Phoenix Footwear Group, Inc.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended October 1, 2005
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o |
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 001-31309
PHOENIX FOOTWEAR GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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15-0327010 |
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(State or Other Jurisdiction of
Incorporation or Organization)
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IRS Employer
Identification No.) |
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5759 Fleet Street, Suite 220, Carlsbad, |
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California
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92008 |
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(Address of Principal Executive Offices)
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(Zip Code) |
(760) 602-9688
(Registrants Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 R No £
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No R
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No R
Indicate the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.
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CLASS
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OUTSTANDING AT NOVEMBER 11, 2005 |
Common, $0.01 par value
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8,379,443 |
PHOENIX FOOTWEAR GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
PART I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
PHOENIX FOOTWEAR GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
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October 1, |
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January 1, |
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2005 |
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2005 |
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ASSETS |
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CURRENT ASSETS: |
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Cash |
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$ |
3,032,000 |
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$ |
694,000 |
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Accounts receivable (less allowances of $1,010,000 in 2005 and $1,567,000 in 2004) |
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23,744,000 |
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11,177,000 |
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Inventories-net |
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33,791,000 |
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28,317,000 |
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Other receivable |
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336,000 |
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911,000 |
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Other current assets |
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3,712,000 |
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2,971,000 |
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Deferred income tax asset |
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255,000 |
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256,000 |
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Total current assets |
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64,870,000 |
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44,326,000 |
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PLANT AND EQUIPMENT Net |
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4,270,000 |
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3,530,000 |
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OTHER ASSETS: |
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Other assets net |
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1,208,000 |
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121,000 |
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Goodwill |
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34,541,000 |
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27,500,000 |
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Unamortizable intangibles |
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26,769,000 |
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17,975,000 |
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Intangible assets, net |
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10,057,000 |
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4,728,000 |
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Total other assets |
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72,575,000 |
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50,324,000 |
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TOTAL ASSETS |
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$ |
141,715,000 |
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$ |
98,180,000 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
10,948,000 |
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$ |
7,568,000 |
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Accrued expenses |
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4,142,000 |
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3,543,000 |
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Notes payable current |
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9,200,000 |
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3,656,000 |
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Other current liabilities |
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1,052,000 |
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400,000 |
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Total current liabilities |
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25,342,000 |
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15,167,000 |
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OTHER LIABILITIES: |
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Notes payable noncurrent |
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25,800,000 |
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10,451,000 |
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Note payable, line of credit |
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23,641,000 |
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12,500,000 |
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Other long-term liabilities |
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3,469,000 |
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1,111,000 |
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Deferred income tax liability |
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9,263,000 |
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9,265,000 |
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Total other liabilities |
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62,173,000 |
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33,327,000 |
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Total liabilities |
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87,515,000 |
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48,494,000 |
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Commitments
and Contingencies |
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STOCKHOLDERS EQUITY: |
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Common
stock, $.01 par value 50,000,000 shares authorized; 8,400,000 and 7,858,000
shares issued in 2005 and 2004, respectively |
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84,000 |
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78,000 |
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Additional paid-in-capital |
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45,763,000 |
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42,685,000 |
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Retained earnings |
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9,424,000 |
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8,303,000 |
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55,271,000 |
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51,066,000 |
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Less: Treasury stock at cost, 378,000 and 504,000 shares in 2005 and 2004, respectively |
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(1,071,000 |
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(1,380,000 |
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Total stockholders equity |
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54,200,000 |
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49,686,000 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
141,715,000 |
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$ |
98,180,000 |
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See notes to consolidated condensed financial statements.
3
PHOENIX FOOTWEAR GROUP, INC.
CONSOLIDATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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October 1, |
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September 25, |
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October 1, |
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September 25, |
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2005 |
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2004 |
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2005 |
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2004 |
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NET SALES |
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$ |
34,275,000 |
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$ |
23,176,000 |
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$ |
76,028,000 |
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$ |
55,690,000 |
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COST OF GOODS SOLD |
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21,703,000 |
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13,345,000 |
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47,026,000 |
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31,424,000 |
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GROSS PROFIT |
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12,572,000 |
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9,831,000 |
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29,002,000 |
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24,266,000 |
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OPERATING EXPENSES: |
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Selling, general and administrative expenses |
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9,090,000 |
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6,530,000 |
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22,850,000 |
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16,836,000 |
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Non cash 401k stock grant compensation |
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233,000 |
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213,000 |
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700,000 |
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637,000 |
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Amortization |
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433,000 |
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164,000 |
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814,000 |
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267,000 |
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Other expenses net |
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2,000 |
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3,000 |
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617,000 |
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62,000 |
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Total operating expenses |
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9,758,000 |
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6,910,000 |
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24,981,000 |
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17,802,000 |
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OPERATING INCOME |
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2,814,000 |
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2,921,000 |
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4,021,000 |
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6,464,000 |
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INTEREST EXPENSE |
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1,156,000 |
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199,000 |
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2,121,000 |
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503,000 |
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EARNINGS BEFORE INCOME TAXES |
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1,658,000 |
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2,722,000 |
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1,900,000 |
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5,961,000 |
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INCOME TAX PROVISION |
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677,000 |
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994,000 |
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779,000 |
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2,354,000 |
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NET EARNINGS |
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$ |
981,000 |
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$ |
1,728,000 |
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$ |
1,121,000 |
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$ |
3,607,000 |
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NET EARNINGS PER SHARE (Note 5) |
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Basic |
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$ |
.12 |
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$ |
.26 |
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$ |
.15 |
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$ |
.68 |
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Diluted |
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$ |
.12 |
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$ |
.24 |
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$ |
.14 |
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$ |
.61 |
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SHARES OUTSTANDING: |
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Basic |
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8,001,439 |
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6,665,616 |
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7,688,673 |
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5,272,501 |
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Diluted |
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8,371,290 |
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7,331,021 |
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8,057,542 |
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5,903,212 |
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See notes to consolidated financial statements.
4
PHOENIX FOOTWEAR GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended |
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October 1, |
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September 25, |
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2005 |
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2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net earnings |
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$ |
1,121,000 |
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$ |
3,607,000 |
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Adjustments to reconcile net earnings to net cash used by operating activities: |
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Depreciation and amortization |
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1,578,000 |
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753,000 |
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Allocation of shares in defined contribution plan |
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700,000 |
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854,000 |
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Changes in assets and liabilities (net of impact of acquisitions): |
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(Increase) decrease in: |
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Accounts receivable net |
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(4,866,000 |
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(5,761,000 |
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Inventories net |
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3,238,000 |
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(2,544,000 |
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Other current receivable |
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575,000 |
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(172,000 |
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Prepaid income tax |
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Other current assets |
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(49,000 |
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(412,000 |
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Other noncurrent assets |
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(2,533,000 |
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58,000 |
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Increase (decrease) in: |
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Accounts payable |
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(1,662,000 |
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999,000 |
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Accrued expenses |
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276,000 |
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(89,000 |
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Other liabilities |
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(535,000 |
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(339,000 |
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Income taxes payable |
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(111,000 |
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Net cash used by operating activities |
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(2,157,000 |
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(3,157,000 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of equipment |
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(668,000 |
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(872,000 |
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Proceeds from disposal of property and equipment |
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3,000 |
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Acquisitions, net of cash acquired |
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(25,876,000 |
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(37,862,000 |
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Net cash used by investing activities |
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(26,541,000 |
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(38,734,000 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net borrowings on note payable-line of credit |
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36,374,000 |
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6,980,000 |
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Proceeds from notes payable |
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35,000,000 |
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8,013,000 |
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Repayments of notes payable |
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(39,396,000 |
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(1,775,000 |
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Bank overdraft |
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Issuance of common stock |
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327,000 |
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28,490,000 |
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Debt issuance and other costs |
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(1,269,000 |
) |
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Purchases of treasury stock |
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(100,000 |
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Net cash provided by financing activities |
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31,036,000 |
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41,608,000 |
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NET INCREASE
(DECREASE) IN CASH |
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2,338,000 |
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(283,000 |
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CASH Beginning of period |
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694,000 |
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1,058,000 |
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CASH End of period |
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$ |
3,032,000 |
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$ |
775,000 |
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SUPPLEMENTAL CASH FLOW INFORMATION |
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Cash paid during the period for: |
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Interest |
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$ |
1,164,000 |
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$ |
507,000 |
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Income taxes |
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$ |
51,000 |
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$ |
2,439,000 |
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See notes to consolidated condensed financial statements.
5
PHOENIX FOOTWEAR GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
Description of Business and Summary of Significant Accounting Policies
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements of Phoenix Footwear
Group, Inc. (the Company) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments which are of a normal recurring nature, necessary for fair presentation
have been included in the accompanying financial statements. These financial statements should be
read in conjunction with the consolidated financial statements and notes included in the Companys
Annual Report on Form 10-K/A filed with the Securities and Exchange Commission for the fiscal year
ended January 1, 2005, the Companys Form 8-K filed on July 5, 2005, for the acquisition of
Chambers Belt Company and the Companys Form 8-K filed on August 9, 2005 for the acquisition of
substantially all of the assets of The Paradise Shoe Company, LLC (Tommy Bahama Footwear),
including the exclusive license of the Tommy Bahama® line of mens and womens footwear, hosiery
and belts. Amounts related to disclosures of January 1, 2005 balances within these interim
statements were derived from the aforementioned 10-K/A. The results of operations for the three and
nine months ended October 1, 2005, or for any other interim period, are not necessarily indicative
of the results that may be expected for the full year.
Principles of Consolidation
The consolidated financial statements consist of Phoenix Footwear Group, Inc. and its wholly
owned subsidiaries, Penobscot Shoe Company (Penobscot), H.S. Trask & Co (Trask), Royal Robbins,
Inc. (Robbins), Altama Delta Corporation (Altama), Chambers Belt Company (Chambers Belt) and
Phoenix Delaware Acquisition, Inc. (Phoenix Acquisition), which holds the assets of Tommy Bahama
Footwear. Intercompany accounts and transactions have been eliminated in consolidation. The results
of Altamas, Chambers and Phoenix Acquisitions operations have been included in the consolidated
financial statements since the date of their respective acquisitions.
Accounting Period
Effective January 1, 2003, the Company changed its year-end to a fiscal year that is the 52-
or 53-week period ending the Saturday nearest to December 31st. The third quarters consisted of the
13 weeks ended October 1, 2005 and September 25, 2004.
Reclassifications
Certain reclassifications have been made to the 2004 financial statements to conform to the
classifications used in 2005.
Critical Accounting Policies
As of October 1, 2005, the Companys consolidated critical accounting policies and estimates
have not changed materially from those set forth in the Annual Report on Form 10-K/A for the year
ended January 1, 2005 with the following exception:
On February 24, 2005, the Company authorized an immediate vesting of eligible employees
unvested share options with an exercise price greater than $6.50 per share. In total, 440,333
options with an average exercise price of $10.20 immediately vested and have an average remaining
contractual life of 8.6 years. The unamortized fair value associated with these accelerated-vest
shares in the amount of $2.5 million amortized immediately. Had the accelerated-vest program not
occurred, the related-cost in the fiscal years of 2005, 2006 and 2007 would have included $1.1
million, $1.1 million and $347,000, respectively. In addition to its employee-retention value, the
Companys decision to accelerate the vesting of these out-of-the-money options was based upon the
accounting of such costs moving from disclosure-only in 2005 to being included in the Companys
statement of operations in 2006.
6
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123R, Share-Based Compensation, which supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee services through share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services received in exchange for the
award of equity investments based on the fair value of the award at the date of grant. The cost
will be recognized over the period during which an employee is required to provide services in
exchange for the award. On April 14, 2005, the Securities and Exchange Commission issued a release
announcing the adoption of a new rule delaying the required implementation of SFAS No. 123R. Under
this new rule, SFAS No. 123R is effective as of the beginning of the first annual reporting period
that begins after June 15, 2005. The impact on net earnings as a result of the adoption of SFAS No.
123R, from a historical perspective, can be found in Note 4 to the Consolidated Financial
Statements in this Quarterly Report and in Note 1 to the Consolidated Financial Statements
contained in the Companys 2004 Annual Report on Form 10-K/A for the year ended January 1, 2005. The
Company is currently evaluating the provisions of SFAS No. 123R and will adopt it in the first
quarter of 2006, as required.
