======= ======= Loss per share from continuing operations......... $ (0.06) $ (0.22) $ (0.35) Extraordinary gain................................ 0.00 0.11 0.00 ------- ------- ------- Net loss per share................................ $ (0.06) $ (0.11) $ (0.35) ======= ======= =======
EX-16.1 4 LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT 1 EXHIBIT 16.1 LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT [DELOITTE & TOUCHE LLP LETTERHEAD] March 30, 1998 Securities and Exchange Mail Stop 9-5 450 5th Street, N.W. Washington, DC 20549 Dear Sirs/Madams: We have read and agree with the comments in Item 4 of Form 8-K of Utopia Marketing, Inc. dated March 26, 1998. Yours truly, [DELOITTE & TOUCHE LLP] DELOITTE & TOUCHE LLP EX-21.1 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 UTOPIA MARKETING, INC. FORMERLY SAM & LIBBY, INC. SUBSIDIARIES
JURISDICTION NAME ------------ Sanders-Importacao E Exportacao Ltd......................... Brazil Sam & Libby (HK) Limited.................................... Hong Kong Sam & Libby Outlets, Inc.................................... California
EX-23.1 6 INDEPENDENT AUDITORS' CONSENT & REPORT ON SCHEDLS. 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the use in Registration Statement No. 33-45671 of Utopia Marketing, Inc. (formerly Sam & Libby, Inc.) (the "Company") on Form S-8 of our report dated March 31, 1998 appearing in the Annual Report on Form 10-K/A of Utopia Marketing, Inc. for the year ended January 3, 1998. Our audits of the financial statements referred to in our aforementioned report also include the financial statement schedule of Utopia Marketing, Inc. (formerly Sam & Libby, Inc.) listed in Item 14(a)2. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements takes as a whole, presents fairly in all material respects the information set forth therein. MICHAEL, ADEST & BLUMENKRANTZ New York, New York May 1, 1998 EX-27 7 FINANCIAL DATA SCHECULE
5 YEAR JAN-03-1998 DEC-29-1996 JAN-03-1998 2,389 0 39 0 0 2,428 0 0 2,428 55 0 0 0 14 2,359 2,428 129 129 58 58 966 0 (109) (786) 0 (786) 0 0 0 (786) (.06) (.06)
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