U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 3
to
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to _________________
Commission File Number: 1-14078
BLUE FISH CLOTHING, INC.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Pennsylvania 22-2781253
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
No. 3 Sixth Street, Frenchtown, New Jersey 08825
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(Address of Principal Executive Offices)
(908) 996-3844
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.001 par
value per share Chicago Stock Exchange
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[ ]
Issuer's revenues for the fiscal year ended December 31, 1996, were $11,610,855.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of June 18, 1997, was $2,886,090.
As of June 18, 1997, 4,599,200 shares of Common Stock, $.001 par value per
share, were issued and outstanding.
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Blue Fish Clothing, Inc. (the "Company") is a designer, manufacturer,
wholesaler and retailer of hand block-printed women's and children's clothing
and accessories for the home. Each piece or garment that the Company sells is
unique in that it is based upon individual artwork applied by brush and
block-print, artist signature and embellishment. The Company's mission, to
inspire creativity and self-expression, is reflected in its products, its
workplace, its selling environments and its community involvement. The Company
markets its products through its wholesale division, as well as its four
Company-owned retail stores and participation in juried arts and craft fairs and
festivals across the United States.
COMPANY BACKGROUND
The Company was founded in 1985 by Jennifer Paige Barclay, who, prior to
founding the Company and at the age of 17, began block-printing cotton T-shirts
and dresses in her parents' garage, which she then sold at craft shows and
festivals. In 1986, Blue Fish participated in a New York wholesale show and
received over $100,000 in orders. In March 1987, the Company leased its first
production facility in Frenchtown, New Jersey, and was incorporated in the state
of New Jersey ("Blue Fish-NJ"). In June 1987, the first Blue Fish retail store
was opened in a renovated stone mill in Frenchtown, New Jersey. A second store
followed in June 1989, in Taos, New Mexico, and Blue Fish Taos, Inc. ("Blue
Fish-NM") was incorporated in New Mexico in May 1989. In Spring 1988, Nordstrom
became the Company's first major retailer added as a wholesale account. By 1994,
Blue Fish clothing was showcased in the Savvy department in 52 Nordstrom stores
across the United States. The Company expanded its product offerings by
introducing a line of sweaters in September 1993, and by experimenting with
different fabrications. In Spring 1994, the Company introduced a line of
children's clothing, and in Spring 1995 it offered its first home furnishing
products, tablecloths and pillows, through its own retail stores. In December
1994, the Company opened its third retail store in Santa Fe, New Mexico. The
Company opened a wholesale showroom in New York City in February 1996, and
opened its fourth retail store in Austin, Texas, in September 1996. In December
1996, the Company signed a lease for a retail store in New York City, which
opened in late March 1997. In January 1997, the Company closed its Taos, New
Mexico store.
In September 1995, Blue Fish-NJ, Blue Fish-NM and Blue Fish Clothing, Inc.,
a Pennsylvania corporation incorporated on September 6, 1995 (the "Company"),
entered into a Plan of Merger, pursuant to which the Company was the surviving
corporation. The merger became effective on September 19, 1995.
PUBLIC OFFERING
On November 13, 1995, the Company's Registration Statement on Form SB-2 for
800,000 shares of its Common stock was declared effective by the Securities and
Exchange Commission and the Company commenced a public offering of its Common
Stock. The Offering was made directly by the Company on a best efforts-basis at
a price of $5 per share for a minimum of 500,000 shares ($2,500,000) (the
"Minimum") and a maximum of 800,000 shares ($4,000,000). The Minimum was raised
as of May 13, 1996, the public offering closed as of May 15, 1996, and 787,200
shares were issued, generating cash of approximately $3,215,000, net of
transaction costs of $721,000, of which approximately $247,000 was expended in
1995.
COMPANY VALUES AND PHILOSOPHY
The Company's goal in its artisan crafted products and through its business
is to encourage people to believe in themselves and to inspire creativity and
self-expression (the "Blue Fish Concept"). The Company seeks to build long-term
relationships with its employees, suppliers, customers, stockholders, community
and environment. The Company has created its own educational outreach program,
called BLUEFISHGARTEN(TM), which brings the talents of Blue Fish employees to
art workshops at schools, camps and community organizations.
The Company also strives to be a leader among businesses in addressing
social and environmental concerns. The Company's major impact on the environment
is through its material usage. The Company outsources its dyeing to U.S.
contractors that use energy-efficient dyeing processes and water-based,
non-metallic, non-toxic fabric paints. The Company does not use any sizings or
acid washing treatments, which contain formaldehyde and are frequently used
throughout the industry. The Company uses only organic cotton for all of its
jersey garments. An independent
2
environmental audit performed on the Company in March 1995 by GreenAudit, Inc.,
found that, as a result of its extensive recycling and reuse programs, which the
Company has implemented at its production studio and at its stores, the Company
produces 7.6 times less waste per sales dollar than the New Jersey average.1 The
Company takes pride in this ratio in that New Jersey has historically the second
highest recycling rate in the country. The Company's commitment to social
responsibility is evidenced by its support of community organizations through
sponsorships, product donations and donations of a percentage of certain product
proceeds, as well as considerable time and effort. The Company contributed
$31,419 and $19,472 in cash, resources and products to various organizations
during 1995 and 1996, respectively, as well as donating designs and
participating in local events, such as environmental cleanups. In future years,
the Company intends to donate up to 10% of its net income as determined at the
discretion of the Board of Directors.
PRODUCTS
The Company designs, hand block-prints and distributes clothing and
accessories for the home. Each product is individually hand block-printed with
evocative designs and symbols and signed by the artist. Many products are
embellished with the distinctive Blue Fish label carrying a poetic message or
graphic design. The clothes are designed to be worn in a variety of ways
befitting the wearer. The Company seeks to produce clothing that is beautiful,
easy to wear, comfortable and practical, and that reflects the lifestyle and
spirit of the wearer and appeals to all age groups.
The Company currently has a women's line, and offers approximately 2,500
stock keeping units (SKUs). In 1996, the women's line was offered for eight
seasons per year. In 1997, the Company plans to introduce a men's clothing line.
The Company continually researches and develops new products, which are
introduced through its retail stores to test customers' reactions and gauge the
products' sell-through potential before offering them through the wholesale
business.
MESSENGER PROGRAM
The Messenger Program, which was implemented in the Spring of 1995, shifts
the Company's emphasis from using outside sales representatives to having its
own Company direct sales team out in the field. Each member, called a Messenger,
is responsible for growing wholesale accounts in their territory and for
relating the Company's philosophy, the Blue Fish Concept. The Messengers provide
personalized service by visiting the Company's wholesale accounts and by
providing merchandising support, which includes helping with the display of its
clothing, teaching the customers how to wear and combine the clothing, and
working with the accounts to provide support for local communities. By servicing
and growing its specialty store and boutique accounts, the Company intends to
reduce dependence on major retailers thereby reducing the risk of lost revenue
from account exodus or from forced price reductions.
To date, the Company has five regional Messengers, who cover the Southwest,
Southeast, Mid-Atlantic, New England and Midwest regions of the United States.
The Company believes that the Messenger program encourages wholesale sales
growth due to the higher level of personal contact and attention being available
in a region, as well as having a Blue Fish employee explain the Blue Fish
Concept. The Messenger Program incurs a higher level of fixed costs than
commission-only sales representatives do; however, the Company believes that the
higher costs of the Messenger Program will be offset by proportionately higher
sales, although no assurance can be given that this will occur. The Company
intends to expand the Messenger Program to other regions of the United States.
OBJECTIVE AND GROWTH STRATEGY
The Company's objective is to consistently offer products that inspire
creativity, self-expression and quality in terms of aesthetics. The Company
believes that this objective can be achieved by making and selling the highest
quality artisan-crafted clothing and related accessories. The Company defines
highest quality in terms of durability, craftsmanship and diversity. The
Company's growth strategy includes designing new product categories such as
men's clothing and home furnishings along with new clothing lines within
existing categories, such as a basics line, and a more ornate Blue Fish line.
Additionally, the Company plans to increase the number of its wholesale accounts
and open new retail stores. This expansion, the Company believes, will enable it
to reach out to more people by attracting new customers, providing jobs and
allowing the Company to expand its community outreach programs. The following
are the principal elements of the Company's growth strategy. Elements not funded
through the Company's public offering are intended to be ultimately funded
through internally generated cash flow and debt.
3
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Source: BioCycle, Vol. 34, No. 5 (May 1993), Table 1, p. 46. U.S. Solid Waste
Management, By State (1992).
WHOLESALE GROWTH STRATEGY. The Company's wholesale growth strategy is to
increase the number of wholesale accounts through geographic expansion and by
reaching new market segments through product line extensions.
o Geographic Expansion. The Company plans to target new wholesale accounts
that embrace the Company's philosophy of self-expression. The Company
intends to increase the number of specialty and boutique clothing stores as
well as major retailers that carry its products. With the Messenger
Program, the Company intends to focus on developing sales to its specialty
and boutique accounts across the country. The Messengers are expected to
attend to smaller, regional markets and travel across their territories to
attract new customers and grow existing accounts.
In February 1996, the Company opened a showroom in New York City to
increase sales and to reduce its presence at trade shows and markets in New
York. The Company believes that a New York showroom will enable wholesale
accounts to buy directly from the Company at their convenience in a more
relaxed and unique Blue Fish environment. The Company also believes that,
by maintaining a showroom and by continuing to participate only at the
highest quality wholesale markets in New York, it will attract a
significant number of new wholesale customers.
o Product Line Extensions. The Company introduced a basic, lower priced
women's clothing line for the Spring of 1996. Management believes that this
new line will further distinguish the Company from its competitors by
enabling it to offer a wider price range of merchandise. The new line can
be combined with and is planned to be sold together with the Company's
current lines. In addition, to help accomplish its growth plans, the
Company has redefined the National Sales Manager's job description and will
fill this position in 1997. The Company also plans to launch a men's
clothing line in 1997, and plans to hire a men's designer.
RETAIL GROWTH STRATEGY. Management's decision to expand the number of Blue
Fish retail stores was based upon the increased retail margins, the ability to
offer a greater selection by designing small lines exclusively for its retail
stores and the desire to foster increased customer interaction. In addition to
the showroom described above, the Company's retail store expansion plan includes
the addition of two or more retail stores per year through 2000. This expansion
plan includes standard stores (small city or town destination points with
approximately 1,500 selling sq. ft.) and high volume, city stores (such as New
York City) of approximately 2,250 selling sq. ft. Expansion is expected to have
a minimal effect upon the Company's existing wholesale business due to the
limited number of new retail sites currently selected. Management believes that
retail store expansion may improve the Company's wholesale business through
increased marketing efforts and brand recognition. The new retail stores are
intended to reflect a lifestyle by offering a wide assortment of distinctive
products in unique shopping environments. Primary elements of the retail growth
strategy include:
o Retail Store Location. The Company plans to select retail sites that
naturally attract large concentrations of its target customers. These are
usually larger cosmopolitan cities and smaller cities or towns (such as
state capitals, major university towns and destination locations) that have
a strong arts, education and craft culture and attract a large number of
tourists. The Company opened and entered into a lease agreement for two new
retail stores within 7 months of the public offering, an approximately
2,000 selling sq. ft. Austin, Texas store in September 1996, and an
approximately 3,000 selling square foot store in New York City in December
1996. Wherever possible, the Company intends to locate its stores in
unconventional retail spaces and stand-alone structures.
o Retail Store Environments. The Company believes that it differentiates
itself from other retailers by designing distinctive store environments and
by employing local or regional artisans to assist in the buildout of each
new store. By creatively using and re-using natural materials, such as
wood, stone, metal and glass, finishes and existing architectural elements,
the Company creates a shopping environment that it believes appeals to the
senses and sensibilities of its customers. Each store is unique and a
showpiece to local craftsmanship.
o Merchandise Selection. The Company intends to maintain and increase the
emphasis on its own merchandise within its stores, as well as broaden its
range of merchandise by offering a more basic, lower priced women's line,
and a men's line along with "lifestyle" goods including home furnishings,
gifts, and other related products. The Company has hired a Product
Development/Merchandising Manager to design these goods in-house, and
intends to produce the goods itself wherever economically viable.