2. Inventories
The components of inventories are:
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|
|
October 1, 2005 |
|
|
January 1, 2005 |
|
Raw materials |
|
$ |
3,433,000 |
|
|
$ |
1,861,000 |
|
Work in process |
|
|
1,537,000 |
|
|
|
807,000 |
|
Finished goods |
|
|
28,821,000 |
|
|
|
25,649,000 |
|
|
|
|
|
|
|
|
|
|
$ |
33,791,000 |
|
|
$ |
28,317,000 |
|
|
|
|
|
|
|
|
3. Goodwill and Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets. As a result of adopting SFAS No. 142, the Companys goodwill and certain intangible assets
are no longer amortized, but are subject to an annual impairment test. Impairment would be examined
more frequently if certain indicators are encountered. The Company determined that there was no
impairment of goodwill to be recorded during the quarter and nine month period ended October 1,
2005. The following sets forth the intangible assets by major asset class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful |
|
|
October 1, 2005 |
|
|
January 1, 2005 |
|
|
|
Life |
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
|
|
|
Accumulated |
|
|
Net Book |
|
|
|
(Years) |
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
|
Gross |
|
|
Amortization |
|
|
Value |
|
Non-amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/trade
names |
|
|
|
|
|
$ |
19,134,000 |
|
|
|
|
|
|
$ |
19,134,000 |
|
|
$ |
10,340,000 |
|
|
$ |
|
|
|
$ |
10,340,000 |
|
Customer
relationships |
|
|
|
|
|
|
7,635,000 |
|
|
|
|
|
|
|
7,635,000 |
|
|
|
7,635,000 |
|
|
|
|
|
|
|
7,635,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-amortizing assets |
|
|
|
|
|
$ |
26,769,000 |
|
|
|
|
|
|
$ |
26,769,000 |
|
|
$ |
17,975,000 |
|
|
|
|
|
|
$ |
17,975,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists |
|
|
5-13 |
|
|
|
6,369,000 |
|
|
|
636,000 |
|
|
|
5,733,000 |
|
|
|
3,222,000 |
|
|
|
278,000 |
|
|
|
2,944,000 |
|
Other |
|
|
2-5 |
|
|
|
5,016,000 |
|
|
|
692,000 |
|
|
|
4,324,000 |
|
|
|
2,021,000 |
|
|
|
237,000 |
|
|
|
1,784,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortizing
intangible assets |
|
|
|
|
|
$ |
11,385,000 |
|
|
$ |
1,328,000 |
|
|
$ |
10,057,000 |
|
|
$ |
5,243,000 |
|
|
$ |
515,000 |
|
|
$ |
4,728,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with definite lives are amortized using the straight-line method over
periods ranging from 2 to 13 years. During the three and nine month periods ended October 1, 2005
aggregate amortization expense was approximately $433,000 and $814,000, respectively. During the
three and nine month periods ended September 25, 2004 aggregate amortization expense was $157,000
and $260,000, respectively. Amortization expense related to intangible assets at October 1, 2005 in
each of the next five fiscal years and beyond is expected to be incurred as follows:
|
|
|
|
|
Remainder of 2005 |
|
$ |
438,000 |
|
2006 |
|
|
1,744,000 |
|
2007 |
|
|
1,744,000 |
|
2008 |
|
|
1,729,000 |
|
2009 |
|
|
1,522,000 |
|
Thereafter |
|
|
2,880,000 |
|
|
|
|
|
|
|
$ |
10,057,000 |
|
|
|
|
|
Changes in goodwill during the nine months ended October 1, 2005 related primarily to the
acquisition of Chamber Belt and the payment of an earnout associated with the purchase of Royal Robbins (see Note 6). The preliminary purchase price allocation of Chambers Belt
and Tommy Bahama Footwear are subject to refinement based upon managements final conclusions. (See
Note 10)
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
Balance
Forward at January 1, 2005 |
|
|
$ |
27,500,000 |
|
Acquired |
|
|
|
7,041,000 |
|
|
|
|
|
|
Ending
Balance at July 2, 2005 |
|
|
|
34,541,000 |
|
Acquired |
|
|
|
|
|
|
|
|
|
|
Ending
Balance at October 1, 2005 |
|
|
$ |
34,541,000 |
|
|
|
|
|
|
7
4. Stock-Based Compensation
The Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations, in accounting for its stock-based
compensation. Under APB Opinion No. 25, compensation expense is recognized when the market price of
the stock underlying an award on the date of grant exceeds any related exercise price. No employee
stock-based compensation expense was recorded for the quarters or nine month periods ended October
1, 2005 and September 25, 2004. Pro forma information regarding net earnings and earnings per share
as required by SFAS No. 123 and SFAS No. 148 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 1, |
|
|
September 25, |
|
|
October 1, |
|
|
September 25, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net earnings, as reported |
|
$ |
981,000 |
|
|
$ |
1,728,000 |
|
|
$ |
1,121,000 |
|
|
$ |
3,607,000 |
|
Add/Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects |
|
|
(123,000 |
) |
|
|
(225,000 |
) |
|
|
(2,832,000 |
) |
|
|
(480,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings (loss) |
|
$ |
858,000 |
|
|
$ |
1,503,000 |
|
|
$ |
(1,711,000 |
) |
|
$ |
3,127,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.12 |
|
|
$ |
0.26 |
|
|
$ |
0.15 |
|
|
$ |
0.68 |
|
Basic pro forma |
|
$ |
0.11 |
|
|
$ |
0.23 |
|
|
$ |
(0.22 |
) |
|
$ |
0.59 |
|
Diluted as reported |
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.14 |
|
|
$ |
0.61 |
|
Diluted pro forma |
|
$ |
0.10 |
|
|
$ |
0.21 |
|
|
$ |
(0.21 |
) |
|
$ |
0.53 |
|
The pro forma amounts reflected above may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense as the options vest and
additional options may be granted in future years. The weighted average fair value of the stock
options granted was $7.02 for the quarter ended September 25, 2004 and was $3.45 and $5.68 for the nine months ended October 1, 2005 and September 25,
2004, respectively. There were no stock options granted for the
quarter ended October 1, 2005. The fair value of employee stock options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 1, |
|
September 25, |
|
October 1, |
|
September 25, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility from stock |
|
|
44.84 |
% |
|
|
45.92 |
% |
|
|
44.84 |
% |
|
|
45.92 |
% |
Risk free interest rates |
|
|
4.16 |
% |
|
|
4.73 |
% |
|
|
4.16 |
% |
|
|
4.73 |
% |
Expected lives |
|
10 years |
|
10 years |
|
10 years |
|
10 years |
The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Companys employee stock options
have characteristics significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in managements
opinion, the existing models do not necessarily provide a reliable single measure of the fair value
of grants under the Companys employee stock-based compensation plans.
8
5. Per Share Data
Basic net earnings per share is computed by dividing net earnings by the weighted average number of
common shares outstanding for the period. Diluted net earnings per share is calculated by dividing
net earnings and the effect of assumed conversions by the weighted average number of common and,
when applicable, potential common shares outstanding during the period. A reconciliation of the
numerators and denominators of basic and diluted earnings per share is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 1, |
|
|
September 25, |
|
|
October 1, |
|
|
September 25, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Basic net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
981,000 |
|
|
$ |
1,728,000 |
|
|
$ |
1,121,000 |
|
|
$ |
3,607,000 |
|
Weighted average common shares outstanding |
|
|
8,001,439 |
|
|
|
6,665,616 |
|
|
|
7,688,673 |
|
|
|
5,272,501 |
|
Basic net earnings per share |
|
$ |
0.12 |
|
|
$ |
0.26 |
|
|
$ |
0.15 |
|
|
$ |
0.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
981,000 |
|
|
$ |
1,728,000 |
|
|
$ |
1,121,000 |
|
|
$ |
3,607,000 |
|
Weighted average common shares outstanding |
|
|
8,001,439 |
|
|
|
6,665,616 |
|
|
|
7,688,673 |
|
|
|
5,272,501 |
|
Effect of stock options outstanding |
|
|
369,851 |
|
|
|
665,405 |
|
|
|
368,869 |
|
|
|
630,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and potential
common shares outstanding |
|
|
8,371,290 |
|
|
|
7,331,021 |
|
|
|
8,057,542 |
|
|
|
5,903,212 |
|
Diluted net earnings per share |
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.14 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three and nine months ended October 1, 2005 and
September 25, 2004, options outstanding totaling 580,242 and
312,500 shares, respectively, were excluded from the calculations, as
their effect would have been antidilutive.
In addition to shares outstanding held by the public, the Companys defined contribution
401(k) savings plan held approximately 359,000 shares as of October 1, 2005, which were issued
during 2001 in connection with the termination of the Companys defined benefit pension plan. These
shares, while eligible to vote, are classified as treasury stock and therefore are not outstanding
for purpose of determining per share earnings until the time that such shares are allocated to
employee accounts. This allocation is occurring over a seven-year period which commenced in 2002.
During the first quarter of 2005, approximately 120,000 shares were allocated to the defined
contribution 401(k) savings plan.
6. Contingent Liability
In connection with the Companys acquisition of Royal Robbins, it agreed to pay as part of the
purchase price potential earnout cash payments equal to 25% of the gross profit of the Royal
Robbins product lines for the 12-month periods ending May 31, 2004 and 2005, respectively, so long
as minimum thresholds are achieved by the acquired business during these periods. On June 30, 2005
and 2004 the Company paid $2.8 million and $2.0 million, respectively, which represented the second
and first earnout payments earned for the 12-month periods ended May 31, 2005 and 2004,
respectively. In connection with the Companys acquisition of Chambers Belt, the Company agreed to
pay as part of the purchase price earnout payments based on Chambers Belt meeting certain earnings
requirements. Managements current estimate of potential earnout payments is approximately $2.5
million and $3.0 million for the 12-month periods ending June 29, 2006 and 2007, respectively, so
long as Chambers Belt meets certain earnings requirements, although actual payments may vary from
these estimated amounts.
7. Debt
During the first month of fiscal 2005, the Company had a $33.4 million credit facility with
Manufacturers and Traders Trust Company (M&T) pursuant to a Third Amended and Restated Revolving
Credit and Term Loan Agreement dated as of July 19, 2004, which was comprised of an $18.0 million
revolving line of credit (revolver) and $15.4 million in term loans, including a new $10.0
million term loan which was repayable in equal monthly installments maturing in July 2009. The
Companys obligations under the credit facility were secured by accounts receivable, inventory and
equipment. The revolver and the notes payable to M&T contained certain financial covenants relative
to average borrowed funds to earnings ratio, net earnings, current ratio, and cash flow coverage.
9
On February 1, 2005, the Company entered into Amendment Number 1 (the Amendment) to the
credit agreement between the Company and M&T. The Amendment, among other things, established a $4
million overline credit facility in addition to the $18 million revolving credit facility already
existing under the credit agreement. The overline credit facility expired on May 30, 2005 and all
borrowings under that facility were due and payable on that date. Until May 30, 2005, Phoenixs
combined availability under the overline credit facility and revolving credit facility was $22
million, subject to a borrowing base formula. The Amendment revised the borrowing base formula to
remove until May 30, 2005 the inventory caps which had applied to each of the Companys product
lines. The Amendment also modified the financial covenants requiring us not to exceed certain
average borrowed funds to EBITDA ratios and cash flow coverage ratios.
On June 29, 2005, the Company entered into a new Credit Facility Agreement with M&T in
connection with its acquisition of Chambers Belt. This new credit agreement replaced the
Companys prior credit agreement with M&T for a new $52.0 million credit facility. The new credit
facility was an increase of approximately $19.0 million over the prior credit facility with M&T.
The new credit agreement established up to a $24.0 million revolving credit facility, a $5.0
million swing line loan and a $28.0 million term loan. The revolving line had an interest rate of
LIBOR plus 3.0%, or the prime rate plus .375%. The term loan had an interest rate of LIBOR plus
3.5%. The borrowings under that new credit agreement were secured by a blanket security interest in
all the assets of the Company and its subsidiaries. The Companys availability under the revolving
credit facility was $24.0 million and was subject to a borrowing base formula with inventory caps,
and financial covenants requiring the Company not to exceed certain average borrowed funds to
EBITDA ratios and cash flow coverage ratios.
On
August 3, 2005, the Company and M&T entered into an Amended and Restated Credit Facility
Agreement (the Amended Credit Agreement) in connection
with its acquisition of Tommy Bahama Footwear. This Amended Credit Agreement replaced the Companys
existing credit agreement with M&T of $52 million and increased its availability to $63 million.
M&T acted as lender and administrative agent for additional lenders under the Amended Credit
Agreement. The Amended Credit Agreement increases the existing line of credit from $24 million to
$28 million and adds a $7 million bridge loan used for the
acquisition of Tommy Bahama Footwear. The revolving line has an interest rate of LIBOR plus 3.0%, or the prime rate plus .375%. The
bridge loan has an interest rate of LIBOR plus 3.5% or the prime rate plus 0.75%. The borrowings
under the Amended Credit Agreement are secured by a blanket security interest in all the assets of
the Company and its subsidiaries. The amended credit facility expires on June 30, 2010 and all
borrowings under that facility are due and payable on that date. The Companys availability under
the revolving credit facility will be $28 million (subject to a borrowing base formula). The bridge
loan is due December 31, 2005, and may be prepaid at any time. At October 1, 2005, LIBOR with a
90-day maturity was 3.86% and the prime rate was 6.75%. In addition,
the payment or declaration of dividends and distributions is
restricted. The Company is permitted to pay dividends on its common stock as long as it is
not in default and doing so would not cause a default, and as long as its average borrowed funds to
EBITDA ratio, as defined in the amended Credit Agreement, is no greater than 2 to 1. Under the terms of the
amended Credit Agreement, the borrowing base for the revolver is based on certain balances of accounts
receivable and inventory, as defined in the agreement.
The borrowing base formula contains inventory caps, and financial covenants requiring the Company not to
exceed certain average borrowed funds to EBITDA ratios and cash flow coverage ratios. We were not in compliance with the average
borrowed funds to EBITDA ratio and cash flow coverage ratio covenants
under the credit agreement at October 1, 2005. On
November 14, 2005, we obtained a waiver from our lender of these
defaults. We are currently in discussions with our lender to revise
the covenants, and if necessary, the terms of our bridge loan, to
reflect more accurately our current operating position. We anticipate that our lender will agree
to amend these covenants and our bridge loan terms in this manner,
although there can be no assurance that these negotiations will be
successful or that we will be able to comply with these covenants in
the future. See below Risk Factors Defaults
under our secured credit arrangement could result in a foreclosure on
our assets by our bank.
Long-term debt as of October 1, 2005 and January 1, 2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
October 1, |
|
|
January 1, |
|
|
|
2005 |
|
|
2005 |
|
Revolving line of credit to
bank; secured by accounts
receivable, inventory and
equipment; interest due monthly at
LIBOR rate of 6.44%; |
|
$ |
16,000,000 |
|
|
$ |
|
|
Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .375%; |
|
|
7,641,000 |
|
|
|
|
|
Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at LIBOR plus 275
basis points |
|
|
|
|
|
|
5,000,000 |
|
Revolving line of credit to bank;
secured by accounts receivable,
inventory and equipment; interest
due monthly at Prime plus .25% |
|
|
|
|
|
|
7,500,000 |
|
Term loan payable to bank in
variable quarterly installments
through 2011, interest due monthly
at LIBOR plus 3.5% |
|
|
28,000,000 |
|
|
|
|
|
Term loan payable to bank in
annual installments of $750,000
through 2006, interest due monthly
at LIBOR plus 300 basis points |
|
|
|
|
|
|
1,500,000 |
|
Term loan payable to bank in
quarterly installments of $150,000
through 2008, interest due monthly
at LIBOR plus 300 basis points |
|
|
|
|
|
|
2,250,000 |
|
Term loan payable to bank in
monthly installments of $25,000
through 2008, interest due monthly
at LIBOR plus 300 basis points |
|
|
|
|
|
|
1,175,000 |
|
Term loan payable to bank in
monthly installments of $167,000
through 2009, interest due monthly
at LIBOR plus 300 basis points |
|
|
|
|
|
|
9,167,000 |
|
Bridge loan payable to bank on
December 31, 2005, interest due
monthly at LIBOR plus 3.5% or the
prime rate plus .75% |
|
|
7,000,000 |
|
|
|
|
|
Note payable to financial
institution; collateralized by
vehicle; interest at 0%; principal
payable $493 monthly; remaining
principal balance due July 2007 |
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
58,641,000 |
|
|
|
26,607,000 |
|
Less: current portion |
|
|
9,200,000 |
|
|
|
3,656,000 |
|
|
|
|
|
|
|
|
Noncurrent portion |
|
$ |
49,441,000 |
|
|
$ |
22,951,000 |
|
|
|
|
|
|
|
|
The aggregate principal payments of notes payable are as follows:
|
|
|
|
|
One year or less |
|
$ |
9,200,000 |
|
One to three years |
|
|
6,500,000 |
|
Three to five years |
|
|
42,941,000 |
|
|
|
|
|
Total |
|
$ |
58,641,000 |
|
|
|
|
|
10
8. Other (income) expenses net
Other (income) expense-net, of $617,000 for the nine months ended October 1, 2005 consists
primarily of severance and management restructuring costs. The prior year nine month
expense of $62,000 consisted primarily of expenses incurred in connection with non-capitalizable
acquisition activities.
9. Operating Segment Information
The Companys operating segments have been classified into three business segments: footwear
and apparel, accessories and military boot operations. The footwear and apparel operation designs,
develops and markets various branded dress and casual footwear, apparel, and accessories,
outsources the majority of the production of its products from foreign manufacturers primarily
located in Brazil and Asia and sells its products primarily through department stores, national
chain stores, independent specialty retailers, third-party catalog companies and directly to
consumers over the Companys Internet web sites. The accessories operation designs, develops,
manufactures and markets various branded belts and accessories, and sells its products primarily
through department stores, national chain stores and independent specialty retailers. The military
boot operation manufactures one brand of mil-spec combat boots for sale to the Department of
Defense (DoD) which serves all four major branches of the U.S. military, however these boots are
used primarily by the U.S. Army and the U.S. Marines. In addition, the military boot operation
manufactures or outsources commercial combat boots, infantry combat boots, tactical boots and
safety and work boots and sells these products primarily through domestic footwear retailers,
footwear and military catalogs and directly to consumers over its own web site. Operating profits
by business segment exclude allocated corporate interest expense and income taxes. Corporate assets
consist principally of cash, certain receivables and non-current assets.
In the Companys footwear and apparel segment, no customer exceeded 10% of net sales in this
segment for the three and nine month periods ended October 1, 2005. In the Companys accessories
segment, sales to Wal-Mart stores represented 51% of net sales for both the three and nine month
periods ended October 1, 2005, and K-Mart stores represented 9% of net sales in both the three and
nine month periods ended October 1, 2005. No other customer exceeded 10% of net sales for this
segment. In the Companys military boot segment, sales to the DoD represented 64% and 65%,
respectively, of net sales for the three and nine month periods ended October 1, 2005. No other
customer exceeded 10% of net sales in this segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
October 1, |
|
|
September 25, |
|
|
October 1, |
|
|
September 25, |
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear and apparel |
$ |
18,408,000 |
|
|
$ |
16,431,000 |
|
|
$ |
49,875,000 |
|
|
$ |
48,945,000 |
|
Accessories |
|
9,710,000 |
|
|
|
|
|
|
|
9,710,000 |
|
|
|
|
|
Military boots |
|
6,157,000 |
|
|
|
6,745,000 |
|
|
|
16,443,000 |
|
|
|
6,745,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34,275,000 |
|
|
$ |
23,176,000 |
|
|
$ |
76,028,000 |
|
|
$ |
55,690,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Footwear and apparel |
$ |
2,252,000 |
|
|
$ |
2,871,000 |
|
|
$ |
5,854,000 |
|
|
$ |
8,222,000 |
|
Accessories |
|
1,135,000 |
|
|
|
|
|
|
|
1,135,000 |
|
|
|
|
|
Military boots |
|
943,000 |
|
|
|
1,445,000 |
|
|
|
2,379,000 |
|
|
|
1,445,000 |
|
Reconciling items(1) |
|
(1,516,000 |
) |
|
|
(1,395,000 |
) |
|
|
(5,347,000 |
) |
|
|
(3,203,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,814,000 |
|
|
$ |
2,921,000 |
|
|
$ |
4,021,000 |
|
|
$ |
6,464,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
| October 1, | | |
January 1, |
|
| 2005 | | |
2005 |
Identifiable assets |
|
|
|
|
|
|
Footwear and apparel |
$ |
25,745,000 |
|
|
$ |
28,785,000 |
Accessories |
|
12,344,000 |
|
|
|
|
Military boots |
|
10,029,000 |
|
|
|
7,527,000 |
Goodwill and non-amortizable intangibles |
|
|
|
|
|
|
Footwear and apparel |
|
14,269,000 |
|
|
|
10,645,000 |
Accessories |
|
10,745,000 |
|
|
|
|
Military boots |
|
36,297,000 |
|
|
|
34,830,000 |
Reconciling items(2) |
|
32,286,000 |
|
|
|
16,393,000 |
|
|
|
|
|
|
$ |
141,715,000 |
|
|
$ |
98,180,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents corporate general and administrative expenses and other income (expense) not
utilized by management in determining segment profitability. |
|
(2) |
|
Identifiable assets are comprised of net inventory, certain property and plant and equipment.
Reconciling items represent unallocated corporate assets not segregated between the three
segments. |
11
10. Acquisitions
On August 4, 2005, the Company acquired substantially all of the assets of Tommy Bahama
Footwear for approximately $6.3 million, plus a holdback of $500,000, to be released after 14
months less any indemnity claims made by the Company under the Asset Purchase Agreement. Tommy
Bahama Footwear is based in Phoenix, Arizona and was the exclusive licensee of the Tommy Bahama®
line of mens and womens footwear, hosiery and belts. In addition, on the same date, the Company
entered into a trademark license agreement with Tommy Bahama Group, Inc., a wholly owned subsidiary
of Oxford Industries, Inc.
Under
the terms of the trademark license agreement, the Company has an exclusive license to
manufacture and distribute mens and womens footwear, hosiery, belts and mens small leather goods
and accessories bearing the Tommy Bahama® mark and related marks in the United States, Canada,
Mexico and certain Caribbean Islands for an initial term through May 31, 2012 with an option to
extend the agreement through May 31, 2016 if certain requirements are met. The license agreement
may be terminated by Tommy Bahama before the end of the term for several reasons, including
material defaults by the Company or its failure to sell products for 60 consecutive days. The
license is non-exclusive for the last 120 days of the term for which no extension is available.
The following table summarizes the preliminary allocation of the purchase price based on the
estimated fair values of the assets acquired and liabilities assumed at August 4, 2005, the date of
acquisition. The preliminary purchase price allocation is subject to refinement based upon
managements final conclusions.
|
|
|
|
|
Current assets |
|
$ |
5,432,000 |
|
Property, plant and equipment |
|
|
66,000 |
|
Intangible assets, subject to amortization |
|
|
462,000 |
|
Goodwill and unamortizable intangibles |
|
|
2,347,000 |
|
|
|
|
|
Total assets acquired |
|
|
8,307,000 |
|
|
|
|
|
Less liabilities |
|
|
(2,015,000 |
) |
|
|
|
|
Net assets acquired |
|
$ |
6,292,000 |
|
|
|
|
|
Of the $2.3 million of acquired goodwill and unamortizable intangible assets, $2.3 million was
preliminarily allocated to registered trademarks and tradenames. Intangible assets totaling
$462,000 which are subject to amortization have a weighted-average useful life of approximately 8
years. The intangible assets subject to amortization include commercial customer lists.
On June 29, 2005, the Company acquired substantially all of the assets of Chambers Belt
Company for approximately $21.5 million, plus contingent earn-out payments subject to Chambers Belt
meeting certain post-closing sales requirements. As part of the transaction, the Company incurred
approximately $1.3 million in acquisition related expenses and entered into a $3.0 million
non-compete agreement with four of Chambers Belts stockholders and officers, which increased the
net purchase price. Payment of the purchase price at closing was made by delivery of $19.7 million
in cash, and 374,462 shares of common stock valued at $2.0 million.
Under the terms of the asset purchase agreement, the Company agreed to pay four of Chambers
Belts stockholders and officers $3.0 million in consideration for a five-year
covenant-not-to-compete and other restrictive covenants. The Company also entered into
employment agreements with three of Chambers Belts stockholders and officers: Charles
Stewart, Kelly Green and David Matheson. Chambers Belt is a leading manufacturer of mens and
womens belts and accessories.
The following table summarizes the preliminary allocation of the purchase price based on the
estimated fair values of the assets acquired and liabilities assumed at June 29, 2005, the date of
acquisition. The preliminary purchase price allocation is subject to refinement based upon
managements final conclusions.
|
|
|
|
|
Current assets |
|
$ |
11,587,000 |
|
Property, plant and equipment |
|
|
753,000 |
|
Intangible assets, subject to amortization |
|
|
5,686,000 |
|
Goodwill and unamortizable intangibles |
|
|
10,746,000 |
|
|
|
|
|
Total assets acquired |
|
|
28,772,000 |
|
|
|
|
|
Less liabilities |
|
|
(7,027,000 |
) |
|
|
|
|
Net assets acquired |
|
$ |
21,745,000 |
|
|
|
|
|
12
Of
the $10.7 million of acquired goodwill and unamortizable
intangible assets, $6.4 million was
preliminarily allocated to registered trademarks and tradenames. Intangible assets totaling $5.7
million which are subject to amortization have a weighted-average useful life of approximately 6.5
years. The intangible assets subject to amortization include commercial customer list of $2.7
million (8 year weighted-average useful life) and non-compete agreement of $3.0 million (5 year
weighted-average useful life).
The following is the consolidated results of operations of the Company for the three and nine
month periods ended October 1, 2005 and September 25, 2004, respectively, on a pro forma basis
using internally generated unaudited information, assuming the Chambers Belt, Altama and Tommy
Bahama Footwear acquisitions occurred at the beginning of the earliest period presented. This pro
forma information is presented after giving effect to certain adjustments which are based upon
currently available information and upon certain assumptions that the Company believes are
reasonable. This pro forma information does not purport to present what the Companys consolidated
results of operations would actually have been if the Chambers Belt, Altama and Tommy Bahama
Footwear acquisitions had in fact occurred at the beginning of the periods indicated, nor do they
project the Companys consolidated results of operations for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
October 1, |
|
|
September 25, |
|
|
October 1, |
|
|
September 25, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
35,775,000 |
|
|
$ |
39,584,000 |
|
|
$ |
106,153,000 |
|
|
$ |
126,171,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
13,067,000 |
|
|
$ |
15,715,000 |
|
|
$ |
39,489,000 |
|
|
$ |
48,669,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
734,000 |
|
|
$ |
2,151,000 |
|
|
$ |
585,000 |
|
|
$ |
7,100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per diluted common share |
|
$ |
0.09 |
|
|
$ |
0.28 |
|
|
$ |
0.07 |
|
|
$ |
1.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the historical consolidated
financial statements and the related notes and the other financial information included in our
Annual Report on Form 10-K/A filed with the Securities and Exchange Commission (SEC) for the
fiscal year ended January 1, 2005. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from these forward-looking
statements as a result of any number of factors, including those set forth under Factors That May
Affect Forward Looking Statements below.
References to our fiscal 2003 refer to our fiscal year ended December 27, 2003, references
to our fiscal 2004 refer to our fiscal year ended January 1, 2005, and references to our fiscal
2005 refer to our fiscal year ending December 31, 2005.
Overview
We design, develop and market a diversified selection of a mens and womens dress and casual
footwear, belts, personal items, outdoor sportswear and travel apparel and design, manufacture and
market military specification (mil-spec) and commercial combat and uniform boots. Our
moderate-to-premium priced brands include Royal Robbins® apparel, the Tommy Bahama®, Trotters®,
SoftWalk®, Strol®, H.S. Trask® and Altama® footwear lines, and Chambers Belts®.
In
our footwear and apparel segment including the recently acquired
Tommy Bahama Footwear, we sell over 100 different styles of footwear and over
250 different styles of apparel products. By emphasizing traditional style, quality and fit in this
segment, we believe we can better maintain a loyal consumer following that is less susceptible to
fluctuations due to changing fashion trends and consumer preferences. As a result, a significant
number of our product styles carry over from year-to-year. In addition, our design and product
development teams seek to create and introduce new products and styles that complement these
longstanding core products, are consistent with our brand images and meet our high quality
standards.
We entered into the accessories segment in fiscal 2005 through our June 29, 2005 acquisition
of substantially all of the assets of Chambers Belt Company, a leading manufacturer of mens and
womens belts and accessories headquartered in Phoenix, Arizona. Through the accessories segment,
we sell over 750 different styles of personal accessories. Under exclusive license agreements to
distribute certain accessories for the Wrangler Hero, Timber Creek by Wrangler, Wrangler Jeans
Co., Wrangler Outdoor Gear, Wrangler, Wrangler Rugged Wear, 20X
and Twenty X marks, we accessorize each brand based on its respective lifestyle and price point.
We entered the military boot segment in fiscal 2004 through our acquisition of Altama Delta
Corporation on July 19, 2004. In our military boot segment, we sell a total of 18 boot models under
our Altama brand for the military and commercial markets. We believe that the majority of products
under this brand are not sensitive to fashion risk, but are subject to risks of doing business with
the U.S. government.