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o Personal Shopping Service. The Company provides a personal shopping service
to customers across the United States who may not have access to Blue Fish
clothing locally or who do not have the time to visit stores. A personal
shopper, who gets to know and keeps a record of each customer's details
(such as height, weight, coloring as well as print, color and style
preferences), describes and discusses the store's selection with the
customer over the phone. A personal shopper often spends 30-45 minutes on
the phone with a customer, helping her select garments and putting together
outfits for her. Customers using this service are sent the Blue Fish
catalog each major season. The Company intends to expand its personal
shopping service, currently offered largely through its Frenchtown store,
to all of its retail locations. The Company believes that by increasing the
level of personalized service offered, the stores will increase their
average sales per customer as well as move additional merchandise in slower
months due to increased marketing efforts.
PRODUCTION AND MANAGEMENT EXPANSION. In order to achieve its objectives and
implement its wholesale and retail growth strategies, the Company anticipates
the need for a significant expansion of its production capacity and management
infrastructure support.
o Move to a New Facility. In December 1996, the Company entered into an
agreement to lease a 60,000 square foot corporate center and production
facility. The expected move date is January 1998. The Company believes this
will meet its space requirements for the foreseeable future. The Company
intends to fund the lease of the building and leasehold improvements
through funds generated from operations and a new debt facility, for which
the Company has not yet secured a commitment. See "Management's Discussion
and Analysis or Plan of Operation -- Liquidity and Capital Resources."
o Hire New Key Managers. In 1996, the Company hired a Human Resource Manager
and a Product Development Manager. The Company reorganized its
infrastructure with the assistance of outside management consultants, and
named two current executives to the positions of Vice President of Sales
and Marketing, and Vice President of Production, and hired a new Vice
President of Finance and Chief Financial Officer. In 1997, the Company
hired a new Vice President of Retail.
o Invest in Information Systems. The Company has invested and intends to
continue to invest in computer hardware, software and training. The Company
believes that its investment in computer information systems will improve
its efficiency and decrease its costs by facilitating the monitoring of
inventory, enabling more accurate sales forecasting, ensuring faster, more
accurate order processing and refining production scheduling and work flows
to ensure maximum efficiency and minimum waste.
o Provide Greater Employee Benefits. In order to continually improve its work
environment and attract and retain high caliber employees, the Company
intends to develop a child care center, a fitness center, and a workplace
lunch program over time when it moves to its new facility. It also intends
to emphasize continued employee training and development, through in-house
training courses and workshops.
COMPANY OPERATIONS
DESIGN. The Company's team of designers create 20 or more designs for each
of the eight seasons per year. Each season has a distinctive color palate and
unique set of prints, inspired by a certain topic or theme. Much of the
Company's inspiration comes from nature, the world around us, poetry, animals
and children. Management believes that the Company maintains freshness in its
product offerings by using different fabrics, such as recycled cotton, acetate
and silk, and by using vintage clothing, as well as having a distinctive
inspiration for each season. The in-house design team also creates home
accessory products, which are offered mainly through the Company's own stores.
PRODUCTION. The Company's production process is divided into two production
categories, external and internal. External production refers to all sourcing
from outside contractors and vendors. The Company uses different cutting and
sewing houses, depending on the fabrication and the quantities involved. The
Company piece-dyes its jersey fabric, which it believes improves the quality of
the garments produced while reducing cost and waste and favorably reducing the
inventory production cycle. The Company continues to garment-dye its other
fabrications due to the relatively small quantities involved. The Company
strives to maintain numerous vendor relationships in order to generate the best
pricing for materials and external labor. The Company believes that this
strategy will also decrease its reliance upon any one vendor. The cutting,
sewing and dyeing of all the Company's
5
products are by U.S. contractors and vendors that are currently located within a
100 mile radius of the Company's facility.
After the garments have been cut, sewn and dyed by outside production, they
are brought into the Company for internal production. The garments are then hand
printed with handcarved blocks and embellished at the Company's production
studio. Each garment is printed, signed by the artist and hung to dry. Most of
the garments are then embellished with the Blue Fish label, handmade clay or
antique buttons or ribbons, as appropriate, before going to the Company's
quality assurance department, where all of the Company's products are inspected.
Finally, the garments are sent to the shipping department to be packed and sent
through the various distribution channels to the customer.
SALES AND DISTRIBUTION. Blue Fish sells and distributes its products
through three channels:
o Wholesale. The Company currently sells to approximately 400 specialty
stores and boutiques, as well as to major retailers such as Nordstrom and
Neiman Marcus, which the Company believes place a high emphasis on personal
attention and service. Thirteen West Coast states are covered by an
independent sales representative based in Los Angeles. Blue Fish Messengers
currently cover additional states located in five national regions, the
Southwest, the Southeast, Mid-Atlantic, New England and the Midwest.
o Retail. The Company's first retail store opened in Frenchtown, New Jersey
in 1987. Subsequent retail expansion involved the opening of a second store
in Taos, New Mexico in 1989, a third in Santa Fe, New Mexico in December
1994, and a fourth store in Austin, Texas in September, 1996. The Company's
Taos, New Mexico store closed its operations on January 31, 1997. Due to
the proximity of the Santa Fe store (70 miles), sales revenues needed could
not be maintained in both stores. The Santa Fe location was selected to be
maintained because of its larger population base as well its larger size.
The Company entered into a ten-year lease agreement for a retail store in
New York City, which opened in late March 1997. A personal shopping service
is provided by telephone, largely from the Frenchtown store, for customers
to make purchases from the Company's catalog, which is mailed out each
quarter to individuals who request to be on the Company's mailing list. The
Company uses dynamic visual merchandising, striking store displays and a
distinctive cross merchandising approach to present its products in a
creative and inspirational context. Product displays and fixtures are
continually updated in tandem with the stores' changing merchandise. The
Company relies heavily on visual merchandising and community involvement,
rather than traditional forms of advertising, to invite its customers to
enter and explore its stores and buy its merchandise. Retail stores
incorporate creative decor, fixtures and leasehold improvements. The
Company's current policy is to lease retail sites. The Company believes
that this allows adequate post-opening site evaluation without a long-term
financial commitment.
o Craft. The Company attended 37 juried art and craft fairs and festivals
across the United States in 1996. At juried arts and craft fairs,
merchandiser participation is limited to those invited after evaluation of
representative product offerings. In 1997, this number is anticipated to
increase, with a greater emphasis on developing the Company's presence at
arts and crafts fairs and festivals in the West. The Company uses this
sales vehicle as a means to explore and develop new markets, as well as to
sell excess inventory. Since past season goods are sold between wholesale
and retail prices at craft fairs, the Company is not forced to take
undesirable markdowns for clearance in its retail stores or give deep
discounts to wholesalers. As the Company's inventory levels are
significantly reduced with the development of its management information
systems, the Company plans to continue using this outlet as a vehicle for
public relations, increasing its exposure and name recognition, raising
money for causes it supports, as well as for networking.
MARKETING
The Company's strategy is to develop highly interactive relationships with
customers through a variety of means, including: (i) creating very distinctive
sales environments, which encourage customers to explore the creativity of the
Blue Fish Concept; and (ii) creating excitement about the clothes and
encouraging word-of-mouth advertising by creating educational and inspiring
events at the Company's retail stores and at its wholesale account stores,
attending arts and craft fairs, as well as supporting creative events and causes
through sponsorship or product donations. The Company's advertising expenditures
have been limited and have focused on the Company's own stores as well as
cooperative advertising around special events with major wholesale accounts, and
mailings for its arts and craft fairs and events.
6
o Wholesale. The Company's Messenger Program provides a high level of
personalized service on a regional basis. Messengers visit the wholesale
accounts, assist with the display of clothing, educate the customers on how
to wear and combine the clothing and work with the accounts to provide
support for local communities. By listening to the customers, Messengers
provide valuable feedback to the Company in terms of design and sales
forecasts and, because they are out in the field, they can act upon
customers' ideas and suggestions promptly.
o Retail Stores. The Company's stores carry a range of related accessories
and gifts, as well as other designers' merchandise that complement Blue
Fish clothing. The Company regularly produces a color catalog which is
mailed to all its retail customers on its mailing list to promote store
visits and telephone sales. The stores hold frequent events to promote new
merchandise and to create the spirit of inspiration and sharing, in order
to make shopping at Blue Fish retail stores a unique experience.
o Craft Fairs and Events. The Company maintains an extensive mailing list
with over 45,000 names and sends customers on this mailing list a postcard
inviting them to the craft fairs or events in their region. At craft fairs,
the Company hands out a listing of all the specialty stores and boutiques
in the area that carry its clothing and encourages customers to buy current
season goods. The Company also provides support or sponsorship for
conferences, festivals and other events, many of which have a similar
philosophical approach. In 1996, the Company's sponsorship included the
Bioneers biodiversity conference, the Taos Film Festival, the American
Comedy Awards, Citizen's Action, and the National Organic Farmers
Association in New Jersey.
CUSTOMER BRAND LOYALTY
The Company believes that it has a very high degree of customer brand
loyalty. Due to customer demand, the Company reintroduced its former tradition
of sewing its Blue Fish label on the outside of most of its garments. Earlier
Blue Fish garments, which had dates printed on them, are considered collectors
items by some of the Company's customers. The Company proactively attempts to
communicate directly with its customers and develop a rapport and a personal
relationship through special events at its own stores and through the Messenger
Program. Hang tags on the Company's clothing frequently encourage interaction
with its customers and the Company's Summer 1996 catalog asked customers to
share something special about their involvement with Blue Fish Clothing. The
Company is continuing its customer contact through periodic Company updates and
highlights included in its seasonal catalog mailings.
The Company distributes a newsletter to all of its wholesale accounts for
each major season. The newsletter communicates information about the Company,
its philosophy and products, the inspiration for the season, as well as news
from the field and from its customers. The Company has also sent out surveys and
questionnaires to measure customer needs and satisfaction, and to hear their
ideas and feedback.
MANAGEMENT INFORMATION SYSTEM
From September 1994 through December 1995, the Company invested
approximately $150,000 to begin the establishment of a fully customized wide
area network, with remote dial-in capability. During 1996, the Company invested
approximately $700,000 from its initial public offering proceeds on the
continued expansion of its management information systems in hardware, software,
consulting, services and supplies. In 1996 the Company completed the
implementation of its retail point-of-sale system and merchandising system. This
system allows the Company to experience greater inventory control, higher retail
gross margins through better monitoring of inventory turn, and more efficient
customer check out. During 1996 the Company also completed the installation of a
Wide Area Network ("WAN") that connects the three primary production and
operational facilities in Frenchtown, New Jersey. The Company has already
experienced improved communications and productivity due to the WAN enabling the
use of messaging software and the sharing of files. Extensive training has and
will accompany each software/system installation.
During 1997, the Company plans to complete the installation and integration
of numerous software systems. A new accounting package will be installed that
will allow the Company to report on and monitor the Company's financial position
more effectively, automate specific tasks, and improve efficiencies. In
addition, a new manufacturing/production software system will be installed which
will allow the Company to obtain greater inventory control, improve production
management, improve capacity planning, allow for the Company's sales force to
enter orders while on the road, obtain information more easily, allow for
Electronic Data Interchange ("EDI"), and utilize bar coding and bar code
scanners. A new patternmaking system will also be installed which will allow the
Company to send patterns electronically, develop an electronic/file library of
patterns, and improve pattern, marker,
7
and grading efficiencies. The software systems will be integrated, including but
not limited to integration of the accounting package to the existing retail
point-of-sale system and the manufacturing/production system; and integration of
the manufacturing/production system from the retail point-of-sale system to
receive purchase orders directly. By 1999, the Company plans to have a fully
integrated Company-wide computer network with Internet access.