During
the past few years we have consummated a number of acquisitions,
including those discussed below, which have significantly contributed
to our growth. We intend to continue to pursue acquisitions of footwear, apparel and related products
companies that we believe could complement or expand our business, or augment our market coverage.
We seek companies or product lines that we believe have consistent historical cash flow and brand
growth potential. We also may acquire businesses that we feel could provide us with important
relationships or otherwise offer us growth opportunities. We plan to fund our future acquisitions
through bank financing, seller debt or equity financing and public or private equity financing.
Although we are actively seeking acquisitions that will expand our existing brands, as of the date
of this report we have no agreements with respect to any such acquisitions, and there can be no assurance
that we will be able to identify and acquire such businesses or obtain necessary financing on
favorable terms.
Altama Acquisition
On July 19, 2004, we purchased all of the outstanding capital stock of Altama Delta
Corporation for approximately $37.8 million, plus a contingent earnout payment which was not
required to be paid. As part of the transaction, we refinanced Altamas indebtedness of
approximately $1.7 million and incurred approximately $740,000 in acquisition related expenses
which increased the net purchase price. Payment of the purchase price at closing was made by
delivery of $35.5 million in cash, and 196,967 shares of common stock then valued at $2.5 million.
To fund the Altama acquisition, we conducted a follow on public offering of our common stock
which was consummated on July 19, 2004. In the offering we issued 2,500,000 shares at the $12.50
per share offering price, resulting in net proceeds, after deducting the underwriters fees and
transaction costs, of approximately $28.4 million. In addition to these proceeds we utilized
approximately $10.0 million of additional borrowings under our amended credit facility to finance
the cash portion of the purchase price for the Altama acquisition, to refinance Altamas funded
indebtedness and to pay related transaction fees and expenses.
Under the terms of the stock purchase agreement, we agreed to pay W.Whitlow Wyatt, the former
owner of Altama, $2.0 million in consideration for a five-year covenant-not-to-compete and other
restrictive covenants. We also entered into a two-year consulting agreement with Mr. Wyatt which
provides for an annual consulting fee of $100,000.
Altama has manufactured military footwear for the U.S. Department of Defense (DoD), for 36
consecutive years. Altama also produces combat and uniform boots for commercial markets. During
2004, Altama operated under a surge option pursuant to which it sold boots to the DoD in excess of
the initial maximum amount awarded under its DoD contract. In September 2004, the DoD exercised the
first option term under its contract with Altama, and at that time increased Altamas portion of
the contract volume from 20% to 30%. The first year option term ran from October 2004 through
September 2005. The maximum pairs that the DoD ordered under the
first option was less than that of the
base contract year, as a result of the discontinuance of the all leather-combat boot. On September
23, 2005, the DoD exercised the second option term under its contract with Altama with minimum
pairs similar to that of the first option term. The Defense Supply Center Philadelphia anticipates
issuing a new five year solicitation for hot weather combat boots late this year with awards to be
made by the end of the third quarter of our fiscal 2006. We anticipate participating in this new
solicitation and expect to receive a contract award similar to our
historical awards experienced, although there can be no assurance
that we will be successful in obtaining the contract award or an
award of equal amount or percentage to previous years.
14
Our Altama brand met our expectations during the first quarter of 2005, but experienced a
temporary slow down in DoD deliveries during the second quarter ended July 2, 2005. This
development had an adverse effect on our operating results for the second quarter. We believe this
slow down is a timing issue isolated to the second quarter and that the DoD order delivery flow
which we had originally anticipated for the year, substantially resumed during the third quarter of
fiscal 2005 and is expected to continue at this level for the remainder of fiscal 2005.
Altamas business generates lower gross margins than our business historically has generated.
As a result, the acquisition caused our gross margin to be lower since the acquisition date as
compared to prior year periods and we expect this trend to continue. Altamas selling, general and
administrative expenses as a percentage of net sales has been historically lower than ours, which
we believe mitigates the impact on our gross margin.
As a result of its DoD business, Altama has different working capital requirements and lower
inventory risks than our historical business. For its DoD business, Altama produces its inventory
only upon receipt of orders under specific contracts. After completion of the manufacturing
process, DoD orders are reviewed for quality assurance, and upon approval Altama bills the DoD.
Chambers Belt Acquisition
On June 29, 2005, we acquired substantially all of the assets of Chambers Belt Company
(Chambers) for approximately $21.5 million, plus contingent earn-out payments subject to Chambers
meeting certain post-closing sales targets. As part of the transaction, we incurred approximately
$1.7 million in acquisition related expenses and entered into a five-year, $3.0 million non-compete
agreement with four Chambers stockholders. We paid the purchase price by delivery of $19.7 million
in cash, and 374,462 shares of common stock then valued at $2.0 million. We funded the cash portion
of the purchase price through a $19.5 million increase in our credit facility. Chambers business
generates lower gross margins than our historical footwear and apparel business which is expected
to have a negative impact on our consolidated gross margins in the future.
Tommy
Bahama Footwear Acquisition
On August 4, 2005, we acquired substantially all of the assets of The Paradise Shoe Company,
LLC ( Tommy Bahama Footwear) exclusive licensee of the Tommy Bahama® line of mens and womens
footwear, hosiery and belts in the United States, Canada and certain Caribbean Islands for
approximately $6.8 million in cash. We funded the cash portion of the purchase price through an
amendment to our credit facility by increasing our borrowing capacity
to $63.0 million including a $7.0 million bridge loan. The Tommy Bahama Footwear business generates lower gross margins than
our historical footwear and apparel business which is expected to have a negative impact on our
consolidated gross margins in the future.
With the acquisition of Altama and Chambers our principal operations have been classified into
three business segments: footwear and apparel, accessories and military boot operations. See Note 9
to Financial Statements.
Results of Operations
The following table sets forth selected consolidated operating results as a percentage of net
sales for each of the quarterly and nine month periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 1, |
|
September 25, |
|
October 1, |
|
September 25, |
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
Net sales |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
Costs of goods sold |
|
|
63 |
% |
|
|
58 |
% |
|
|
62 |
% |
|
|
56 |
% |
Gross profit |
|
|
37 |
% |
|
|
42 |
% |
|
|
38 |
% |
|
|
44 |
% |
Operating expenses and other expenses net |
|
|
29 |
% |
|
|
30 |
% |
|
|
33 |
% |
|
|
32 |
% |
Operating (loss) income |
|
|
8 |
% |
|
|
12 |
% |
|
|
5 |
% |
|
|
12 |
% |
Interest expense |
|
|
3 |
% |
|
|
1 |
% |
|
|
3 |
% |
|
|
1 |
% |
Earnings (loss) before income taxes |
|
|
5 |
% |
|
|
11 |
% |
|
|
2 |
% |
|
|
11 |
% |
Income tax provision (benefit) |
|
|
2 |
% |
|
|
4 |
% |
|
|
1 |
% |
|
|
4 |
% |
Net (loss) earnings |
|
|
3 |
% |
|
|
7 |
% |
|
|
1 |
% |
|
|
7 |
% |
15
Fiscal Quarter Ended October 1, 2005 Compared to Fiscal Quarter Ended September 25, 2004.
Consolidated Net Sales
Consolidated net sales for the third quarter of fiscal 2005 increased $11.1 million or 47.9%,
to $34.3 million from $23.2 million for the third quarter of fiscal 2004. The increase in revenues
resulted primarily from acquisitions completed during fiscal 2005 including the acquisition of
Chambers during the second quarter of fiscal 2005, which contributed $9.7 million and the
acquisition of Tommy Bahama Footwear during the third quarter of fiscal 2005, which contributed
$2.0 million. This increase attributable to acquired brand revenue was partially offset by an 8.7%
decline in Altama® quarter-over-quarter net sales for the third quarter of fiscal 2005 as compared
to net sales during the third quarter of fiscal 2004.
Consolidated Gross Profit
Consolidated gross profit for the third quarter of fiscal 2005 increased 27.9% to $12.6
million as compared to $9.8 million for the comparable prior year period while the corresponding
gross profit percentage decreased to 36.7% from 42.4% for the same period. The decrease in the
gross margin percentage is due to our recent acquisitions, which generate lower gross margins than
our other branded products, and a higher level of footwear close-out and mark down sales in our
Trotters, Softwalk and H.S. Trask brands as compared to the prior year period. All costs incurred
to bring finished products to our warehouse are included in the cost of goods sold line item.
These items include shipping and handling costs, agent and broker fees, letter of credit fees,
customs duty, inspection costs, inbound freight and internal transfer costs. Costs associated with
our own distribution and warehousing are recorded in selling, general and administrative expenses.
As a result of our classification of the above items, gross margins may not be comparable to other
companies.
Consolidated Operating Expenses
Consolidated selling, general and administrative expenses were $9.8 million, or 28.5% of net
sales, for the third quarter of fiscal 2005 as compared to $6.9 million or 29.8% of net sales for
the third quarter of fiscal 2004. This increase is due to $3.3 million in operating costs
and $270,000 from our recent acquisitions which added
intangible asset amortization costs, offset by net operating
expense reductions totaling $700,000 associated with reduced marketing, advertising and other
selling expenses.
Our Consolidated Other expense net totaled $2,000 for the third quarter of fiscal 2005 and
$3,000 for the third quarter of fiscal 2004. These amounts consisted primarily of expenses incurred
in connection with non-capitalizable acquisition activities.
Consolidated Interest Expense
Consolidated interest expense for the third quarter of fiscal 2005 was $1.2 million as
compared to $0.2 million in the comparable prior year period. The increase in interest expense
during fiscal 2005 was a result of increased acquisition and working capital indebtedness associated with
our 2005 brand acquisitions and higher interest rates.
Consolidated Income Tax Provision
We recorded income tax expense for the third quarter of fiscal 2005 of $677,000 as compared to
income tax expense of $994,000 for the comparable prior year period.
Our effective tax rate increased to 41% for the quarter ended
October 1, 2005 compared to 37% for the quarter ended
September 25, 2004 primarily due to a shift in our apportionment
taxes to higher income tax states which resulted from recent
acquisitions. We anticipate that our effective tax rate for the remainder of fiscal 2005 will be 41%.
Consolidated Net Earnings
Our net earnings for the third quarter of fiscal 2005 was $981,000 as compared to net earnings
of $1,728,000 for the third quarter of fiscal 2004 and our net
earnings per diluted share were $0.12 for the quarter ended
October 1, 2005 as compared to $0.24 per diluted share for the
same period of fiscal 2004. The decrease in net earnings resulted from a
combination of factors including reduced gross margin percentages
associated with brands acquired in fiscal 2005, lower net sales for
our Trotters and Softwalk brands, increased acquisition related
expenses and increased interest expense associated with increased levels of acquisition and working
capital indebtedness and increased legal, accounting, employee
compensation and other operating costs associated with our legacy
brands. While brands acquired in 2005 have historically generated lower gross
margins as compared to our legacy branded products we have also made an effort to clear inventory
of discontinued styles and have therefore experienced a higher level of footwear close-out and mark
down sales in our Trotters, Softwalk and H.S. Trask brands as compared to the prior year period.
16
Footwear and Apparel Business
Net Sales
Net sales for the third quarter of fiscal 2005 increased $2.0 million or 12.0%, increasing to
$18.4 million from $16.4 million for the third quarter of fiscal 2004. This increase was primarily
due to the recent acquisition of the Tommy Bahama Footwear brand and
a 15.6% increase net in sales
from our Royal Robbins brand during the quarter was offset by a
similar decline net in sales from our
other legacy footwear brands.
Gross Profit
Gross profit for the third quarter of fiscal 2005 decreased 7.3% to $7.2 million as compared
to $7.8 million for the comparable prior year period. Gross margin in this segment as a percentage
of net sales decreased to 39.1% from 47.2% in the comparable prior year period. Gross margin
percentages have decreased primarily due to an effort to clear inventory of discontinued styles
which resulted in a higher level of footwear close-out and mark down sales in our legacy footwear
brands as compared to the prior year period. The current quarter gross margin percentage was also
negatively impacted from the addition of the Tommy Bahama Footwear brand gross margins, which
generate lower gross margins than our legacy footwear and apparel brands.
Operating Expenses
Selling, general and administrative expenses were $4.9 million, or 26.9% of net sales for the
third quarter of fiscal 2005 as compared to $4.9 million or 29.8% of net sales for the third
quarter of fiscal 2004. A decrease in operating costs for our legacy footwear and apparel brands of
$0.5 million for comparable quarters was offset by $0.5 million in operating expenses incurred in
the third quarter of fiscal 2005 due to our acquisition of the Tommy Bahama Footwear brand.
Accessories Business
Net Sales
Net sales for the third quarter of fiscal 2005 were $9.7 million compared to zero for the
third quarter of fiscal 2004. As we acquired Chambers in the second
quarter of fiscal 2005, results of
Chambers for the third quarter of fiscal 2004 are not included in our financial results.
Gross Profit
Gross profit for the third quarter of fiscal 2005 was $3.8 million or 39.5% of net sales
compared to zero for the third quarter of fiscal 2004. As we acquired
Chambers in the second quarter of fiscal 2005, results of
Chambers for the third quarter of fiscal 2004 are not included in our financial results.
Operating Expenses
Selling, general and administrative expenses were $2.7 million or 27.8% of net sales compared
to zero for the third quarter of fiscal 2004. As we acquired Chambers
in the second quarter of fiscal 2005, results of
Chambers for the third quarter of fiscal 2004 are not included in our financial results.
17
Military Boot Business
Net Sales
Net sales for the third quarter of fiscal 2005 decreased to $6.2 million from $6.8 million
for the comparable period in fiscal 2004. Net sales to the DoD were $3.9 million or 63.3% of total
net sales for our military boot business and net sales to commercial customers were $2.3 million or
36.7% of total net sales for our military boot business. The Altama brand experienced a $0.6 million
decrease in comparable quarters due primarily to the quantity and timing of delivery orders against
its hot weather combat boot contract with the DoD.
Gross Profit
Gross profit for the third quarter of fiscal 2005 was $1.6 million or 24.9% of net sales for
this segment as compared to gross profit of $2.0 million or 30.7% for the comparable period in
fiscal 2004. This decrease in gross profit as a percentage of net sales is due primarily to higher
per unit manufacturing costs associated with lower production levels.
Operating Expenses
Direct selling, general and administrative expenses were $0.6 million, or 9.6% of net sales
for this segment, for the third quarter of fiscal 2005, compared to $0.6 million, or 9.3% of net
sales for the comparable period in fiscal 2004. This increase in
direct selling, general and administrative expenses as a
percentage of net sales was due primarily to maintaining a similar operating structure during a period
of decreased net sales.
Corporate Expenses
Corporate expenses for the third quarter of fiscal 2005 increased $0.1 million to $1.6 million
compared to $1.4 million for the same period of fiscal 2004. The slight increase in corporate
expenses is primarily represented by amortization of intangible assets associated with the Chambers
acquisition totaling $234,000 offset by a $208,000 reduction in employee compensation expense
incurred in the third quarter of fiscal 2004.
Fiscal Nine Month Period Ended October 1, 2005 Compared to Fiscal Nine Month Period Ended September
25, 2004.
Consolidated Net Sales
Consolidated net sales for the nine months ended October 1, 2005 increased $20.3 million or
36.5%, increasing to $76.0 million from $55.7 million for the comparable period of fiscal 2004. Of
this increase $9.6 million is attributable to acquired brand revenue associated with the Altama®
brand acquisition which occurred during the third quarter of fiscal 2004. An additional $11.7
million is attributable to acquired brand revenue associated with the Chambers and Tommy Bahama
Footwear acquisitions which occurred during fiscal 2005, partially offset by a decline in other
footwear brand sales.
Consolidated Gross Profit
Consolidated gross profit for the nine months ended October 1, 2005 was $29.0 million or 38.1%
of net sales as compared to $24.3 million or 43.6% of net sales in the comparable period of fiscal
2004. The decrease in gross profit was primarily related to the addition of the Altama brand gross
margins for a full nine months, which generate lower gross margins than our legacy footwear and
apparel brands. Additionally, we have made an effort to clear inventory of discontinued styles and
have therefore experienced a higher level of footwear close-out and mark down sales in our
Trotters, Softwalk and H.S. Trask brands as compared to the prior year period. All costs incurred
to bring finished products to our warehouse are included in the cost of goods sold line item.
These items include shipping and handling costs, agent and broker fees, letter of credit fees,
customs duty, inspection costs, inbound freight and internal transfer costs. Costs associated with
our own distribution and warehousing are recorded in selling, general and administrative expenses.
As a result of our classification of the above items, gross margins may not be comparable to other
companies.
Consolidated Operating Expenses
Consolidated selling, general and administrative expenses as a percentage of net sales were
32.9% or $25.0 million for the nine months ended October 1, 2005 versus 32.0% or $17.8 million for
the comparable period of fiscal 2004. This dollar increase primarily relates to acquisitions in
fiscal 2004 and 2005. We acquired Altama on July 19, 2004, and
therefore approximately 2.5 months of Altama
operating expense were included in comparable fiscal 2004 period while a full nine months of Altama
operating expenses have been recorded for the nine months ended
October 1, 2005. Our fiscal 2005 acquisitions added $3.2 million to operating expenses for the
current fiscal year.
18
Our consolidated Other expense net was $617,000 for the nine months ended October 1, 2005
and consisted primarily of expenses incurred in connection with severance and management
restructuring charges. Our Other expense net was $62,000 for the comparable nine month period
in fiscal 2004 consisted primarily of expenses incurred in connection with non-capitalizable
acquisition activities.
Consolidated Interest Expense
Interest expense for the nine month period ended October 1, 2005 was $2,121,000 as compared to
$503,000 for the same period of fiscal 2004. The increase in interest expense is related to
increased acquisition and working capital debt associated with brand acquisitions and higher
interest rates.
Consolidated Income Tax Provision
We recorded income tax expense for the nine months ended October 1, 2005 of $779,000 as
compared to $2,354,000 for the same period of fiscal 2004. Our effective tax rates during the nine
month period ended October 1, 2005 and September 25, 2004
were 41% and 39%, respectively. The increase in our effective tax
rate was primarily due to a shift in our apportionment of taxes to
higher income tax states which resulted from recent acquisitions.
Consolidated Net Earnings
Our consolidated net earnings for the nine months ended October 1, 2005 were $1.1 million as
compared to $3.6 million for the same period of fiscal 2004 and our net earnings per diluted share
were $0.14 for the nine months ended October 1, 2005 as compared to $0.61 per diluted share for the
same period of fiscal 2004. This year to date net income decline is due to a decline in net sales
for our Trotters and Softwalk brands, the recording of a severance and management restructuring
charge of $614,000, higher interest expense associated with increased acquisition and working
capital debt and higher interest rates, a reduction in margins related to higher markdowns and
inventory close-outs, lower gross margins associated with brands
acquired in fiscal 2004 and fiscal 2005, and increased legal, accounting, employee compensation and other operating costs
associated with our legacy brands.
Footwear and Apparel Business
Net Sales
Net sales for the nine months ended October 1, 2005 increased $0.9 million or 1.9% to $49.9
million from $48.9 million for the same period of fiscal 2004. This slight increase is represented
by a $2.9 million or 16.8% increase in net sales for Royal Robbins and acquired brand revenue of
$2.0 million from the Tommy Bahama Footwear acquisition offset by a $4.0 million or 13% decrease in
net sales of our legacy footwear brands.
Gross Profit
Gross profit for the nine months ended October 1, 2005 was $20.8 million or 41.7% of net sales
as compared to $22.2 million or 45.4% of net sales in the same period of fiscal 2004. Gross margin
percentages have decreased primarily due to an effort to clear our inventory of discontinued styles
which has resulted in a higher level of footwear close-out and mark down sales in our Trotters,
Softwalk and H.S. Trask brands as compared to the prior year period.
Operating Expenses
Selling, general and administrative expenses as a percentage of net sales were 30.0% or $15.0
million for the nine months ended October 1, 2005 versus 28.6% or $14.0 million for the same period
of fiscal 2004. This dollar increase related to increased operating
costs associated with supporting growth in net sales for Royal
Robbins and added operating costs of $500,000 from the acquisition of
Tommy Bahama Footwear.
19
Accessories Business
Net Sales
Net sales for the nine
months ended October 1, 2005 were $9.7 million compared to zero for the
same period of fiscal 2004. We acquired Chambers in the second quarter of 2005, and therefore results of
Chambers for the nine month period ended September 25, 2004 are not included in our financial
statements.
Gross Profit
Gross profit for the nine months ended
October 1, 2005 was $3.8 million or 39.5% of net sales
compared to zero for the same period of fiscal 2004. We acquired Chambers in the second quarter of 2005, and therefore results of
Chambers for the nine month period ended September 25, 2004 are not included in our financial
statements.
Operating Expenses
Selling, general and
administrative expenses for the nine months ended October 1, 2005 were
$2.7 million or 27.8% of net sales compared to zero for the same period of fiscal 2004. We acquired Chambers in the second quarter of 2005, and therefore results of
Chambers for the nine month period ended September 25, 2004 are not included in our financial
statements.
Military Boot Business
Net Sales
Net sales for the nine months ended October 1, 2005 were $16.4 million. Sales to the DoD were
$8.6 million or 53.2% of total net sales for our military boot business and sales to commercial
customers were $7.8 million or 46.8% of total net sales for our military boot business. Net sales
for the military boot segment increased $9.6 million or 143.8% from the comparative period in
fiscal 2004 due to our acquisition of Altama during the third quarter of fiscal 2004. The second and
final option of the hot weather combat boot contract
was invoked by the government on September 23, 2005 and runs through September 22, 2006.
20
Gross Profit
Gross profit for the nine months ended October 1, 2005 was $4.4 million or 26.5% of net sales
for this segment as compared to gross profit of $2.1 million or
30.7% for the period from the date of our acquisition of Altama on
July 19, 2004 until September 25, 2004 . This decrease in gross profit as a percentage of sales is due to higher
per unit manufacturing costs associated with the lower production levels experienced due to the
cessation of the war-time surge requirements.
Operating Expenses
Direct selling, general and administrative expenses were $2.0 million, or 12.2% of net sales,
for the nine months ended October 1, 2005, compared to $0.6 million, or 9.3% of net sales for the
period during which we owned Altama in fiscal 2004. This dollar increase was primarily
related to increased operating costs associated with supporting a
higher sales volume.
Corporate Expenses
Corporate expenses for the nine months ended October 1, 2005 increased $2.1 million to $5.3
million compared to $3.2 million for the same period of fiscal 2004. The increase in corporate
expenses primarily relates to the amortization of intangible assets associated with the Altama
acquisition totaling $277,000 which was not incurred during the first two quarters of fiscal 2004,
amortization of intangible assets associated with the Chambers acquisition totaling $234,000 which
were not incurred prior to the third quarter of ficsal 2005, the recording of a severance charge of
$610,000 related to management restructuring recorded in the first quarter of fiscal 2005 and
interest expense associated with increased acquisition and working capital debt and higher interest
rates.
Seasonal and Quarterly Fluctuations
The following sets forth our net sales and income (loss) from operations summary operating
results for the quarterly periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 |
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
Net sales |
|
$ |
18,638 |
|
|
$ |
13,876 |
|
|
$ |
23,176 |
|
|
$ |
20,696 |
|
Income (loss) from operations |
|
$ |
2,301 |
|
|
$ |
1,242 |
|
|
$ |
2,921 |
|
|
$ |
(603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
|
First Quarter |
|
Second Quarter |
|
Third Quarter |
|
Fourth Quarter |
Net sales |
|
$ |
26,400 |
|
|
$ |
15,353 |
|
|
$ |
34,275 |
|
|
|
|
|
Income (loss) from operations |
|
$ |
2,400 |
|
|
$ |
(1,193 |
) |
|
$ |
2,814 |
|
|
|
|
|
Our quarterly results of operations have fluctuated, and we expect will continue to fluctuate
in the future, as a result of seasonal variances. Notwithstanding the effects of our acquisition
activity, net sales and income from operations in our first and third quarters historically have
been stronger than in our second and fourth quarters.
Liquidity and Capital Resources
Our primary liquidity requirements have continued to include debt service, capital
expenditures, working capital needs, financing for acquisitions, and
acquisition earn out and
covenant not to compete payments. We have historically met these
liquidity needs with cash flows from operations, borrowings under our credit facility, seller
financing in acquisitions and equity issuances.
On
August 3, 2005, in connection with our acquisition of substantially all of the assets of
Tommy Bahama Footwear, we entered into an amended and restated credit facility agreement with M&T.
This agreement replaced our existing credit agreement with M&T of $52 million and increased its
availability to $63 million. M&T acted as lender and administrative agent for additional lenders
under
21
the new credit agreement. The new credit agreement increases the existing line of credit from
$24 million to $28 million and adds a $7 million bridge loan used for the acquisition of Tommy
Bahama Footwear. The revolving line has an interest rate of LIBOR plus 3.0%, or the prime rate plus
.375%. The bridge loan has an interest rate of LIBOR plus 3.5% or the prime rate plus .75%. The
borrowings under the new credit agreement are secured by a blanket security interest in all the
assets of the Company and its subsidiaries. The credit facility expires on June 30, 2010 and all
borrowings under that facility are due and payable on that date. Our availability under the
revolving credit facility is $28 million (subject to a borrowing base formula). The bridge loan is
due December 31, 2005. The new credit agreement includes a borrowing base formula with inventory
caps, and financial covenants requiring us not to exceed certain average borrowed funds to EBITDA
ratios and cash flow coverage ratios.
We
were not in compliance with the average borrowed funds to EBITDA
ratio and cash flow coverage ratio covenants under the credit
agreement at October 1, 2005. On November 14, 2005, we
obtained a waiver from our lender of these defaults. We are currently
in discussions with the our lender to revise the covenants, and if
necessary, the terms of our bridge loan, to reflect more accurately
our current operating position. We anticipate that our lender will agree to amend these
covenants and our bridge loan terms in this manner, although there
can be no assurance that these negotiations will be successful or
that we will be able to comply with these covenants in the future.
See below Risk Factors Defaults under our secured
credit arrangement could result in a foreclosure on our assets by our
bank.
Cash Flows Used By Operations. During the nine months ended October 1, 2005, our net cash used
by operations was $2,157,000 as compared to net cash used by operations of $3,157,000 for the
comparable period of fiscal 2004. The decrease in cash used by operations was primarily due to
better management of inventory levels partially offset by an increase in accounts payable due to
higher operating expenses.
Working capital at the end of the third quarter of fiscal 2005 was approximately $39.5
million, compared to approximately $29.2 million at the end of fiscal 2004. Our working capital
varies from time to time as a result of the seasonal requirements of our brands, which have
historically been heightened during the first and third quarter related to the timing of factory
shipments, the need to increase inventories and support an in-stock position in anticipation of
customers orders, and the timing of accounts receivable collections. The increase in working
capital at the end of the third quarter of fiscal 2005 compared to the end of fiscal 2004 was due
primarily to increases in accounts receivables and inventories associated with the impact of our
fiscal 2005 acquisitions. Our current ratio, the relationship of current assets to current
liabilities, decreased to 2.56 at the end of the third quarter of fiscal 2005 from 2.92 at the end
of fiscal 2004. Accounts receivable days sales outstanding decreased from 58 days at the end of
fiscal 2004 to 54 days at the end of the third quarter of fiscal 2005.
Investing Activities. In the nine months ended October 1, 2005, our cash used in investing
activities totaled $26.5 million compared to cash used totaling $38.7 million in the comparable
period of fiscal 2004. During the nine months ended October 1, 2005 and September 25, 2004, cash
used in investing activities was primarily due to the 2005 acquisition and the purchases of
equipment.