INVENTORY MANAGEMENT
The Company's designs for its women's line are produced for eight seasons
per year, which limits production, sales and delivery times. The Company has
countered this problem by improving workflows, delivery schedules and by selling
at or above planned production for new seasons, which compensates for returns or
cancellations. Any garments that are unsold go to the Company's inventory
management center which tracks all past season merchandise and handles the sale
of frequently requested garments from wholesale customers, promotional garments,
garments sold at craft fairs, as well as garments sold to employees.
The Company completed implementation of a customized Point-of-Sale ("POS")
register and polling system in 1996 for its retail stores. The POS provides
register efficiencies, improves customer checkout and overnight polling, and
will become fully integrated with the Company's planned wholesale order entry,
accounting and inventory management systems. The POS system provides management
with accurate and timely information about inventory, pricing, costing,
markdowns, markups, transfers, damages, sales and perpetual inventory counts.
This system also allows items to be monitored by SKU, by location and by day,
and will enable a faster sales cycle to be achieved by transferring merchandise
from one location to another that is selling the item more quickly.
EMPLOYEES
As of April 22, 1997, the Company employed 167 full-time and 34 part-time
employees. Approximately 88 of these employees were involved in production, 54
in sales and distribution, 28 in design and creative and 31 in general and
administrative. The Company employs temporary staff as the need arises. The
Company believes it generally has good relations with its employees. None of its
work force is unionized.
TRADEMARK AND SERVICE MARKS
The Company is the owner of the trademark and service mark "Blue Fish(R),"
which expires in the year 2000, and the service mark BLUEFISHGARTEN(R), which
expires in 2006 and which is used for its educational outreach program.
Registered trademarks and service marks expire ten years after issuance, but are
renewable indefinitely if still in use at the time of renewal. In the opinion of
management, the Company's trademark and service marks are important to its
business due to their name recognition with the Company's customers.
Accordingly, the Company intends to maintain and preserve its trademark and
service marks and to vigorously protect them from infringement.
The Company regards its trademarks, service marks, trade dress, trade
secrets and other intellectual property as critical to its success. This
intellectual property is protected by common law, as well as by registration and
contract. Nonetheless, given the large number of potentially copyrightable
expressions that the Company could seek to register in the United States and in
other countries, the Company has relied largely on its common law rights, rather
than registration. Merchandising design and artwork are crucial to the success
of Blue Fish, and the Company intends to take action to protect against
imitation of its products and to protect its copyrights as necessary.
COMPETITION
The Company's clothing generally competes with other casual weekend wear or
sportswear apparel, in the better sportswear and bridge categories. The
specialty retail and wholesale apparel businesses are highly competitive. Retail
competitive factors include store location; merchandise breadth, quality, style,
and availability; level of customer service; and price. The Company's retail
stores compete against a wide variety of smaller independent specialty stores as
well as department stores and national specialty stores. The Company's wholesale
division competes with numerous companies. To date, the Company has identified
20 companies that produce clothing with a hand block-printed look, and there may
be others. These companies are generally offering lower-priced garments, but the
Company believes the quality of the printing, the colors used and the design of
the silhouettes are not directly comparable to those of the Company. At the
present time, the Company does not intend to take any legal action against these
particular companies since the Company believes that these companies are too
small to pose any threat to the Company's business, but may do so in the future.
By offering a dressier Blue Fish line with more ornate and elaborate
block-printing, as well as using only organic cotton for all its jersey
garments, the Company plans to further distinguish itself from its competitors.
8
GOVERNMENT REGULATION
The Company is subject to various federal, state and local
environmental laws and regulations that limit the discharge, storage and
disposal of a variety of substances. Operations of the Company are also governed
by laws and regulations relating to workplace safety and worker health,
principally the Occupational Safety and Health Administration Act and
regulations and applicable state laws and regulations thereunder. The Company
believes that it presently is in compliance with these laws and regulations.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has a five-year lease expiring in June 1998 at an annual rent
of $69,413, for an approximately 18,000 sq. ft. facility located in Frenchtown,
New Jersey, which currently accommodates the Company's production,
administrative, accounting, and wholesale functions. The Company also leases a
second facility consisting of approximately 18,000 sq. ft. of additional
production and storage space also located in Frenchtown, New Jersey, for an
annual rental of $50,493, which expires in November 1998. The Company also
leases an 800 sq. ft. design studio located above the Company's Frenchtown
retail store for a monthly rental of $895. The Company intends to continue to
lease the design studio on a month-to-month basis as long as required for the
Company's operations. Effective January, 1, 1996, the Company entered into a
five-year lease to secure a wholesale showroom space in New York City, New York,
at an annual rental of $58,800. The Company's four retail stores are also leased
at monthly rental rates ranging from $2,875 to $19,000, as set forth below.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LOCATION DATE OPENED LEASE EXPIRES NET SELLING SQ. FT.
- -------- ----------- ------------- ------------------
Frenchtown, NJ June 1987 April 2001 1,267
62 Trenton Avenue
Santa Fe, NM December 1994 October 1999 1,725
220 Shelby Street 3 options
3 years each
Austin, TX September 1996 August 2000 2,000
9901 Capital of Texas Hwy,
North
New York City, NY March 1997 December 2006 3,000
148 Greene Street
</TABLE>
The Company has entered into a lease, commencing January 1, 1997, for a
6,500 sq. ft. (approximately 3,000 selling sq. ft.) New York City retail store
at a monthly rent of $19,000, escalating to $24,791, ending in 2006.
The Frenchtown retail store and design studio are leased from David
Barclay, Jennifer Barclay's father. See "Certain Relationships and Related
Transactions."
The Company closed its 750 net selling sq. ft. Taos, New Mexico store in
January 1997 in large part due to its proximity to the Santa Fe, New Mexico
store. The store had been leased on a month-to-month basis.
The Company believes that, in order to accommodate its growth plans, it
will have to move into additional space by 1998. In December 1996, the Company
entered into an agreement to lease a 60,000 sq. ft. corporate center and
production facility in Palmer Township, Pennsylvania commencing in January 1998.
The Company plans to consolidate its production and administrative functions
into this single facility. The Company believes this will meet its space
requirements for at least the next 10 years.
9
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently involved in any material litigation or legal
proceedings and is not aware of any material litigation or proceeding threatened
against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1996 through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is currently traded on the Chicago Stock Exchange
under the symbol BLF. The following table sets forth the high and low sales
prices quoted on the Chicago Stock Exchange for the periods indicated.
Fiscal Year Ended
December 31, 1996
High Low
Quarter Ended June 30, 1996 * 10 1/8 5 1/2
Quarter Ended September 30, 1996 7 7/8 6 1/2
Quarter Ended December 31, 1996 7 1/8 3 3/4
* Covers the period from the May 15, 1996 closing of the Company's initial
public offering though June 30, 1996.
As of June 18, 1997, the Company had approximately 2,624 stockholders of
record. As of that date, the last sale price of the Company's Common Stock was 4
1/4 per share.
The Company's Subchapter S election was terminated upon the closing of the
Company's initial public offering on May 15, 1996. Although the Company paid
dividends and made a distribution while an S corporation, the Company intends to
retain any future earnings and pay no dividends for the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Company is a designer, manufacturer, wholesaler and retailer of hand
block-printed women's and children's clothing and accessories for the home. Each
product is individually hand block printed with evocative designs and symbols
and is signed by the artist. The Company markets its products to approximately
400 specialty stores and boutiques, as well as to major retailers, such as
Nordstrom and Neiman Marcus, through five regional direct sales personnel known
as Messengers, and one independent sales representative. The Company has four
Company-owned retail stores in Frenchtown, New Jersey; Santa Fe, New Mexico; New
York, New York; and Austin, Texas and participates in juried arts and crafts
fairs and festivals across the United States.
10
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
items included in the Company's Statements of Operations (see Financial
Statements and Notes thereto elsewhere in this Report) for the periods
indicated:
Years Ended
December 31,
1995 1996
Statements of Operations Data:
Sales 100.0% 100.0%
Cost of goods sold 44.1 46.3
------- -------
Gross margin 55.9 53.7
Operating expenses, net 47.6 54.7
Compensation expense related to stock grant 9.0 ----
------- -------
Income (loss) from operations (0.7) (1.0)
Interest expense, net 1.7 1.4
----- -----
Historical income (loss) before pro forma income
taxes (benefit) (2.4) (2.4)
Pro forma income taxes (benefit) (0.7) (0.7)
----- -----
Pro forma net income (loss) (1.7)% (1.7)%
======= =======
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. The Company's sales increased by $2.0 million or 20.2% to $11.6
million in 1996. The Company's wholesale sales increased by 16.0% from $6.5
million in 1995 to $7.5 million in 1996, its retail sales increased by 22.6%
from $2.6 million in 1995 to $3.2 million in 1996, and craft fair sales
increased by 59.5% from $538,000 in 1995 to $857,000 in 1996. The Company
attributes the wholesale sales increase during the 1996 period primarily to an
increase in the number of wholesale accounts, and improved relations with
wholesale accounts through the Messenger Program. The increase in retail sales
is primarily attributed to same store sales increases of $384,000 or 14.7%, and
a store opened during 1996 generating sales of $207,000. The Company attributes
these increases to greater marketing efforts and repeat customer business. Same
store sales for the Taos retail store declined due to the close proximity of its
Santa Fe store, which is only 70 miles away. This was instrumental in the
Company's decision to close the Taos store in first quarter 1997. The increase
in craft fair sales was due to an increase in the number of fairs and festivals
the Company attended.
GROSS MARGIN. The major components affecting gross margin are raw
material and production costs, wholesale and retail maintained margins and sales
mix. The Company's gross margin decreased, as a percentage of sales, by 2.2
percentage points from 55.9% in 1995 to 53.7% in 1996. The Company attributes
this decrease to increased customer returns from specialty stores, higher
markdowns at retail, the planned closing of the Taos retail store resulting in
markdown driven sales, and an increase in sales of past season inventory
yielding lower gross margins.
OPERATING EXPENSES. The Company's operating expenses increased by $1.8
million from $4.6 million in 1995 to $6.4 million in 1996. Operating expenses
increased as a percentage of sales, from 47.6% during 1995 to 54.7% in 1996.
This was a result of the Company growing its infrastructure with the proceeds of
the public offering. The increase in the Company's operating expenses was
primarily due to expenses of approximately $1,100,000 in connection with the
addition of corporate management team members and staff support, $114,000
increase in marketing and public relation activities, $248,000 in connection
with the New York showroom and Austin retail store in 1996 and $121,000 relating
to consultant fees associated with the ongoing systems selection process. The
Company anticipates continued investment in the manufacturing, wholesale and
retail operations throughout 1997.
INTEREST EXPENSE, NET. The Company's interest expense, net, decreased
by $10,000 from $167,000 in 1995 to $157,000 in 1996. Interest expense increased
by $76,000 primarily due to increased borrowings for the Company's working
capital. Interest income increased by $86,000 as a result of the Company
investing cash raised from the initial public offering in interest-bearing
instruments.
NET INCOME OR LOSS. The net loss before income taxes of $275,000
represents a decrease of $914,000 or 143% in net income, which would have been
$639,000 in 1995 after removing the impact of the 1995 compensation charge
relating to a stock grant. The income tax benefit of $238,000 includes a one-
time benefit of $174,000 due to
11
reinstatement of deferred income taxes upon conversion of the Company to a C
corporation prior to the closing of the initial public offering. Pro forma net
loss after pro forma income taxes increased 19.4% to $(193,000).
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES. The Company's sales increased by $2.0 million or 26.2% from $7.7
million in 1994 to $9.7 million in 1995. The Company's wholesale sales increased
by 21.7% to $6.5 million, its retail sales increased by 39.3% to $2.6 million,
and craft fair sales increased by 24.6% to $0.5 million in 1995. The Company
attributes the wholesale sales increase during the 1995 period primarily to an
increase in the number of wholesale accounts, improved relations with wholesale
accounts through the Messenger Program, lower return percentages based on timely
shipments and a $100,000 special order received from a major retailer. Same
store sales at the Company's retail division increased 4.1%, which the Company
attributes to increased marketing efforts and repeat customer business at its
Frenchtown store offset by a decrease in same store sales at the Company's Taos
store. The Company believes that same store sales for its Taos retail store
declined during 1995 due to the opening and close proximity of its Santa Fe
store, which achieved $673,000 in sales during 1995 and had minimal sales during
1994 due to the December 1994 opening date for this store. The increase in craft
fair sales was due to an increase in the number of fairs and festivals the
Company attended.
GROSS MARGIN. The major components affecting gross margin are raw
material and production costs, wholesale and retail maintained margins and sales
mix. The Company's gross margin increased, as a percentage of sales, by 3.3
percentage points from 52.6% in 1994 to 55.9% in 1995. The Company attributes
this increase to production efficiencies including increased production units
per employee, damage reductions, lower returns due to on-schedule deliveries,
increased retail sales at higher margins and the sale of past season merchandise
through craft shows.
OPERATING EXPENSES. The Company's operating expenses increased by $1.5
million from $3.1 million in 1994 to $4.6 million in 1995. Operating expenses
also increased as a percentage of sales, from 40.0% during 1994 to 47.6% in
1995. The increase in the Company's operating expenses was primarily due to
expenses of $0.8 million incurred in connection with the addition of management
team members and staff support and increased marketing expenses in the amount of
$0.2 million. The addition of the Santa Fe retail store, including depreciation
and personnel costs and additional depreciation expense from the Taos retail
store renovation were only partially offset by increased Santa Fe revenues.
COMPENSATION EXPENSE RELATED TO STOCK GRANT. In September 1995, the
Company granted its Chief Executive Officer 304,000 shares of common stock at a
market value of $1.58 per share, which resulted in compensation expense of
$480,000. In addition to this grant, the Company also accrued a $393,000 bonus
in September 1995, to be paid to its Chief Executive Officer for the payment of
income taxes associated with this stock grant. There was no comparable item in
1994.
INTEREST EXPENSE. The Company's interest expense increased by $51,000
from $116,000 in 1994 to $167,000 in 1995. This increase was attributed to
additional borrowing on a line of credit (up $300,000 from 1994) and the
increased assignment of receivables (to a factor in 1994 and sold with recourse
in 1995). See "Liquidity and Capital Resources."
NET INCOME OR LOSS. As a result of the $873,000 compensation charge and
the foregoing, net income (loss) before state income taxes (benefit) decreased
by $1.1 million or 127.5% from income of $852,000 in 1994 to a $234,000 loss in
1995. Net income (loss) after pro forma income taxes (benefit) decreased by
$658,000 or 132.6% from income of $496,000 in 1994 to $162,000 loss in 1995.
SEASONALITY AND QUARTERLY RESULTS
The Company's sales are seasonal and therefore its operating results are
subject to seasonal fluctuations. Historically, wholesale sales have been
highest during the Company's third and early fourth quarter (July through
October) when it ships fall and winter merchandise in advance of the apparel
sector's peak holiday selling season. The Company's wholesale sales are the
lowest during January and February. The Company's highest levels of retail sales
have historically occurred during June through August and November through
December. Certain of the Company's retail stores are currently located in
tourist destinations and are therefore affected by each location's overall level
of tourism. Wholesale and retail sales generated during the aforementioned
periods have traditionally had a significant impact on the Company's results of
operations, and any decrease in sales for these periods or in the
12
availability of working capital needed in the months preceding these periods
could have a material adverse effect on the Company's results of operations. The
Company's continued growth tends to mask seasonal fluctuations.
The Company's results of operations in one quarter are not necessarily
indicative of the results of operations that can be expected for any other
quarter or for the full year. The Company's results of operations may also
fluctuate from quarter to quarter as a result of the addition or loss of
wholesale accounts, the amount and timing of expenses incurred in connection
with the expansion and integration of new retail stores into the operations of
the Company, as well as other factors.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through bank
lines of credit, factoring agreements, bank notes and capital lease financing.
In May 1996, the Company completed an initial public offering which generated
approximately $3.5 million in proceeds in 1996, net of expenses. At December 31,
1996, the Company had $1.9 million in cash and cash equivalents (of which
$40,000 was restricted), a receivable purchase line of credit for up to
$1,500,000 (with a $403,000 outstanding balance), a demand bank line of credit
for up to $1,000,000 (with a $1,000,000 outstanding balance) with borrowing
limits subject to 50% of finished goods and 25% of work in progress inventory
levels and a $450,000 loan from a shareholder. The Company had working capital
of $2.9 million on December 31, 1996, reflecting an increase in working capital
of $3.0 million from $(79,000) on December 31, 1995. Working capital is defined
as current assets less current liabilities.
On September 11, 1995 the Company's then sole stockholder Ms. Barclay
requested a distribution of $450,000 of the taxed but undistributed S
corporation earnings. Ms. Barclay received this distribution on January 2, 1996.
Ms. Barclay loaned these funds back to the Company on an unsecured basis. The
Company issued her a promissory note in the principal amount of $450,000 and
bearing interest of 7% per annum, payable monthly. The principal amount of the
note will be payable upon demand by Ms. Barclay, subject to the following
limitations upon repayment: (i) the maximum amount of principal that the Company
is required to pay in any 3-month period is $50,000 and in any 12-month period
is $100,000; (ii) the Company is not required to make any repayments of
principal when its current assets to current liabilities ratio as set forth in
its latest quarterly balance sheet is below 1.0, excluding liabilities related
to amounts due pursuant to the note; and (iii) no repayment of principal will be
paid in the event that a disinterested majority of the Company's Board of
Directors determines that it is not advisable to make a repayment of principal
based upon the Company's then current cash flow or liquidity needs. Although the
restrictions imposed on repayment were designed to protect the Company from
experiencing liquidity problems, no assurance can be given that a demand for
repayment by Ms. Barclay will not result in a shortage of cash available to the
Company for operations. See "Certain Relationships and Related Transactions."
Net cash used by operating activities was $1.2 million during 1996,
consisting primarily of a net loss before deferred tax benefit, an increase in
inventories of $979,000 for store stock levels and planned 1997 wholesale
shipments, and a decrease in accrued bonus-stock grant of $403,000 partially
offset by a decrease in accounts receivable of $293,000. Net cash provided by
operating activities was $348,000 during 1995, consisting primarily of net
income before non-cash stock grant and a corresponding accrued bonus expense of
$636,000 and by payables increases of $367,000. This was partially offset by
increases in inventory of $561,000 for store stock levels and planned 1996
wholesale shipments.
Net cash used in investing activities in 1995 and in 1996 was $288,000
and $425,000, respectively. Net cash used in investing activities in 1996
consisted primarily of capital expenditures to purchase property and equipment,
the majority of which consisted of the buildout of the wholesale showroom in New
York and the Austin retail store. The 1995 investing activities consisted
primarily of capital expenditures to purchase property and equipment, including
the opening of the Company's Santa Fe retail store, the renovation of its Taos
retail store and the initial implementation of the Company's upgrade of its
management information system in 1994.
Net cash provided by financing activities in 1996 was $3.3 million,
consisting primarily of net cash proceeds received from the public offering of
$3.5 million in 1996, an increase on borrowings on the Company's line of credit
of $500,000, and $450,000 of borrowings from a majority shareholder. This
funding was offset in part by equity distributions of $556,000 to pay
stockholder taxes and distribute S corporation earnings. Net cash used in
financing activities in 1995 was $260,000, consisting primarily of deferred
offering costs of $247,000 related to the Company's public offering and equity
distributions of $419,000 to pay stockholder taxes, offset in part by increases
in short-term borrowings.
13
The Company's existing bank line of credit at December 31, 1996,
provided for borrowings up to $1.0 million. This line of credit bears interest
at the bank's prime interest rate plus 0.75% payable on demand or monthly. At
December 31, 1996, outstanding borrowings under the line of credit were
$1,000,000, and the interest rate was 9.0%. The line of credit is subject to a
maximum outstanding balance not to exceed 50% of finished goods inventory plus
25% of work in process. The Company also has a receivable purchase line of
credit agreement, which provides for the assignment and processing of Company
receivables with recourse to a maximum outstanding assigned amount of $1,500,000
for a term of one year. The Company assigns 100% of its wholesale credit sales.
The Company can borrow up to 90% of these assigned receivables, with the
remaining 10% held in reserve in the event of customer payment default. The
receivable purchase line of credit bears interest at 1.75% as a discount to all
receivables assigned, and the Company is responsible for reimbursing the bank
for all uncollectible accounts. Interest expense under this agreement was
$107,000 and $117,000 during 1995 and 1996, respectively. Both the line of
credit and the receivable purchase line of credit are secured by a stockholder
guarantee and have a first lien on all accounts receivable, inventory,
equipment, fixtures and deposit accounts. In March 1997, both the line of credit
and the receivable purchase line of credit were renewed and both were extended
through February 1998.
The Company has four notes payable to banks with outstanding balances
of $49,586 on December 31, 1996, and mature in August 1997 through November
2000. As of December 31, 1996, the Company has $152,537 outstanding in capital
lease obligations for various pieces of equipment. Four leases expire in 1998,
and one lease expires in October 1999.
The proceeds of the Company's public offering, together with planned
additional working capital financing, are expected to meet the Company's funding
needs to achieve its objectives and growth strategy through 1997. Additional
working capital financing would include inventory, receivables and fixed asset
secured lines of credit or term debt. The Company has entered into an agreement
to lease, with an option to buy a corporate headquarters and production
facility. If such a purchase option is exercised, the Company would pursue bank
mortgage financing. Thereafter, if funds generated by operations are
insufficient to finance the Company's growth strategy, it would be necessary to
raise additional funds from public or private financing. The Company would
pursue bank working capital financing, which would include inventory,
receivables and fixed asset secured lines of credit or term debt. No assurance
can be given that the Company would be successful in raising such additional
financing.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 and the Index therein for a listing of the financial statements
which are a part of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accountants on
accounting and financial disclosure items.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The names and ages of the executive officers and directors of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jennifer Barclay (1) 30 Chairman of the Board of Directors
Marc Wallach (1) 59 President and Chief Executive Officer and Director
Richard Swarttz 40 Vice President of Finance, Chief Financial Officer and
Treasurer
Jolie Cross Doyle 41 Vice President of Sales and Marketing
Megan Doyle 28 Vice President of Production
14
Dianne Ige 48 Vice President of Retail
Lana Schempp 50 Corporate Secretary
Ben Cohen (2)(3) 46 Director
Gary Hirshberg (2)(3) 42 Director
</TABLE>
--------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
JENNIFER BARCLAY founded Blue Fish in 1985, and has been its President and
Chairman of the Board of Directors since the Company's incorporation in March
1987. She also served as the Company's Chief Executive Officer from March 1987
until September 1994, and as its Treasurer from August 1993 through August 1995.
In September 1996, Ms. Barclay relinquished the title of President but remains
Chairman of the Board.
MARC WALLACH joined the Company as Chief Operating Officer and General
Manager in September 1993 and became the Company's Chief Executive Officer in
September 1994. Mr. Wallach was appointed as a Director of the Company in June
1995. In September 1996, Mr. Wallach assumed the additional title of President.
From 1990-1993, Mr. Wallach was an independent consultant to the apparel
industry. In 1987, Mr. Wallach founded U.S. One, a manufacturer and marketer of
children's apparel, and served as its President until 1989. For the 15 years
preceding 1987, Mr. Wallach served in various executive capacities, including
Senior Vice President of the Youthwear Division, for Cluett Peabody, Inc., an
apparel conglomerate. Mr. Wallach holds a Bachelor of Science degree in Textile
Management from Philadelphia College of Textiles and Science.
RICHARD SWARTTZ joined the Company in May 1996 as Chief Financial Officer
and was appointed Treasurer in August 1996. In September 1996, Mr. Swarttz's
position was changed to Vice President of Finance, Chief Financial Officer and
Treasurer. Prior to joining the Company, Mr. Swarttz was most recently Vice
President of Finance at International Women's Apparel, Inc., from May 1994, to
May 1996, and Vice President and Controller of McBriar Sportswear, Inc. from
October 1990 to May 1994. Mr. Swarttz is a Certified Public Accountant, and
holds a Bachelor of Science degree in Accounting and a Masters in Business
Administration from Philadelphia College of Textiles and Science.