For
the remainder of the current fiscal year, we anticipate capital
expenditures of approximately $400,000, which
will consist generally of equipment upgrades that Altamas
business will require and general facilities improvements.
Financing Activities. For the nine months ended October 1, 2005, our net cash provided by
financing activities was $31.0 million compared to cash provided of $41.6 million for the
comparable period of fiscal 2004. The cash provided in the current year period was primarily due to
proceeds from borrowings made on our revolving line of credit and notes payable partially offset by
notes payable payments made. This cash was used to complete the acquisition of Chambers and Tommy
Bahama Footwear. The cash provided in fiscal 2004 was primarily due to our follow on stock offering
completed during the third quarter of fiscal 2004 and proceeds from borrowings made on our
revolving line of credit and notes payable partially offset by notes payable payments made. The
cash provided in the third quarter of fiscal 2004 was primarily used to complete the acquisition of
Altama.
For
the remainder of the current fiscal year, we anticipate cash payments
on interest expense of approximately $1.1 million representing
our quarterly payment on the term loan and monthly payments on the
bridge loan and revolver.
Our ability to generate sufficient cash to fund our operations depends generally on the
results of our operations and the availability of financing. Our management believes that cash
flows from operations in conjunction with the available borrowing capacity under our amended credit
facility, with the anticipated amendment to the credit agreement and net of outstanding letters of credit of approximately $4.0 million at October 1, 2005,
will be sufficient for the foreseeable future to fund operations, meet debt service and contingent
earnout payment requirements and fund capital expenditures other than future acquisitions.
Contractual Obligations
In the Annual Report on Form 10-K/A for the year ended January 1, 2005 under the heading
Contractual Obligations, we outlined certain of our contractual obligations as described therein.
For the quarter ended October 1, 2005, there have been no material changes in the contractual
obligations specified except for the following: 1) the additional borrowings under our amended
credit facility as described above and as disclosed in Note 7 of the Notes to Consolidated
Condensed Financial Statements; and 2) the following obligations incurred in connection with the
Chambers Belt acquisition, a) managements current estimate of potential earnout payments of
approximately $2.5 million and $3.0 million for the 12-month periods ending June 29, 2006 and 2007,
respectively, so long as Chambers Belt meets certain earnings requirements, although actual
payments may vary from these estimated amounts; b) $3.0 million to be paid as consideration for a
five-year covenant-not-to-compete and other restrictive covenants to Chambers Belts shareholders;
c) employment agreements with Charles Stewart, Kelly Green and David Matheson which provide for
total compensation of approximately $1.4 million; and d) an aggregate of approximately $21.3
million in minimum royalty payments under the terms of the Companys license agreements and related
agreements.
22
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases. We do not believe that
these operating leases are material to our current or future financial condition, results of
operations, liquidity, capital resources or capital expenditures.
Critical Accounting Policies:
As of October 1, 2005, the Companys consolidated critical accounting policies and estimates
have not changed materially from those set forth in the Annual Report on Form 10-K/A for the year
ended January 1, 2005 with the following exception:
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 123R, Share-Based Compensation, which supersedes
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its
related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in
which an entity obtains employee services through share-based payment transactions. SFAS No. 123R
requires a public entity to measure the cost of employee services received in exchange for the
award of equity investments based on the fair value of the award at the date of grant. The cost
will be recognized over the period during which an employee is required to provide services in
exchange for the award. On April 14, 2005, the SEC issued a release announcing the adoption of a
new rule delaying the required implementation of SFAS No. 123R. Under this new rule, SFAS No. 123R
is effective as of the beginning of the first annual reporting period that begins after June 15,
2005. The impact on net earnings as a result of the adoption of SFAS No. 123R, from a historical
perspective can be found in Note 3 to the Consolidated Financial Statements in this Quarterly
Report and in Note 1 to the Consolidated Financial Statements contained in our Annual Report on
Form 10-K/A. We are currently evaluating the provisions of SFAS No. 123R and will adopt in the
first quarter of 2006, as required.
On February 24, 2005, in response to the issuance of SFAS 123R, we authorized an immediate
vesting of eligible employees unvested share options with an exercise price greater than $6.50 per
share. In total, 440,333 options with an average exercise price of $10.20 immediately vested and
have an average remaining contractual life of 8.6 years. The unamortized fair value associated with
these accelerated-vest shares in the amount of $2.5 million amortized immediately. Had the
accelerated-vest program not occurred, the related-cost in fiscal 2005, 2006 and 2007 would have
included $1.3 million, $1.2 million and $268,000, respectively. In addition to its
employee-retention value, our decision to accelerate the vesting of these out-of-the-money
options was based upon the accounting of such costs moving from disclosure-only in 2004 to being
included in the Companys statement of operations in 2006.
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q and the Securities and Exchange Commission filings that are
incorporated by reference into this report contain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of
the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend that these
forward-looking statements be subject to the safe harbors created by those sections.
These forward-looking statements include, but are not limited to, statements relating to our
anticipated financial performance, business prospects, new developments, new merchandising
strategies and similar matters, and/or statements preceded by, followed by or that include the
words believes, could, expects, anticipates, estimates, intends, plans, projects,
seeks, or similar expressions. We have based these forward-looking statements on our current
expectations and projections about future events, based on the information currently available to
us. These forward-looking statements are subject to risks, uncertainties and assumptions that may
affect the operations, performance, development and results of our business, including those
described below. You are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date stated, or if no date is stated, as of the date of this Quarterly
Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or any other reason except as
required under applicable law. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur.
Investors should also be aware that while we do, from time to time, communicate with
securities analysts, it is against our policy to disclose to them any material non-public
information or other confidential commercial information. Accordingly, investors should not assume
that we agree with any statement or report issued by any analyst irrespective of the content of the
statement or report.
23
Furthermore, we have a policy against publishing financial forecasts or projections issued by
others or confirming financial forecasts, or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or opinions, such reports
are not the responsibility of the Company.
Factors That May Affect Forward Looking Statements
Our acquisitions or acquisition efforts, which are important to our growth, may not be
successful, which may limit our growth or adversely affect our results of operations and financial
condition
Acquisitions have been an important part of our development to date. During fiscal 2003, we
acquired Royal Robbins and H.S. Trask and during fiscal 2004, we acquired Altama. On June 29, 2005
we acquired Chambers Belt, and on August 4, 2005 we acquired
Tommy Bahama Footwear. As part of our business
strategy, we intend to make additional acquisitions of footwear, apparel and related products
companies that we believe could complement or expand our business, augment our market coverage,
provide us with important relationships or otherwise offer us growth opportunities. If we identify
an appropriate acquisition candidate, we may not be able to complete the acquisition timely or at
all, or negotiate successfully the terms of or finance the acquisition. Unsuccessful acquisition
efforts may result in significant additional expenses that would not otherwise be incurred. In
addition, we cannot assure you that we will be able to integrate the operations of our acquisitions
without encountering difficulties, including unanticipated costs, possible difficulty in retaining
customers and supplier or manufacturing relationships, failure to retain key employees, the
diversion of management attention or failure to integrate our information and accounting systems.
Following an acquisition, we may not realize the revenues and cost savings that we expect to
achieve or that would justify the acquisition investment, and we may incur costs in excess of what
we anticipate. These circumstances could adversely affect our results of operations or financial
condition.
Our future success depends on our ability to respond to changing consumer preferences and
fashion trends and to develop and commercialize new products successfully
A significant portion of our principal business is the design, development and marketing of
dress and casual footwear, apparel and accessories. Although our focus in these segments of our
business is on traditional and sustainable niche brands, our consumer brands may still be subject
to rapidly changing consumer preferences and fashion trends. For example, our Trotters and Softwalk
brands have experienced decreased retail acceptance of various styles, which adversely affected our
net sales. Accordingly, we must identify and interpret fashion trends and respond in a timely
manner. Demand for and market acceptance of new products, such as our H.S. Trask womens and Strol
brands and our new Altama public safety footwear line, are uncertain, and achieving market
acceptance for new products generally requires substantial product development and marketing
efforts and expenditures. Any failure on our part to regularly develop innovative products and
update core products could limit our ability to differentiate and appropriately price our products,
adversely affect retail and consumer acceptance of our products, and limit sales growth. Each of
these risks could adversely affect our results of operations or financial condition.
We face intense competition, including competition from companies with greater resources than
ours, and if we are unable to compete effectively with these companies, our market share may
decline and our business and stock price could be harmed
We face intense competition in the footwear and apparel industry from other companies, such as
Brown Shoe Company, which markets the Naturalizer® brand, and Columbia Sportswear Company®. The
primary competitor in our accessories segment is Tandy Brands Accessories, Inc. We also face
competition from several companies in our military boot operations including McRae Industries, Inc.
and Wellco Enterprises, Inc. Many of our competitors have greater financial, distribution or
marketing resources, as well as greater brand awareness. In addition, the overall availability of
overseas manufacturing opportunities and capacity allow for the introduction of competitors with
new products. Moreover, new companies may enter the markets in which we compete, further increasing
competition in the footwear and apparel industry.
We believe that our ability to compete successfully depends on a number of factors, including
anticipating and responding to changing consumer demands in a timely manner, maintaining brand
reputation and authenticity, developing high quality products that appeal to consumers,
appropriately pricing our products, providing strong and effective marketing support, ensuring
product availability and maintaining and effectively assessing our distribution channels, as well
as many other factors beyond our control. Due to these factors within and beyond our control, we
may not be able to compete successfully in the future. Increased competition may result in price
reductions, reduced profit margins, loss of market share, and an inability to generate cash flows
that are sufficient to maintain or expand our development and marketing of new products, each of
which would adversely affect the trading price of our common stock.
24
A large portion of our sales are to a relatively small group of customers with whom we do not
have long-term purchase orders, therefore the loss of any one or more of these customers could
adversely affect our business
Ten major customers represented approximately 40% of net sales in the third quarter of fiscal
2005, including the DoD, Wal-Mart and K-Mart, which comprised 11%, 14% and 3% of net sales for the
period. Though Wal-Mart and K-Mart were added during fiscal 2005 through the acquisition of
Chambers most of these same customers represented a significant portion of net sales in fiscal
2004. Sales to Dillards department stores represented 7% and 11% of our net sales in the full
fiscal years of 2004 and 2003, respectively. Dillards sales for 2005 are expected to decline to
approximately 3% of total fiscal 2005 sales as a result of a consolidation of Dillards footwear
vendor base offset by an expected increase in our Dillards apparel sales. Although we have
long-term relationships with many of our customers, our customers do not have a contractual
obligation to purchase our products, and we cannot be certain that we will be able to retain our
existing major customers. The retail industry can be uncertain due to changing customer buying
patterns and consumer preferences, and customer financial instability.
These factors could cause us to lose one or more of these customers, which could adversely affect
our business. We expect the DoD to be our largest customer in fiscal 2005. Material reductions in
the level of orders from the DoD have harmed our operating results and this trend could continue.
The financial instability of our customers could adversely affect our business and result in
reduced sales, profits and cash flows
We sell much of our merchandise in our footwear and apparel segment to major department stores
and specialty retailers across the U.S. and extend credit based on an evaluation of each customers
financial condition, usually without requiring collateral. However, the financial difficulties of a
customer could cause us to curtail business with that customer. We may also assume more credit risk
relating to that customers receivables due us. Two of our customers constituted 27% of trade
accounts receivable outstanding at October 1, 2005. Our inability to collect on our trade accounts
receivable from any of our major customers could adversely affect our business or financial
condition.
Our ability to compete could be jeopardized if we are unable to protect our intellectual
property rights or if we are sued for intellectual property infringement
We believe that we derive a competitive advantage from our ownership of the Trotters,
SoftWalk, H.S. Trask, Royal Robbins and Altama trademarks, and our patented footbed technology. In
addition, we own and license other trademarks that we utilize in marketing our products. We
vigorously protect our trademarks against infringement. We believe that our trademarks are
generally sufficient to permit us to carry on our business as presently conducted. We cannot,
however, know whether we will be able to secure trademark protection for our intellectual property
in the future or that protection will be adequate for future products. Further, we face the risk of
ineffective protection of intellectual property rights in the countries where we source our
products. We cannot be sure that our activities do not and will not infringe on the proprietary
rights of others. If we are compelled to prosecute infringing parties, defend our intellectual
property, or defend ourselves from intellectual property claims made by others, we may face
significant expenses and liability that could divert our managements attention and resources and
otherwise adversely affect our business or financial condition.
We depend on third-party trademarks to market some of our products and services and the loss
of the right to use these trademarks or the diminished marketing appeal of these trademarks could
adversely affect our business.
We hold licenses to design and distribute products bearing trademarks owned by other persons.
We have an exclusive license from Tommy Bahama Group, Inc. to design and distribute mens and
womens footwear, hosiery, belts and mens small leather goods and accessories bearing the Tommy
Bahama® mark and related marks and exclusive licenses from Wrangler Apparel Corp. to distribute
leather belts, accessories, and suspenders bearing the Wrangler® mark and related marks. Each
license agreement may be terminated by the respective licensors prior to the end of the applicable
term for several reasons, including a material default by us under the applicable agreement, or if
we do not meet certain sales requirements. Although we just recently obtained these licenses in
connection with our fiscal 2005 acquisitions, we expect that the
revenue generated from sales of products under these licenses will be a significant part of our
overall revenue. If an owner of a trademark that we license terminates our license agreements because we have
materially defaulted under the applicable agreement, have not met required sales requirements, or
for any other reason permitted under such agreements, or if the
name Tommy Bahama® (or related marks) or Wrangler® (or related marks) were to suffer
diminished marketing appeal, or if we are unable to renew these agreements, our revenues and
operations could be materially adversely affected.