JOLIE CROSS DOYLE has served as the Company's Vice President of Sales and
Marketing since October 1996. She joined the Company in November 1995 as
Director of Marketing and previously held various marketing positions in the
magazine publishing industry. Until January 1994, Ms. Cross Doyle served as
Vice President of Corporate Communications for Hachette Fillipacchi Magazines, a
company she joined in 1983 when it was owned by CBS Magazines.
MEGAN DOYLE has served as the Company's Vice President of Production since
October 1996. She joined the Company in February 1992 as a Patternmaker and held
various positions in production, such as Production Manager, Director of
Production, and Director of Merchandising and Manufacturing. Ms. Doyle holds a
Bachelor of Fine Arts degree from Parsons School of Design.
DIANNE IGE joined the Company in February 1997 as Vice President of Retail.
From January 1995 to May 1996 she was Director of Merchandising for Gant,
Division of Phillips - Van Heusen. From June 1993 to December 1994 she was
Senior Director of Outerwear for Polo/Ralph Lauren. From March 1992 to May 1993
she was Vice President of Sales and Marketing for Natori. Her professional
experience has spanned many product categories including men's and women's
sportswear, women's accessories, and intimate apparel. She has had experience in
both retail and wholesale, and exposure to both import and domestic
manufacturing markets. Ms. Ige holds a Bachelor of Arts degree in Psychology
from the University of Wisconsin.
LANA SCHEMPP was appointed Corporate Secretary in August 1996. She joined
the Company in January 1993, working with the accounting department in a variety
of capacities until June 1996. She now serves as Executive Assistant to the
President and Chief Executive Officer of Blue Fish Clothing, Inc. Prior to
joining the Company, she was an educator in several New Jersey school districts.
Ms. Schempp holds a Bachelor of Science degree from Douglass College.
15
BEN COHEN has served as a member of the Board of Directors since June 1995.
Mr. Cohen is the Co-Founder and Chairman of the Board of Ben and Jerry's
Homemade, Inc., a public company, and served as its Chief Executive Officer
until February 1995. He presently serves as a member of the Board of Directors
of The Social Venture Network. Mr. Cohen also serves as a member of the Board of
Directors of Community Products, Inc., a privately held buttercrunch candy
manufacturer, which filed a petition for federal bankruptcy protection in April
1997.
GARY HIRSHBERG has served as a member of the Board of Directors since June
1995. Mr. Hirshberg has been the Chief Executive Officer of Stonyfield Farm,
Inc., a privately held yogurt and ice cream company, since September 1983 and
its President since June 1989. He is the Chairman of The Social Venture Network
and a Trustee of Leadership New Hampshire, Inc. Mr. Hirshberg has extensive
experience as an environmental activist, including terms as the founding
President of the Cape and Island Self Reliance Corporation, as founding
President of the Cape Cod Environmental Alliance and as a Director of the New
Hampshire Audubon Society and the Association for the Preservation of Cape Cod.
Mr. Hirshberg holds a Bachelor of Arts degree from Hampshire College, an
honorary Doctor of Science degree from New Hampshire College and an honorary
Doctor of Laws degree from Notre Dame College (Manchester, New Hampshire).
BOARD COMMITTEES
The Company's Board of Directors has established various committees. The
Executive Committee consists of Ms. Barclay and Mr. Wallach. The Executive
Committee is authorized to take any action upon which the Board of Directors is
authorized to act, except as reserved by law or the Company's Bylaws. The
Executive Committee also administers the Company's 1995 Non-Employee Directors'
Stock Option Plan. The Audit Committee consists of Messrs. Cohen and Hirshberg.
The Audit Committee, which is responsible to meet periodically with management
and the Company's independent public accountants, will review the results and
scope of the audit and other services provided by the Company's independent
public accountants, the need for internal auditing procedures and the adequacy
of internal controls. The Compensation Committee consists of Messrs. Cohen and
Hirshberg. The Compensation Committee has the responsibility and authority to
establish and administer compensation policies for all executive officers and
employees of the Company, including the Chief Executive Officer. The
Compensation Committee also administers the Company's 1995 Stock Option Plan.
The personal liability of the Company's directors is limited to the fullest
extent permitted by Pennsylvania law. Under the Company's Bylaws and
Pennsylvania Business Corporation Law ("PBCL"), a director shall not be
personally liable for monetary damages for his or her actions as a director
unless: (1) the director has breached or failed to perform the duties of his
office under subchapter 17B of PBCL; and (2) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. Pennsylvania law
further provides that this limitation is not available with respect to the
responsibility or liability of a director pursuant to any criminal statute or
the liability of a director for the payment of taxes pursuant to Federal, state
or local law.
The Company's Bylaws provide that the Company will indemnify directors and
officers, and may indemnify its employees and other agents, to the fullest
extent permitted by law. Indemnified parties are covered in all cases except
where such indemnification is prohibited by law, or where the conduct of the
indemnified party (i) constitutes willful misconduct or recklessness, or (ii) is
based upon receipt by the indemnified representative from the Company of a
personal benefit to which the indemnified party is not legally entitled. The
Company shall pay the expenses incurred in good faith by an indemnified party,
against an undertaking by the indemnified party to repay such expenses if it is
ultimately determined that the indemnified party is not entitled to
indemnification. Any dispute related to the right of indemnification will be
decided by arbitration. The Company also maintains liability insurance for its
directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act, indemnification may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions. The Company has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable. The Company believes that its Bylaws provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
NUMBER OF DIRECTORS, DIRECTORS' TERM OF OFFICE AND DIRECTOR COMPENSATION
The Company's Bylaws provide that the Company may have up to eight
directors. At each annual meeting of stockholders, directors will be elected to
hold office until the next annual meeting. The Company currently has four
16
directors and intends to elect an additional outside director within the next
year. The Company's employee directors do not receive any cash compensation for
their service on the Board of Directors. Directors who are not otherwise
employees of the Company are eligible to receive stock options under the
Company's 1995 Non-Employee Directors' Stock Option Plan. See "1995 Non-Employee
Directors' Stock Option Plan." All directors may be compensated for certain
expenses in connection with their attendance at Board meetings.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934.
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock ("10% Stockholders"), to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership of the Company's
Common Stock and other equity securities on Form 3 and reports of changes in
such ownership on a Form 4 and Form 5. Executive officers, directors and 10%
Stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during, and with respect to, its most recent
fiscal year and written representation that no other reports were required, all
Section 16(a) filing requirements applicable to its officers, directors and 10%
Stockholders were complied with, except as follows:
On October 1, 1996, the Company appointed Jolie Cross Doyle Vice President
of Sales and Marketing and Megan Doyle Vice President of Production. Both
individuals failed to file Form 3s reporting their beneficial ownership of the
Company's securities (or lack thereof) within ten days of their appointments.
Form 3s for each individual were filed with the Commission on April 17, 1997.
17
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1994, 1995,
and 1996 the annual compensation, including salary, bonuses and certain other
compensation, paid by the Company to its President, Chief Executive Officer, and
any executive officers whose annual compensation exceeded $100,000 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
- -------------------------------- ----------- -------------------------------------- ------------------------------- ------------
Long Term Compensation
-------------------------------
Annual Compensation Awards Payouts
- -------------------------------- ----------- ---------- ---------- ---------------- ---------- --------- ---------- ------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other
Annual Restricted All
Compen- Stock LTIP Other
Name and Fiscal sation Awards(s) Options/ Payouts Compensation
Principal Position Year Salary Bonus ($) ($) ($) SARs(#) ($) ($)
($)
- -------------------------------- ----------- ---------- ---------- ---------------- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jennifer Barclay 12/31/96 $ $ $ $ $ --- $ ---
100,000 -0- 2,178 (4) --- ---
Chairman (1) $
4,905 (5)
$
1,985 (6)
12/31/95 $ $ $ $ $ --- $ ---
100,000 1,923 1,968 (4) --- ---
$
5,420 (5)
$
2,038 (6)
12/31/94 $ $ $ $ $ --- $ ---
108,903 207,328(3) 1,968 (4) --- ---
$
5,420 (5)
Marc Wallach 12/31/96 $ $ $ $ $ --- $ ---
105,000 -0- 4,581 (4) --- ---
President & Chief $
Executive Officer (2) 900 (5)
$
2,355 (6)
12/31/95 $ $ $ $ 114,000 $ --- $ ---
105,000 21,576 5,163 (4) 480,320
$
900 (5)
$
2,532 (6)
$
392,989 (7)
12/31/94 $ $ $
101,524 -0- 5,163 (4)
- -------------------------------- ----------- ---------- ---------- ---------------- ---------- --------- ---------- ------------
</TABLE>
(1) Ms. Barclay served as Chairman and President until September 1996, when she
relinquished the title of President.
(2) Mr. Wallach served as Chief Executive Officer until September 1996, when he
assumed the additional title of President.
(3) S Corporation distribution
(4) Company contribution for healthcare premiums
(5) Allowance for automobile lease
(6) 401(k) Company match accrued at December 31
(7) Deferred grossed up bonus to pay taxes due on the restricted stock grant
The following table sets forth the aggregated option / SAR exercises
and fiscal year end option / SAR values by the Company to each executive officer
of the Company who earned $100,000 or more for the year ended December 31, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------- ---------------------- --------------- --------------------- ----------------------
Number of
Unexercised Value of
Securities Unexercised
Shares Underlying In-The-Money
Acquired Options/SARs Options/SARs
On At FY-End (#) At FY-End ($)
Exercise Value Exercisable/ Exercisable/
Name (#) Realized Unexercisable Unexercisable
(a) (b) (c) (d) (e)
- --------------------------------------------- ---------------------- --------------- --------------------- ----------------------
<S> <C> <C> <C> <C>
Marc Wallach -0- $ -0- 45,600/68,400 $ 28,500/ $ 42,750
President & Chief Executive Officer
- --------------------------------------------- ---------------------- --------------- --------------------- ----------------------
</TABLE>
18
EMPLOYMENT AND NON-DISCLOSURE AGREEMENTS
The Company entered into an Employment Agreement with Marc Wallach to serve
as the Company's General Manager and Chief Operating Officer, effective January
1, 1994, for a period of three years, subject to termination by the Company for
cause or, by either party, at any time upon ninety (90) days prior written
notice. On September 7, 1994, Mr. Wallach was appointed Chief Executive Officer.
Although Mr. Wallach's Employment Agreement expired on December 31, 1996, he
continues to work for the Company on the same terms. The Company's Board of
Directors intends to consider an extension of the current Employment Agreement
or the execution of a new one at its next meeting. The Employment Agreement, as
amended, provides that Mr. Wallach's annual base compensation will be $105,000
effective September 1, 1994, and that he will receive an annual bonus of 3% of
the Company's net after-tax profits for each year that the Employment Agreement
remains in effect. Mr. Wallach will also receive an additional bonus of 1% of
the Company's net after-tax profits for each of the five years commencing
January 1, 1994 and ending December 31, 1998 provided that Mr. Wallach remains
continuously employed by the Company during this five-year period. This
additional bonus will be paid by the Company in five equal annual installments
commencing on January 1, 1999. Mr. Wallach is also entitled to participate in
the Company's employee benefit plans. Mr. Wallach is also subject to certain
non-disclosure covenants and has agreed not to compete with the Company during
the term of the Employment Agreement and for two years thereafter. On September
15, 1995, the Company granted to Mr. Wallach 304,000 shares of Common Stock in
consideration of services rendered. In connection with this stock grant, Ms.
Barclay contributed 304,000 shares of her Common Stock to the capital of the
Company and Ms. Barclay, Mr. Wallach and the Company entered into a Restricted
Stock Agreement. Pursuant to this Agreement, all of Mr. Wallach's 304,000 shares
are subject to purchase by the Company for a total consideration of $1 in the
event that Mr. Wallach voluntarily terminates his employment or is terminated
for cause by the Company prior to September 16, 1997. In 1995, the Company
recognized a compensation expense of $873,309, representing the fair market
value of the Common Stock plus a bonus to cover income taxes payable in
connection with the stock grant. Mr. Wallach also waived his right to receive
any portion or all of his undistributed S corporation earnings other than to pay
taxes on S corporation earnings. See "Certain Relationships and Related
Transactions."