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Our international manufacturing operations are subject to the risks of doing business abroad,
which could affect our ability to manufacture our products in international markets, obtain
products from foreign suppliers or control the costs of our products
We currently rely on foreign sourcing of our products, other than most of our military
footwear and some belts manufactured at our California facility. We believe that one of the key
factors in our growth has been our strong relationships with manufacturers capable of meeting our
requirements for quality and price in a timely fashion. We obtain our foreign-sourced products
primarily from independent third-party manufacturing facilities located in Brazil and Asia. As a
result, we are subject to the general risks of doing business outside the U.S., including, without
limitation, work stoppages, transportation delays and interruptions, political instability,
expropriation, nationalization, foreign currency fluctuation, changing economic conditions, the
imposition of tariffs, import and export controls and other non-tariff barriers, and changes in
local government administration and governmental policies, and to factors such as the short-term
and long-term effects of severe acute respiratory syndrome, or SARS, and the outbreak of avian
influenza in China. Although a diverse domestic and international industry exists for the kinds of
merchandise sourced by us, there can be no assurance that these factors will not adversely affect
our business, financial condition or results of operations.
Our reliance on independent manufacturers for almost all of our non mil-spec products, with
whom we do not have long-term written agreements, could cause delay and damage customer
relationships
In fiscal 2004, 11 manufacturers accounted for 100% of our dress and casual footwear and 5
manufactures accounted for 58% of our apparel volume. Two foreign manufactures accounted for 100%
of our non mil-spec boot volume. Taking into account the inclusion of
Altama, Chambers and Tommy Bahama Footwear, for a full fiscal year following the 2004 and 2005 acquisitions we anticipate in fiscal 2005
that approximately 77% of our net sales could come from products sourced from third party
manufacturers. We do not have long-term written agreements with any of our third-party
manufacturers. As a result, any of these manufacturers may unilaterally terminate their
relationships with us at any time. Establishing relationships with new manufacturers would require
a significant amount of time and would cause us to incur delays and additional expenses, which
would also adversely affect our business and results of operations.
In addition, in the past, a manufacturers failure to ship products to us in a timely manner
or to meet the required quality standards has caused us to miss the delivery date requirements of
our customers for those items. This, in turn, has caused, and may in the future cause, customers to
cancel orders, refuse to accept deliveries or demand reduced prices. This could adversely affect
our business and results of operation.
Our results could be adversely affected by disruptions in the manufacturing system for our
Altama brand
Since July 2004, Altamas manufacturing operations produced approximately 80% of the products
sold under the Altama brand. We expect that these products could represent over 19% of our combined
net sales in fiscal 2005. In September 2004 we encountered production delays at our Puerto Rico
manufacturing plant after a closure for several days due to severe weather. Any significant
disruption in those operations or in our new Chambers Belt California manufacturing operations for
any reason, such as power interruptions, fires, hurricanes, war or other force majeure, could
adversely affect our sales and customer relationships and therefore adversely affect our business.
If we are unable to replace revenues from sales to the DoD of products planned to be
discontinued, our net sales and our consolidated operating results would be adversely affected
Under our current contract with the DoD under our Altama brand, we manufactured three models
of mil-spec combat boots during the first year of the contract which ended September 30, 2004. One
of these models, the all-leather combat boot, was discontinued by the DoD, in favor of a new
waterproof infantry combat boot, and was not subject to the first or
second year options under the DoD contract. Pro forma net sales under the Altama brand of the
all-leather combat boot to the DoD during fiscal 2004 were $2.5 million, representing approximately
9% of Altamas pro forma net sales from sales to the DoD for fiscal 2004.
In March 2003, the DSCP awarded contracts to supply the infantry combat boot. To date, we have
not been awarded a contract to produce the new infantry combat boot. While there may be additional
opportunities to bid on the infantry combat boot and other waterproof boot contracts in the future,
particularly as the U.S. Army transitions from the all-leather combat boot, our failure to be
awarded a contract in March 2003 may be a significant disadvantage in bidding on future
contracts. Consequently, we anticipate that our net sales to the DoD will decline if we are not
able to obtain awards of contracts for infantry combat boots or any other new models or increased
percentages of awards for existing mil-spec boots we currently manufacture.
26
Doing business with the U.S. government entails many risks that could adversely affect us
through the early termination of our contracts or by interfering with Altamas ability to obtain
future government contracts
Our contracts with the DoD under the Altama brand are subject to partial or complete
termination under specified circumstances including, but not limited to, the following
circumstances:
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the convenience of the government; |
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the lack of funding; or |
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our actual or anticipated failure to perform our contractual obligations. |
Additionally, there could be changes in government policies or spending priorities as a result
of election results or changes in political conditions or other factors that could significantly
affect the level of troop deployment. Any of these occurrences could adversely affect the level of
business we do with the DoD and, consequently, our operating results.
For example, the DoD did not order in excess of the maximum volume under the first year option of
the DoD contract and, therefore we did not operate at
surge rates as was the case during fiscal 2004.
There is no certainty that the DSCP will exercise renewal options on any contract we may have
or that we will be awarded future DSCP boot solicitations. Most boot contracts are for multi-year
periods. The DoD has advised us that it anticipates issuing a new
five year solicitation for hot weather combat boats late this year
with awards to be made at the end of the third quarter of our 2006 fiscal
year. We are in the final option year of our current DoD contract.
Therefore, if we do not receive an award from this upcoming
solicitation, we could be
adversely affected for several years.
The DSCP and other DoD agencies with which Altama may do business are also subject to unique
political and budgetary constraints and have special contracting requirements and complex
procurement laws that may affect the contract or Altamas ability to obtain new government
customers. These agencies often do not set their own budgets and therefore have little control over
the amount of money they can spend. In addition, these agencies experience political pressure that
may dictate the manner in which they spend money. Due to political and budgetary processes and
other scheduling delays that frequently occur in the contract or bidding process, some government
agency orders may be canceled or substantially delayed, and the receipt of revenues or payments may
be substantially delayed. For example, the DoD delayed acceptance of products ordered which caused
our results to be lower in the second quarter of fiscal 2005 than we anticipated.
Government agencies have the power, based on financial difficulties or investigations of their
contractors, to deem contractors unsuitable for new contract awards. Because we engage in the
governmental contracting business, we will be subject to audits and may be subject to investigation
by governmental entities. Failure to comply with the terms of any of these government contracts
could result in substantial civil and criminal fines and penalties, as well as our suspension from
future government contracts for a significant period of time, any of which could adversely affect
our business by requiring us to spend money to pay the fines and penalties and prohibiting us from
earning revenues from government contracts during the suspension period.
Furthermore, our failure to qualify as a small business under federal regulations following
the acquisition could reduce the likelihood of our ability to receive awards of future DoD
contracts. Altama qualified as a small business at the time of its bid for the current DoD
contract. Small business status, having less than 500 employees, is a factor that the DoD considers
in awarding its military boot contracts. Our combined employment is
now in excess of 500
employees, which could adversely affect our ability to obtain future
contract awards.
The sales of the Altama brand to the commercial market have grown at significant rates over
the past three years, and there can be no assurance that our net sales growth under this brand will
continue at this rate
In the last three fiscal years, Altamas net sales from sales to the commercial market have
grown significantly. This has contributed in part to Altamas overall growth in net sales over that
period. This growth has been due in part to added customer demand, increased pricing and expansion
of customers, and in particular, higher international demand as the result of increasing military
and security personnel to fight the war on terrorism. There is no assurance that this level of
demand will continue or that we will be able to achieve or maintain this level of growth in the
commercial market after the acquisition.
27
We depend on our senior executives to develop and execute our strategic plan and manage our
operations, and if we are unable to retain them, our business could be harmed
Our future success depends upon the continued services of James Riedman, our Chairman of the
Board, who has played a key role in developing and implementing our strategic plan. We also rely on
Richard E. White, our Chief Executive Officer and Kenneth E. Wolf, our Chief Financial Officer, who
have played key roles in integrating our newly acquired brands. Our loss of any of these
individuals would harm us if we are unable to employ a suitable replacement in a timely manner. We
do not maintain key man insurance on Messrs. Riedman, White or Wolf or any of our other senior
executives.
Fluctuations in the price, availability and quality of raw materials could adversely affect
our gross profit
Fluctuations in the price, availability and quality of raw materials, such as leather and
bison hides, used to manufacture our products, could adversely affect our cost of goods or our
ability to meet our customers demands. Although we do not expect our foreign manufacturing
partners, or ourselves in manufacturing our Altama brand and Chambers
brand, to have any difficulty in obtaining the
raw materials required for footwear and accessories production, certain sources may experience some difficulty in
obtaining raw materials. For example, in fiscal 2002, the availability of leather decreased as a
result of destruction of livestock due to concerns about mad cow disease and hoof and mouth
disease. We generally do not enter into long-term purchase commitments. In the event of price
increases in these raw materials in the future, we may not be able to pass all or a portion of
these higher raw materials prices on to our customers, which would adversely affect our gross
profit.
A decline in general economic conditions could lead to reduced consumer demand for our
products and could lead to a reduction in our net sales, and thus in our ability to obtain credit
In addition to consumer fashion preferences, consumer spending habits are affected by, among
other things, prevailing economic conditions, levels of employment, salaries and wage rates,
consumer confidence and consumer perception of economic conditions. For example, in fiscal 2003 the
U.S. economy, and more specifically the retail environment, experienced a general slowdown, and
adversely affected consumer spending habits. Future slowdowns would likely cause us to delay or
slow our expansion plans and result in lower net sales than expected on a quarterly or annual
basis, which could lead to a reduction in our stockholders equity and thus our ability to obtain
credit as and when needed.
Our recently completed acquisitions make evaluating our operating results difficult given the
significance of these acquisitions to our operations, and our historical results do not give you an
accurate indication of how we will perform in the future
Our historical results of operations do not give effect for a full fiscal year to our 2004
acquisition of Altama or our recent acquisitions of Chambers Belt and
Tommy Bahama Footwear. Accordingly,
our historical financial information does not necessarily reflect what our financial position,
operating results and cash flows will be in the future as a result of these acquisitions, or give
you an accurate indication of how we will perform in the future.
Additionally, our management team has limited experience in selling to the government, which
comprises a significant amount of net sales under the Altama brand.
The financing of any future acquisitions we make may result in dilution to your stock
ownership and/or could increase our leverage and our risk of defaulting on our bank debt
Our business strategy is to expand into new markets and enhance our position in existing
markets through acquisitions. In order to successfully complete targeted acquisitions or to fund
our other activities, we may issue additional equity securities that could dilute your stock
ownership. We may also incur additional debt if we acquire another company, which could
significantly increase our leverage and hence our risk of default under our secured credit
facility. For example, in financing our recent Chambers Belt acquisition we issued 374,462 shares
of our common stock in a private placement to Chambers Belt and
incurred approximately $19.5
million of additional debt under our amended credit facility to pay the purchase price and to
refinance Chambers Belts funded indebtedness. In our recent
acquisition of Tommy Bahama Footwear, we
increased our credit facility again to, among other things, obtain
$7.0 million bridge loan to pay
the cash purchase price.
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Defaults under our secured credit arrangement could result in a foreclosure on our assets by
our bank
We have a $63 million secured credit facility with our bank that we just recently amended on
August 3, 2005, to increase our borrowing capacity from $52 million in connection with our
acquisition of Tommy Bahama Footwear. As of October 1, 2005, we had $51.6 million outstanding under this
facility, not including the new $7.0 million term loan we borrowed on August 4, 2005. In the
future, we may incur additional indebtedness in connection with other acquisitions or for other
purposes. All of our assets are pledged as collateral to secure our bank debt. Our credit facility
includes a number of covenants, including financial covenants. We were in default of two of our
financial covenants as of October 1, 2005, but obtained a waiver from our bank related to this
financial covenant default on November 14, 2005. We are currently
in discussions with the our lender to revise the covenants, and if
necessary, the terms of our bridge loan, to reflect more accurately
our current operating position. If we default under our credit arrangement but are
unable to cure the default, obtain appropriate waivers or refinance the defaulted debt, our bank
could declare our debt to be immediately due and payable and foreclose on our assets, which may
result in a complete loss of your investment.
We may be required to recognize impairment charges that could adversely affect our reported
earnings in future periods
Our business acquisitions typically result in goodwill and other intangible assets. As of
October 1, 2005, we had $61.3 million of goodwill and unamortizable intangibles. We expect this
figure to continue to increase with additional acquisitions. Pursuant to generally accepted
accounting principles in the United States, we are required to perform impairment tests on our
goodwill annually or at any time when events occur that could impact the value of our business. Our
determination of whether an impairment has occurred is based on a comparison of each of our
reporting units fair market value with its carrying value. Significant and unanticipated changes
could require a provision for impairment in a future period that could adversely affect our
reported earnings in a period of such change.
The exercise of outstanding stock options and warrants, and the allocation of unallocated
shares held by our 401(k) plan, would cause dilution to our stockholders ownership percentage
and/or a reduction in earnings per diluted share
As of October 1, 2005, we had outstanding 8,379,443 shares of common stock, including 358,885
unallocated shares held by our 401(k) plan, which despite the fact they are outstanding for voting
and other legal purposes, are classified as treasury shares for financial statement reporting
purposes and are not taken into account in determining our earnings per share or earnings per
diluted share. The 358,885 unallocated shares will be allocated at the rate of approximately
120,000 shares annually until they are fully allocated to the accounts of plan participants. After
each allocation these additional shares will be included in the weighted average shares outstanding
for purposes of determining our earnings per share and earnings per diluted share. In addition, as
of that date, we had outstanding options and warrants to purchase 1,560,602 shares at exercise
prices ranging from $1.73 to $13.33 per share. The exercise of all or part of these options or
warrants would cause our stockholders to experience a dilution in their percentage ownership for
legal purposes.
The charge to earnings from the compensation to employees under our employee retirement plan
could adversely affect the value of your investment in our common stock
As of October 1, 2005, our 401(k) plan held 358,885 unallocated shares of our common stock,
which constituted approximately 4% of our outstanding shares as of that date. Under the terms of
the plan, approximately 120,000 of these shares will be allocated to plan participants in February
of each year until fully allocated of which approximately 120,000 were allocated in February 2005.