The Company has also executed stock option agreements containing
non-competition and non-disclosure provisions with each of the Company's
officers and key employees who have been granted stock options under the
Company's 1995 Stock Option Plan.
401(K) PLAN
In March 1995, the Company adopted an employee savings and retirement plan
(the "401(k) Plan") covering all of the Company's employees who have attained
the age of 21 and who normally work 20 hours per week. The 401(k) Plan is
intended to be a tax-qualified plan under Section 401(a) of the Internal Revenue
Code. The 401(k) Plan enables employees to reduce their taxable compensation by
electing to defer current compensation into the 401(k) Plan, up to the
statutorily prescribed annual limit ($9,500 in 1996). The trustees of the 401(k)
Plan, at the direction of each participant, invest the assets of the 401(k) Plan
in the various investment alternatives offered under the 401(k) Plan. The
Company may, but is not required to, make matching contributions to the 401(k)
Plan based on the amounts participants contribute to the 401(k) Plan, but in no
event may the Company's contribution exceed 10% of the participant's gross
compensation. The Company presently makes monthly matching contributions of up
to 2% of a participant's gross compensation. The 401(k) Plan is administered by
Merrill Lynch.
1995 STOCK OPTION PLAN
The 1995 Stock Option Plan (the "Option Plan") was adopted by the Board of
Directors and approved by the stockholders in September 1995. The Option Plan is
intended to motivate and reward employees and selected consultants by granting
them stock options to acquire shares of Common Stock.
Grants of stock options under the Option Plan may be made to the Company's
employees, officers (including officers who are directors), and consultants. A
total of 570,000 shares of Common Stock has been reserved for issuance under the
Option Plan. The Option Plan is administered by the Compensation Committee of
the Board of Directors.
Both stock options intended to qualify as incentive stock options under the
Code and nonqualified stock options may be granted under the Option Plan. No
employee may receive options in any given calendar year to purchase more than
200,000 shares. The exercise price of incentive stock options granted under the
Option Plan will be at least equal to the fair market value of the Common Stock
of the Company on the date of the grant. The exercise
19
price of nonqualified stock options granted under the Option Plan will be not
less than eighty-five percent (85%) of the fair market value of the Common Stock
of the Company on the date of the grant. In addition, any option granted under
the Option Plan will have an exercise price of one hundred and ten percent
(110%) of the fair market value on the date of the grant in the case of any
person who owns stock possessing more than 10% of the total combined voting
power. Options granted under the Option Plan will vest at such times as are
specified by the Compensation Committee. If an individual with outstanding stock
options terminates employment on account of death, disability or retirement
approved by the Company, all of the individual's stock options will become
immediately exercisable. Once exercisable, stock options granted under the
Option Plan remain exercisable for nine years from the date of grant, unless the
individual terminates his or her relationship with the Company other than
described above. However, if an option holder wishes to preserve the status of
an option as an incentive stock option, the holder must exercise the option
within three months of his or her termination of employment or within one year
from a termination of employment on account of disability.
Prior to October 23, 1995, the Option Plan provided that all outstanding
stock options granted under the Option Plan, whether or not vested, would become
immediately exercisable upon a "change of control of the Company" (as defined in
the Option Plan). In certain circumstances, if an individual who has received an
option grant under the Option Plan terminates employment within 18 months of a
"change of control of the Company," the Company is required to make a cash
payment to the individual in an amount equal to the difference between the fair
market value of the shares of Common Stock subject to the option and the
option's exercise price, unless the individual elects otherwise. In addition, if
the Company is not the surviving corporation in a transaction such as a merger,
or sale of substantially all the assets of the corporation, at least 10 days
before the effective date of the transaction, each individual who has an
outstanding and currently exercisable stock option will be entitled to exercise
the option or to receive a cash payment equal to the difference between the fair
market value of the shares of Common Stock subject to the option and the
option's exercise price if a cash payment of the stock option would not affect
the accounting treatment of any such transaction in the judgment of the
Compensation Committee. The Option Plan was amended such that the provision
relating to individuals who terminate employment within 18 months of a change of
control was deleted, and for options granted on or after October 23, 1995, only
vested options are subject to immediate exercise or cash payment upon a change
of control.
On September 11, 1995 the Compensation Committee authorized the grant of
nine-year incentive stock options with an effective date of September 15, 1995
to purchase an aggregate of 60,000 shares of the Company's Common Stock to its
officers and key employees pursuant to the Option Plan. Options to purchase an
aggregate of only 55,000 shares were actually granted. Twenty percent were
immediately exercisable on September 15, 1995 and an additional 20% will become
exercisable on each of the first four anniversaries of the grant date. The
Compensation Committee also granted a nine-year incentive stock option under the
Option Plan with an effective date of September 15, 1995 to the Company's Chief
Executive Officer, Marc Wallach, to purchase 114,000 shares of the Company's
Common Stock. Mr. Wallach's option becomes exercisable according to a schedule
that provides for the most rapid exercise of the option without disqualifying
the option as an incentive stock option under the Code. All of the options were
granted with an exercise price of $4.00 per share. On December 15, 1995, the
Compensation Committee authorized an additional grant of nine-year incentive
stock options to purchase 45,000 shares to its officers and key employees
pursuant to the Option Plan under the same conditions as the September 15, 1995
grant, with an exercise price of $5.00 per share. Options to purchase only
40,000 shares were actually granted. During 1996, the Compensation Committee
granted a nine-year incentive stock option to purchase 14,300 shares of Common
Stock to an officer, with the same vesting schedule as the 1995 grants (other
than to Mr. Wallach), and at an exercise price of $7.00 per share. The
Compensation Committee also granted non-qualified five-year stock options to
purchase an aggregate of 12,000 shares to three consultants, at an exercise
price of $7.25 per share. One-half of the options became exercisable on January
1, 1997 and the balance become exercisable on January 1, 1998. On April 4, 1997
the Compensation Committee granted an incentive stock option to purchase 10,000
shares of the Company's Common Stock to an officer of the Company with the same
vesting schedule as the 1995 grants with an exercise price of $4.75 per share.
On May 27, 1997 the Compensation Committee granted incentive stock options to
purchase an aggregate of 20,000 shares of the Company's Common Stock to two
managers of the Company with the same vesting schedule as the 1995 grants with
an exercise price of $4.50 per share.
Options to purchase 4,000 shares were exercised by three employees during
1996. The employment of four optionees holding options to purchase an aggregate
of 60,000 shares terminated during 1996. Of these options to purchase 60,000
shares, options to purchase 42,000 shares terminated unexercised during 1996 and
options to purchase an additional 10,000 shares terminated unexercised on March
2, 1997. Options to purchase the remaining
20
8,000 shares were exercised. Accordingly, as of the date of this Report, options
to purchase a total of 181,300 shares of Common Stock granted pursuant to the
Option Plan remain outstanding.
PERFORMANCE STOCK ESCROW AND LOCK-IN AGREEMENTS
All executive officers and directors of the Company are subject to a
"lock-in" agreement, under which they have agreed not to sell or otherwise
transfer any shares of the Company's Common Stock which are held or come to be
held by them for less than the Company's $5.00 initial public offering price. In
addition, Jennifer Barclay, the founder, Chairman of the Board of the Company,
has deposited into escrow 3,495,224 of the 3,486,000 shares of the Company's
Common Stock owned by her. Under the terms of the Escrow Agreement, 25% of her
shares shall become transferable on the sixth, seventh, eighth and ninth
anniversary dates of November 13, 1995. No transfer of those shares may be made
until November 13, 2001, except as follows: (A) Ms. Barclay may transfer a
number of her shares that, within any three-month period, would equal one
percent of the shares of the Company's Common Stock then outstanding; or (B) all
of the shares may earlier become transferable upon certification by the
Company's Chief Financial Officer that any of the following has been achieved:
(i) for two consecutive fiscal years after November 13, 1995, the Company has
minimum annual earnings equal to $0.25 per share; (ii) for five consecutive
fiscal years after November 13, 1995, the Company has an average minimum annual
earnings of $0.25 per share; (iii) after at least one year from November 13,
1995, the Company's Shares have traded on a United States stock exchange at a
price of at least of $8.75 per share (adjusted for stock splits, stock dividends
and recapitalizations) for at least 90 consecutive trading days; or (iv) the
Company's initial public offering is terminated, and none of the Company's
registered Common Stock is sold.
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In September 1995, the Board of Directors adopted and the stockholders
approved the Company's Non-Employee Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides for an annual nondiscretionary
grant of stock options to each director who is not an employee of the Company
(collectively, the "Non-Employee Directors"). The annual grant is in lieu of an
annual retainer for service as a member of the Board of Directors.
A total of 75,000 shares of Common Stock has been reserved for issuance
under the Directors' Plan. On January 1 of each year, each Non-Employee Director
will receive a nondiscretionary grant of options to purchase a total amount of
shares of Common Stock equal in value to $7,500, plus an additional $2,500 for
each Board of Directors' committee on which the Non-Employee Director serves,
based on the fair market value of the Common Stock on the date of grant. The
exercise price of options granted under the Directors' Plan will be equal to the
fair market value of the Common Stock on the date of grant, except that the
exercise price shall be one hundred and ten percent (110%) of the fair market
value in the case of any person who owns stock possessing more than 10% of the
total combined voting power. Options will remain exercisable for nine years from
the date of grant.
Pursuant to the terms of the Directors' Plan, each of the two Non-Employee
Directors received grants of nonqualified stock options to purchase 2,500 shares
of Common Stock, at an exercise price of $5.00 per share on January 1, 1996, and
2,700 shares of Common Stock, at an exercise price of $4.63 per share on January
1, 1997. As of the date of this Report, options to purchase a total of 10,400
shares of Common Stock have been granted under the Directors' Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock as of June 18,
1997 for (i) each director and executive officer of the Company; (ii) each
stockholder known by the Company to own beneficially 5% or more of the
outstanding shares of its Common Stock; and (iii) all directors and officers as
a group for each class of capital stock of the Company. The Company believes
that the beneficial owners of the Common Stock listed below, based on
information furnished by such owners, have sole investment and voting power with
respect to such shares, subject to community property laws where applicable.
21
<TABLE>
<CAPTION>
DIRECTORS, SHARES
EXECUTIVE OFFICERS BENEFICIALLY
AND 5% STOCKHOLDERS: OWNED (1) PERCENTAGE OF COMMON SHARES OUTSTANDING (1):
--------------------------------------------- ----------------------------------------------
<S> <C> <C>
Jennifer Barclay................. 3,486,000 75.8%
c/o Blue Fish Clothing, Inc.
No. 3 Sixth Street
Frenchtown, NJ 08825
Marc Wallach......... 349,600 (2) 7.5%
Richard Swarttz ................. 2,860 (3) *
Jolie Cross Doyle................ 4,400 (4) *
Megan Doyle...................... 1,000 (5) *
Dianne Ige....................... 2,000 (6) *
Ben Cohen ....................... 5,200 (7) *
Gary Hirshberg .................. 5,200 (7) *
All directors and executive ..... 3,856,260 (8) 82.7%
officers as a group (eight persons)
</TABLE>
*Less than 1%
(1) Pursuant to the rules of the Securities and Exchange Commission,
shares of Common Stock which an individual or group has a right to
acquire within 60 days pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing
the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(2) Consists of 304,000 shares of Common stock owned beneficially by Mr.
Wallach and 45,600 shares of Common Stock issuable upon exercise of
currently exercisable incentive stock options assuming a five-year
vesting schedule but excludes 68,400 shares of Common Stock issuable
upon exercise of incentive stock options granted under the Option
Plan that are not currently exercisable.
(3) Consists of 2,860 shares of Common Stock issuable upon exercise of
currently exercisable incentive stock options but excludes 11,440
shares of Common Stock issuable upon exercise of incentive stock
options granted under the Option Plan that are not currently
exercisable.