We are required to record an expense for compensation based on the market value of the amount
allocated to employees each year. For fiscal 2003 and 2004, we recorded non-cash expenses for this
allocation of $402,000 and $854,000, respectively. To the extent our stock price increases, we
would be required to take a higher charge for this allocation and thereby decrease our reported
earnings. This could adversely affect the value of your investment in our common stock.
We are controlled by a principal stockholder who may exert significant control over us and our
significant corporate decisions in a manner adverse to your personal investment objectives, which
could depress the market value of our stock
James R. Riedman, our Chairman of the Board, is the largest beneficial owner of our stock.
Through his personal holdings and shares over which he is deemed to have beneficial ownership held
by Riedman Corporation (of which he is a shareholder, President and a director), our employee
retirement plan, his children, and an affiliated entity, he beneficially owned approximately 26.8%
of our outstanding shares as of October 31, 2005. Mr. Riedman also has beneficial ownership of
shares underlying options which, if exercised, would increase his percentage beneficial ownership
to approximately 31.4% as of October 31, 2005. Through this beneficial ownership, Mr. Riedman can
direct our affairs and significantly influence the election or removal of our directors and the
outcome of all matters submitted to a vote of our stockholders, including amendments to our
certificate of incorporation and bylaws and approval of mergers or sales of substantially all of
our assets. The interest of our principal stockholder may conflict with interests of other
stockholders. This concentration of ownership may also harm the market price of our common stock
by, among other things:
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delaying, deferring or preventing a change in control of our company; |
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impeding a merger, consolidation, takeover or other business combination involving our company; |
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causing us to enter into transactions or agreements that are not in the best interests of all stockholders; or |
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company. |
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Our inventory levels may exceed our actual needs, which could adversely affect our operating
results by requiring us to make inventory write-downs
If we order more product than we are able to sell, we could be required to write-down this
inventory, adversely affecting our margins and in turn, our operating
results. Additionally, excess
inventory adversely affects our liquidity. Excess inventory could occur as the result of change in
customer order patterns, general sales activity, orders subject to cancellation by customers,
misforecasting and consumer demand. Write-downs of inventory could adversely affect our gross
profit and operating results.
Our financial results may fluctuate from quarter to quarter as a result of seasonality in our
business, and if we fail to meet expectations, the price of our common stock may fluctuate
The
footwear and apparel, and accessories industries generally, and our business specifically, are characterized
by seasonality in net sales and results of operations. Our business is seasonal, with the first and
third quarters generally having stronger sales and operating results than the other two quarters.
These events could cause the price of our common stock to fluctuate.
Delaware law, our charter documents and agreements with our executives may impede or
discourage a takeover, even if a takeover would be in the interest of our stockholders
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various
impediments to the ability of a third-party to acquire control of us, even if a change in control
would be beneficial to our existing stockholders. In addition, our Board of Directors has the
power, without stockholders approval, to designate the terms of one or more series of preferred
stock and issue shares of preferred stock, which could be used defensively if a takeover is
threatened. All options issued under our stock option plans automatically vest upon a change in
control unless otherwise determined by the compensation committee. In addition, several of our
executive officers have employment agreements that provide for significant payments on a change in
control. These factors and provisions in our certificate of incorporation and bylaws could impede a
merger, takeover or other business combination involving us or discourage a potential acquirer from
making a tender offer for our common stock or reduce our ability to achieve a premium in such sale,
which could limit the market value of our common stock and prevent you from maximizing the return
on your investment.
Shares of our common stock eligible for public sale could cause the market price of our stock
to drop, even if our business is doing well
Sales of a substantial number of shares of our common stock in the public market, or the
perception that these sales could occur, could adversely affect the market price for our common
stock. As of October 31, 2005, there were 8,379,443 shares of our common stock outstanding. Of our
currently outstanding shares of common stock, 5,774,338 shares are freely tradable without
restriction or further registration under federal securities laws,
including 36,637 shares held by
our affiliates which are registered for resale on a Form S-8. The
remaining 2,605,105 shares are
held by our affiliates or were issued in a private placement and are considered restricted or
control securities and are subject to the trading restrictions of Rule 144 under the Securities Act
of 1933, as amended, or the Securities Act. These securities cannot be sold unless they are
registered under the Securities Act or unless an exemption from registration is otherwise
available. We also have in effect registration statements on Form S-8 covering 1,500,000 shares of
common stock, under our 2001 Long-Term Incentive Plan, 1,331,398 shares of which are subject to
previously granted options and the remainder of which are available for future awards under that
plan.
Our principal stockholders, James Riedman and Riedman Corporation, who beneficially own in the
aggregate 2,244,963 shares of our common stock and vested options to acquire an additional 560,084
shares, have demand registration rights covering 1,152,710 of the shares they beneficially own. In
connection with our recent Altama acquisition, we entered into a registration rights agreement with
Altamas sole shareholder for 196,967 shares issued in a private placement to him in connection
with the acquisition. The registration rights agreement grants to Altamas sole shareholder,
subject to certain conditions, one demand registration exercisable
between 180 days and three years after the acquisition closing and unlimited piggyback
registration rights for registration statements we file with the SEC during the three years
following the closing except in limited circumstances. We also granted registration rights to
Chambers Belt as part of the acquisition covering the 374,462 shares and any additional shares
issued to Chambers Belt as part of the earnout consideration under the terms of the acquisition.
The agreement provides one demand registration right per year for three years and unlimited
piggyback registration rights for three years, subject to certain exceptions.
Significant resales of these shares could cause the market price of our common stock to
decline regardless of the performance of our business. These sales also might make it difficult for
us to sell equity securities in the future at a time and at a price that we deem appropriate.
30
Our stock price has fluctuated significantly during the past 12 months and may continue to do
so in the future, which could result in litigation against us and significant losses for investors
Our stock price has fluctuated significantly during the past 12 months and in the future may
continue to do so. A number of factors could cause our stock price to continue to fluctuate,
including the following:
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the failure of our quarterly operating results or those of similarly situated companies to meet expectations; |
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adverse developments in the footwear, apparel or accessories markets and the worldwide economy; |
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changes in interest rates; |
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our failure to meet investors expectations; |
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changes in accounting principles; |
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sales of common stock by existing stockholders or holders of options; |
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announcements of key developments by our competitors; |
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the reaction of markets to announcements and developments involving our company, including future
acquisitions and related financing activities; and |
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natural disasters, riots, wars, geopolitical events or other developments affecting us or our
competitors. |
In addition, in recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
These broad market fluctuations may adversely affect our stock price, regardless of our
operating results. In the past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its securities. We may in the future
be the target of similar litigation. Securities litigation could result in substantial costs and
liabilities and could divert managements attention and resources.
We operate in a very competitive and rapidly changing environment. New risk factors can arise
and it is not possible for management to predict all such risk factors, nor can it assess the
impact of all such risk factors on our business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors should not place undue
reliance on forward-looking statements.
Investors should also be aware that while we do, from time to time, communicate with
securities analysts, it is against our policy to disclose to them any material non-public
information or other confidential commercial information. Accordingly, investors should not assume
that we agree with any statement or report issued by any analyst irrespective of the content of the
statement or report.
Furthermore, we have a policy against issuing or confirming financial forecasts or projections
issued by others. Thus, to the extent that reports issued by securities analysts contain any
projections, forecasts or opinions, such reports are not the responsibility of the Company.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our revolver and long-term
debt under our credit facility, which we use to maintain liquidity and to fund capital expenditures
and expansion. Our market risk exposure with respect to this debt is to changes in the prime rate
in the U.S. and changes in LIBOR. Our revolver and our term loans provide for interest on
outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At
January 1, 2005 and October 1, 2005, we had $26.6 million and $58.6 million, respectively, in
outstanding borrowings under our credit facility. A 1.0% increase in interest rates on our current
borrowings would have had a $586,000 impact on income before income taxes. We do not have any
foreign currency risk. We do not enter into any of these transactions for speculative purposes.
Item 4. Controls and Procedures
An evaluation was performed under the supervision of the Companys management, including the
Chief Executive Officer or CEO, and Chief Financial Officer or CFO, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures, (as defined in Securities
Exchange Act of 1934 (the Exchange Act) Rules 13a-15(e) and 15-d-15(e),) as of the end of the
period covered by this report. Based on that evaluation, the Companys management, including the
CEO and CFO, concluded that the Companys disclosure controls and procedures were effective as of
the end of the period covered by this report to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in SEC rules and forms.
Notwithstanding the foregoing, there can be no assurance that the Companys disclosure
controls and procedures will detect or uncover all failures of persons within the Company and its
consolidated subsidiaries to disclose material information otherwise required to be set forth in
the Companys periodic reports. There are inherent limitations to the effectiveness of any system
of disclosure controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable, not absolute, assurance of achieving their
control objectives.
There has been no change in the Companys internal controls over financial reporting that
occurred during the last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal controls over financial reporting.
Part II Other Information
Item 1. Legal Proceedings
On September 22, 2005, we reached an amicable settlement of our lawsuit against Mark Tucker,
Inc., in the United States District Court, Southern District of California, alleging infringement
of Phoenix Footwears patent relating to the insole construction of our SoftWalk and Strol brand
footwear. We had also named retailers Saks & Company and Sears, Roebuck and Company as defendants
in the litigation. Under the terms of the settlement, Mark Tucker, Inc. acknowledged and
recognized the validity and enforceability of our patent that was the subject of the infringement
claim. In exchange we agreed to settle and dismiss the lawsuit without liability to the
defendants, which was dismissed on October 11, 2005.
Item 3. Default Upon Senior Securities
We
were not in compliance with the average borrowed funds to EBITDA
ratio and cash flow coverage ratio covenants at October 1, 2005
under our amended and restated credit facility agreement with M&T
Bank. On November 14, 2005, we obtained a waiver from
our lender of these defaults, and are currently in discussions with
the lender to amend these financial covenants under the credit
agreement. See Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and
Capital Resources.
Item 5: Other Information
On
September 23, 2005, our subsidiary, Altama Delta Corporation,
entered into an amendment (the Amendment) to its
award/contract with the Defense Supply Center Philadelphia
(DSCP), dated September 30, 2003, which provides for
the supply of combat boots to the DSCP. The Amendment is an exercise
of the second and final option term by the DSCP under the award/contract and
provides for a one-year term expiring on September 22, 2006.
The
Amendment provides for minimum quantities of two types of combat
boots that the DSCP would order, which are similar to the minimum
quantities under the first option term of the award/contract.
Although the award/contract and Amendment provide for minimum and
maximum quantities of boots that the government may order during the
renewal terms, the DSCP has the right to change the minimum/maximum
quantity per item as demand dictates. As a result, there can be no
assurance of the ultimate number of combat boots that the DSCP will
purchase under any extension.
Item 6. Exhibits:
Exhibit 10.1 Asset Purchase Agreement dated August 3, 2005 by and among Phoenix Delaware
Acquisition, Inc., The Paradise Shoe Company, LLC, Tommy Bahama Group, Inc., Sensi USA, Inc., and
Phoenix Footwear Group, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on
August 9, 2005 by Phoenix Footwear Group, Inc. (SEC File No. 001-31309))
Exhibit 10.2 Amended and Restated Credit Facility Agreement between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company, dated August 4, 2005 (incorporated by reference
to exhibit 10.12 to the quarterly report form 10-Q filed on August 16, 2005 by Phoenix Footwear
Group, Inc. (SEC File No. 001-31309))
Exhibit 10.3 Trademark License Agreement between Tommy Bahama Group, Inc. and Phoenix Delaware
Acquisition, Inc. dated August 3, 2005
Exhibit 10.4 Amendment dated September 23,
2005 to the award/contract by and between The Defense Supply Center
Philadelphia and Altama Delta Corporation dated September 23,
2005
Exhibit 31.1 Section 302 Certification of Chief Executive Officer
Exhibit 31.2 Section 302 Certification of Chief Financial Officer
Exhibit 32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer
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Certain confidential information contained in the document has been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of
1934, as amended. |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto, duly authorized.
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PHOENIX FOOTWEAR GROUP, INC.
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Date: November 15, 2005 |
/s/ Richard E. White
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Richard E. White |
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Chief Executive Officer |
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Date: November 15, 2005 |
/s/ Kenneth E. Wolf
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Kenneth E. Wolf |
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Chief Financial Officer |
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EXHIBIT INDEX
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Exhibit |
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No. |
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Description of Exhibit |
Exhibit 10.1
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Asset Purchase Agreement dated August 3, 2005 by and among Phoenix Delaware
Acquisition, Inc., The Paradise Shoe Company, LLC, Tommy Bahama Group, Inc.,
Sensi USA, Inc., and Phoenix Footwear Group, Inc. (incorporated by reference to
Exhibit 2.1 to the Form 8-K filed on August 9, 2005 by Phoenix Footwear Group,
Inc. (SEC File No. 001-31309)) |
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Exhibit 10.2
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Amended and Restated Credit Facility Agreement between Phoenix Footwear Group,
Inc. and Manufacturers and Traders Trust Company, dated August 4, 2005
(incorporated by reference to exhibit 10.12 to the quarterly report form 10-Q
filed on August 16, 2005 by Phoenix Footwear Group, Inc. (SEC File No.
001-31309)) |
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Exhibit 10.3
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Trademark License Agreement between Tommy Bahama Group, Inc. and Phoenix
Delaware Acquisition, Inc. dated August 3, 2005 |
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Exhibit 10.4
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Amendment dated September 23,
2005 to the award/contract by and between The Defense Supply Center
Philadelphia and Altama Delta Corporation dated September 23,
2005 |
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Exhibit 31.1
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Section 302 Certification of Chief Executive Officer |
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Exhibit 31.2
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Section 302 Certification of Chief Financial Officer |
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Exhibit 32.1
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Section 906 Certification of Chief Executive Officer and Chief Financial Officer |
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Certain confidential information contained in this document has been omitted and filed
separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities
Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of
1934, as amended. |
34