(4) Consists of 400 shares of Common stock owned beneficially by Ms.
Cross Doyle and 4,000 shares of Common Stock issuable upon exercise
of currently exercisable incentive stock options but excludes 6,000
shares of Common Stock issuable upon exercise of incentive stock
options granted under the Option Plan that are not currently
exercisable.
(5) Consists of 1,000 shares of Common Stock issuable upon exercise of
currently exercisable incentive stock options but excludes 3,000
shares of Common Stock issuable upon exercise of incentive stock
options granted under the Option Plan that are not currently
exerciable.
(6) Consists of 2,000 shares of Common Stock issuable upon excercise of
currently exercisable incentive stock options but excludes 8,000
shares of Common Stock issuable upon exercise of incentive stock
options granted under the Option Plan that are not currently
exercisable.
(7) Consists of 2,500 shares of Common Stock issuable upon exercise of
nonqualified options issued under the Directors' Plan
(8) Includes an aggregate of 65,860 shares of the Common Stock issuable
upon exercise of currently exercisable incentive stock options
granted under the Option Plan and Directors' Plan to executive
officers and directors, but excludes 96,840 shares of Common Stock
issuable upon exercise of incentive stock options granted under the
Option Plan that are not yet exercisable.
22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE OF FRENCHTOWN RETAIL STORE
The Company leases its Frenchtown retail store, together with a design
studio located above the store, from David Barclay, the father of Jennifer
Barclay, the Company's Chairman and President, under leases dated April 1, 1991,
and April 11, 1994, respectively. The lease for the retail store, which consists
of 1,267 square feet of selling space, is for a term of ten years. The Company
pays approximately $35,000 in rent on an annual basis for the retail store. The
design studio is leased on a monthly basis for approximately $900 per month and
consists of 800 square feet.
AGREEMENTS WITH FORMER STOCKHOLDER
Pursuant to an Agreement dated June 30, 1993, the Company repurchased all
of the 2,048,696 shares of the Company's Common Stock then owned by Anne Haag, a
former stockholder and officer of the Company. These shares were held in
Treasury by the Company (the "Treasury Stock"). Pursuant to a Security
Agreement, the Treasury Stock, together with all accounts receivable,
inventories, work-in-progress, bank accounts, trademarks, choses in action,
leasehold interests, and fixed assets now or hereafter acquired, served as
collateral to secure the Company's obligations under certain promissory notes
representing the purchase price for Ms. Haag's shares. The total purchase price
of the Treasury Stock was $230,000, of which $162,400 was in the form of a
promissory note due in monthly installments of $3,140 including interest at 6%
and maturing in March 1997. The stockholder's note had an outstanding balance,
as of December 31, 1996, of $24,557. The Company satisfied all of its
obligations to Anne Haag pursuant to the Agreement and promissory notes on April
5, 1997. On April 20, 1997, the Company retired the Treasury Stock and returned
it to the status of authorized but unissued shares.
In addition, the Company executed a separate agreement on August 27, 1993
consisting of a Consulting and Non-Competition Agreement with Ms. Haag which
provided that the Company would retain Ms. Haag for a period of five years to
provide management consulting services to the Company and Ms. Haag agreed not to
compete with the business of the Company during this period of time. During the
period of the Consulting and Non-Competition Agreement, Ms. Haag may not engage
in a competitive business within a twenty-five (25) mile radius of Frenchtown,
New Jersey. Originally, Ms. Haag was to be paid a total of $120,000 over a
period of five years in monthly installments of $2,000 through August 1998 for
such consulting services, and $50,000 over a period of five years in monthly
installments of $833 through August 1998 for her agreement not to compete. In
December 1995, the Company agreed with Ms. Haag to accelerate quarterly payments
by $20,000 ($40,000 in the first quarter of 1996) in anticipation of increased
usage of her consulting contract on a short-term basis. This repayment agreement
is coincident with the existing loan, consulting, and non-compete agreements,
and does not increase the long-term liability of the Company, but rather repays
these agreements in an accelerated fashion. See "Certain Relationships and
Related Transactions". As a result of these accelerated payments, Ms. Haig was
paid in full as of September, 1996.
EMPLOYMENT AGREEMENT WITH MARC WALLACH
The Company entered into an Employment Agreement with Marc Wallach to serve
as the Company's General Manager and Chief Operating Officer effective January
1, 1994, for a period of three years, subject to termination by the Company for
cause or, by either party, at any time upon ninety (90) days prior notice. On
September 7, 1994, Mr. Wallach was appointed Chief Executive Officer. Although
Mr. Wallach's Employment Agreement expired on December 31, 1996, he continues to
work for the Company on the same terms. The Company's Board of Directors intends
to consider an extension of the current Employment Agreement or the execution of
a new one at its next meeting. The Employment Agreement provides that Mr.
Wallach will be employed by the Company for a period of three years, subject to
termination by the Company for cause. Mr. Wallach's annual base compensation is
$105,000 effective September 1, 1994 and Mr. Wallach is to receive an annual
bonus of 3% of the Company's net after-tax profits for each year the Employment
Agreement remains in effect. Mr. Wallach will also receive an additional bonus
of 1% of the Company's net after-tax profits for each of the five years
commencing January 1, 1994 and ending December 31, 1998, provided that Mr.
Wallach remains continuously employed by the Company during this five year
period. This additional bonus will be paid by the Company in five equal annual
installments commencing on January 1, 1999. Mr. Wallach is also entitled to
participate in the Company's employee benefit plans. Mr. Wallach is also subject
to certain non-disclosure covenants and has agreed not to compete with the
Company during the term of the Employment Agreement and for two years
thereafter. Effective September 15, 1995, in connection with an understanding
Mr. Wallach reached with Ms. Barclay in September 1994 regarding the terms of
his service
23
as Chief Executive Officer, the Company granted to Mr. Wallach 304,000 shares of
Common Stock in consideration for services rendered. In connection with this
stock grant, Ms. Barclay contributed 304,000 shares of her Common Stock to the
Company and Ms. Barclay, Mr. Wallach and the Company entered into a Restricted
Stock Agreement. Pursuant to this Agreement, all of Mr. Wallach's 304,000 shares
are subject to purchase by the Company for a total consideration of $1.00 in the
event that Mr. Wallach voluntarily terminates his employment or is terminated
for cause by the Company prior to September 16, 1997. The Company recorded a
compensation expense charge of $873,309 in 1995, representing the fair market
value for the Common Stock plus a bonus to Mr. Wallach to cover income taxes
payable in connection with the stock grant. The Company also granted a nine-year
incentive stock option to Mr. Wallach pursuant to the Option Plan to purchase
114,000 shares of the Company's Common Stock at an exercise price of $4.00 per
share. This option becomes exercisable according to a schedule that provides for
the most rapid exercisability permitted under the Internal Revenue Code without
disqualifying the incentive stock option.
DISTRIBUTION OF S CORPORATION EARNINGS AND LOAN FROM STOCKHOLDER
On September 11, 1995, the Company's then sole stockholder Jennifer Barclay
requested a withdrawal of $450,000 of the taxed but undistributed S corporation
earnings. Ms. Barclay received this distribution on January 2, 1996. Ms. Barclay
has loaned these funds back to the Company on an unsecured basis and the Company
issued her a promissory note in the principal amount of $450,000 and bearing
interest of 7% per annum, payable monthly. The principal amount of the note will
be payable upon demand by Ms. Barclay, subject to the following limitations upon
repayment: (i) the maximum amount of principal that the Company is required to
pay in any 3-month period is $50,000 and in any 12-month period is $100,000;
(ii) the Company is not required to make any repayments of principal when its
current assets to current liabilities ratio as set forth in its latest quarterly
balance sheet is below 1.0, excluding liabilities related to amounts due
pursuant to the note; and (iii) no repayment of principal will be paid in the
event that a disinterested majority of the Company's Board of Directors
determines that it is not advisable to make a repayment of principal based upon
the Company's then current cash flow or liquidity needs. Although the
restrictions imposed on repayment were designed to protect the Company from
experiencing liquidity problems, no assurance can be given that a demand for
repayment by Ms. Barclay will not result in a shortage of cash available to the
Company for operations.
The Company believes the foregoing transactions were fair and on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties. The Bylaws of the Company provide that contracts or transactions
between the Company and any of its officers or directors shall not be void or
voidable solely for that reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors that
authorizes the contract or transaction, or solely because his, her or their
votes are counted for that purpose, if (i) the contract or transaction is fair
as to the Company as of the time it is authorized, approved or ratified by the
Board of Directors or the stockholders, or (ii) the material facts as to the
relationship or interest are disclosed to or are known either by (a) the Board
of Directors and the Board authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors even though the
disinterested directors are less than a quorum; or (b) the stockholders entitled
to vote thereon and the contract or transaction is specifically approved in good
faith by vote of those stockholders.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS. The financial statements required to be
filed by Item 8 herewith are as follows:
Index to Financial Statements F-1
Report of Independent Public Accountants - Arthur Andersen LLP F-2
Balance Sheets at December 31, 1996 F-3
Statements of Operations for the years ending
December 31, 1995 and 1996 F-4
Statements of Stockholders' Equity for the years
ending December 31, 1995 and 1996 F-5
Statements of Cash Flows for the years ending
December 31, 1995 and 1996 F-6
Notes to Financial Statements F-7
(B) EXHIBITS AND REPORTS ON 8-K. The exhibits listed below were filed on
September 27, 1995 pursuant to Item 601 of Regulation S-B as part of the
Registration Statement on Form SB-2, on November 6, 1995 as part of
Amendment No. 1 thereto, on November 13, 1995 as part of Amendment No. 2
thereto, on December 27, 1995 as part of Form 10-QSB, on May 20, 1996 as
part of Form 10-QSB, or on March 31, 1997 as part of Form 10-KSB. No
Reports on Form 8-K were filed with the Commission during the last quarter
of 1996.
Exhibit
Number Description
------ -----------
2.1(a) Articles of Merger merging Blue Fish Clothing, Inc. a New
Jersey corporation, and Blue Fish Taos, Inc., a New Mexico
corporation with and into Blue Fish Clothing, Inc., a
Pennsylvania corporation, dated September 6, 1995
2.1(b) Certificate of Merger merging Blue Fish Clothing, Inc. a New
Jersey corporation, and Blue Fish Taos, Inc., a New Mexico
corporation with and into Blue Fish Clothing, Inc., a
Pennsylvania corporation, dated September 6, 1995
2.1(c) Merger Agreement and Irrevocable Appointment of the Secretary
of State of New Mexico as Agent for Service of Process, dated
September 8, 1995
3.1 Articles of Incorporation
3.2 Bylaws, as amended
4.1 Specimen Stock Certificate
4.2 Excerpts from Registrant's Bylaws defining the rights of
security holders
10.1 Employment Agreement between the Registrant and Marc Wallach
effective as of January 1, 1994
10.2 1995 Stock Option Plan, as amended
10.2(a) Form of Stock Option Grant and Nondisclosure/Noncompetition
Agreement
10.3 1995 Non-Employee Directors' Stock Option Plan, as amended
10.4 401(k) Plan
10.5 Restricted Stock Agreement by and among Marc Wallach, Jennifer
Barclay and the Registrant dated September 15, 1995
10.6 Agreement for Purchase and Sale of Shares by and among Anne F.
Haag, Blue Fish Clothing, Inc. and Blue Fish Taos, Inc. dated
June 30, 1993
10.6(a) Promissory Note dated August 27, 1993 in the principal amount
of $162,400 by and between the Registrant as Maker and Anne
Haag as Payee
10.6(b) Resignations of Anne Haag dated August 27, 1993 as Director,
Officer and employee of Blue Fish Clothing, Inc. and Blue Fish
Taos, Inc.
10.6(c) General Releases dated August 27, 1993 executed by Anne Haag in
favor of the Registrant
10.6(d) Security Agreement dated August 27, 1993 by and between the
Registrant as Debtor and Anne Haag as Secured Party
10.6(e) Consulting and Non-Competition Agreement dated as of August 27,
1993 by and between the Registrant and Anne Haag
10.7 Lease Agreement between David M. Barclay and the Registrant
dated April 1, 1991
10.8 Lease Agreement between Frederick A. Krause and the Registrant
dated July 1, 1993, as amended
10.9 Lease Agreement between T.H. McElvain Oil & Gas Limited
Partnership and the Registrant dated October 24, 1994 (Santa
Fe, New Mexico Retail Store)
10.10 $500,000 Line of Credit Agreement between Flemington National
Bank and Trust Company and the Registrant dated February 9,
1995
10.10(a) Loan and Security Agreement and $1,000,000 Line of Credit
Agreement between Carnegie Bank NA and the Registrant dated
February 9, 1996
10.11 Business Manager Receivable Purchase Line of Credit Agreement
between Flemington National Bank and Trust Company and the
Registrant dated February 9, 1994
10.11(a) Business Manager Receivable Purchase Line of Credit Agreement
between Carnegie Bank NA and the Registrant dated February 9,
1996
10.12 Revised Forms of Subscription and Share Purchase Agreement
10.13 Impound Agreement between Flemington National Bank and Trust
Company and the Registrant dated September 19, 1995
10.13(a) Impound Account Fee Agreement between Flemington National Bank
and Trust Company and the Registrant dated September 19, 1995
10.13(b) Custody Agreement between Flemington National Bank and Trust
Company and the Registrant dated September 19, 1995 as amended
10.13(c) Acknowledgment Letter to Flemington National Bank and Trust
Company and the Registrant dated September 19, 1995
10.13(d) Acknowledgment Letter between United Jersey Bank (formerly
Flemington National Bank and Trust Company) and the Registrant
dated March 5, 1996
10.14 Key Person Life Insurance Policies, National Life of Vermont
10.15 Marketing Agreement between Drew Field/Direct Public Offerings
and the Registrant dated April 12, 1995
10.16 Lease Agreement between the Ruth Group and the Registrant dated
as of December 1, 1995
10.17 Form of Escrow Agreement by and between the Registrant,
Jennifer Barclay and Flemington National Bank
10.18 Form of Lock-in Agreement for the Shares of the Registrant's
Common Stock
10.19 Lease agreement dated November 15, 1995 with G. Holdings
Corporation and Blue Fish Clothing, Inc.
10.20 Letter agreement dated December 6, 1995 with Anne Haag and Blue
Fish Clothing, Inc.
10.21 Promissory Note between the Registrant and Jennifer Barclay
dated January 2, 1996
10.22 Lease Agreement between Tangmere Ltd. and the Registrant dated
January 5, 1996
10.23 Employment Agreement by and between the Registrant and Richard
Swarttz dated April 29, 1995, and effective May 20, 1996
10.24 Lease Agreement dated December 16, 1996, between William I.
Roberts and the Registrant
10.25 Lease Agreement dated December 19, 1996, between 150 Greene
Street Corp. and the Registrant
27 Financial Data Schedule
BLUE FISH CLOTHING, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
BALANCE SHEET F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' EQUITY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Blue Fish Clothing, Inc.:
We have audited the accompanying balance sheet of Blue Fish Clothing, Inc. (a
Pennsylvania corporation) as of December 31, 1996, and the related statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blue Fish Clothing, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Philadelphia, Pa.
March 4, 1997
F-2
BLUE FISH CLOTHING, INC.
BALANCE SHEET (Note 1)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,887,994
Restricted cash 40,346
Receivables, net of allowance of $33,000 526,157
Inventories 3,005,717
Other current assets 63,013
Deferred income taxes 222,119
---------------
Total current assets 5,745,346
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of
$472,343 1,113,411
OTHER ASSETS:
Noncompete and consulting agreement, net 56,667
Security deposits 197,884
Deferred income taxes 15,876
---------------
$ 7,129,184
===============
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Line of credit $ 1,000,000
Current portion of long-term debt 193,698
Receivable purchase line of credit 403,464
Accounts payable 849,667
Accrued expenses 432,099
---------------
Total current liabilities 2,878,928
---------------
LONG-TERM DEBT 482,982
---------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 11,000,000 shares authorized, 6,647,896
shares issued and 4,599,200 shares outstanding 6,648
Additional paid-in capital 4,027,766
Retained earnings (deficit) (37,140)
Less- Treasury stock, 2,048,696 common shares, at cost (230,000)
---------------
Total stockholders' equity 3,767,274
---------------
$ 7,129,184
===============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
BLUE FISH CLOTHING, INC.
STATEMENTS OF OPERATIONS (Note 1)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------
1995 1996
--------------- ----------
<S> <C> <C>
SALES $ 9,657,842 $ 11,610,855
COST OF GOODS SOLD 4,257,813 5,371,707
--------------- --------------
Gross margin 5,400,029 6,239,148
OPERATING EXPENSES 4,593,779 6,356,986
COMPENSATION RELATING TO
STOCK GRANT 873,309 --
--------------- --------------
(Loss) from operations (67,059) (117,838)
INTEREST EXPENSE, net of interest income
of $4,275 and $90,062 167,127 157,297
--------------- --------------
(LOSS) BEFORE INCOME TAXES (234,186) (275,135)
INCOME TAX PROVISION (BENEFIT) 13,527 (237,995)
--------------- --------------
NET (LOSS) $ (247,713) $ (37,140)
=============== ==============
PRO FORMA DATA (Note 3)
(unaudited):
Historical (loss) before
income taxes $ (234,186) $ (275,135)
Pro forma income tax (benefit) (72,363) (81,990)
--------------- --------------
PRO FORMA NET (LOSS) $ (161,823) $ (193,145)
=============== ==============
PRO FORMA NET (LOSS) PER SHARE $ (.04) $ (.04)
============== ==============
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING 3,800,000 4,362,366
=============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
BLUE FISH CLOTHING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (NOTE 1)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $5,849 $23,151 $1,101,574 $(230,000) $900,574
Stockholder distributions,
$0.037 per share -- -- (142,042) -- (142,042)
Stock contribution to
Company -- 480,320 -- (480,320) --
Stock grant (Note 10) -- -- -- 480,320 480,320
Net (loss) -- -- (247,713) -- (247,713)
------- -------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 5,849 503,471 711,819 (230,000) 991,139
Sale of common stock in initial
public offering, net of
expenses 787 3,214,597 -- -- 3,215,384
S corporation distribution -- -- (454,109) -- (454,109)
Reclassification of S
corporation earnings -- 257,710 (257,710) -- --
Exercise of common stock
options 12 51,988 -- -- 52,000
Net (loss) -- -- (37,140) -- (37,140)
------- -------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $6,648 $4,027,766 $(37,140) $(230,000) $3,767,274
======= =========== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
BLUE FISH CLOTHING, INC.
STATEMENTS OF CASH FLOWS (Note 1)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) $ (247,713) $ (37,140)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities-
Non-cash stock grant 480,320 --
Deferred tax benefit -- (237,997)
Depreciation and amortization 167,192 214,776
Provision for losses on accounts receivable 93,397 (1,452)
(Gain) on disposal of property and equipment (1,918) --
(Increase) decrease in assets-
Accounts receivable (183,771) 293,361
Inventories (561,144) (978,729)
Other current assets 4,050 (42,329)
Security deposits (9,920) (177,681)
Increase (decrease) in liabilities-
Accounts payable 367,098 109,115
Accrued expenses (163,068) 105,812
Accrued bonus 402,989 (402,989)
----------- -----------
Net cash provided by (used in) operating activities 347,512 (1,155,253)
----------- -----------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 7,639 --
Payments for purchases of property and equipment (295,223) (425,476)
----------- -----------
Net cash used in investing activities (287,584) (425,476)
----------- -----------
FINANCING ACTIVITIES:
Net borrowings on line of credit 300,000 500,000
Increase (decrease) in receivable purchase line of credit, net 131,431 (406,699)
Borrowing on long-term debt 63,313 450,000
Repayments on long-term debt (88,387) (173,766)
Payments on capital lease obligations -- (24,052)
Stockholder distributions paid (419,381) (556,266)
Net proceeds from initial public offering (246,590) 3,461,974
Exercise of employee stock options -- 52,000
----------- -----------
Net cash provided by (used in) financing activities (259,614) 3,303,191
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (199,686) 1,722,462
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 405,564 205,878
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 205,878 $ 1,928,340
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 168,434 $ 244,438
=========== ===========
Income taxes $ 13,527 $ 3,452
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
BLUE FISH CLOTHING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. COMPANY BACKGROUND AND BASIS OF PRESENTATION:
Business
Blue Fish Clothing, Inc. is a designer, manufacturer, wholesaler and retailer of
specialty block-printed merchandise sold to upscale department and specialty
stores throughout the United States and through four Company-owned specialty
stores.
Basis of Combination
The financial statements of Blue Fish Clothing, Inc. (the "Company") include the
accounts of Blue Fish Clothing, Inc. ("Blue Fish") and Blue Fish Taos, Inc.
("Taos"), which were wholly owned and managed by the same stockholder. All
material intercompany transactions and balances have been eliminated in
combination. In connection with the consummation of the Company's initial public
offering (the "Offering"), Blue Fish and Taos, were merged into Blue Fish
Clothing, Inc. (a newly-formed Pennsylvania corporation) in September 1995. This
combination has been accounted for similar to a pooling-of-interest whereby all
historical financial statements have been combined.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less, amounts due from bank card sales,
restricted cash and amounts in transit from bank for factored receivables to be
cash equivalents for the purpose of determining cash flows.
F-7
Accounts Receivable
Accounts receivable are transferred with recourse to a third party for
processing under a business manager receivable purchase line of credit. The
Company borrows against these receivables for working capital purposes (see Note
7).
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories manufactured by the Company include the cost of materials, freight,
direct labor and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
calculated using the straight-line method based on the estimated useful lives of
the assets as follows:
Automobiles 3-5 years
Fixtures and equipment 5-7 years
Leasehold improvements Lesser of useful life or lease term
Repair and maintenance costs are charged to operations, while additions and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are eliminated from the accounts, and any gains or losses
are reflected in operations.
Preopening Costs
Costs incurred prior to opening a store are charged to expense over a six-month
period after the store commences operations. Preopening costs of approximately
$54,200 are included in other current assets at December 31, 1996.
Accrued Expenses
Accrued expenses include payroll, bonus and related costs of $278,464 as of
December 31, 1996.
Income Taxes
Effective January 1, 1993, the Company adopted the Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." The
effect of this statement is to take principally a balance sheet approach to
providing deferred income taxes. Deferred tax balances will be adjusted through
the income statement to reflect the current year estimate of future tax
payments. In May 1996, the Company elected to terminate its S Corporation status
and become a C Corporation. A deferred tax asset of approximately $174,000 was
recorded by the Company in May 1996, to record the future tax benefits that will
accrue to the C Corporation for tax differences that existed at the date of the
C Corporation election.
F-8
Prior to May 1996, the Company had elected not to be taxed as a corporation and
the shareholders had consented to include the income or loss in their individual
federal and state income tax returns. In 1995 and 1996, the Company made cash
distributions to shareholders for their estimated tax liability. Prior to May
1996, the Company recorded a provision for state income taxes for those states
that did not recognize or partially recognize S Corporations.
Major Customers and Concentration of Credit Risk
The Company has one significant customer that accounted for 18.9% and 10.4% of
net sales for the years ended December 31, 1995 and 1996, respectively. This
same customer accounted for 6.3% of net accounts receivable at December 31,
1996.
The Company manufactures and retails specialty block-printed merchandise and
accessories, and has four specialty stores located in Frenchtown, New Jersey;
Taos and Santa Fe, New Mexico and Austin, Texas. In addition, the Company sells
manufactured merchandise to other retailers. The Company grants credit to
substantially all its wholesale customers, the majority of whom are in the
apparel industry. Prior to December 31, 1996, the decision to close the Taos
store was made and appropriate accruals recorded.
Stock Split
In September 1995, the Board of Directors authorized a 3304.34783-for-1 split of
the Company's common stock and authorized 11,000,000 shares of common stock at
$.001 par value. All common stock and per share amounts included in the
accompanying financial statements have been adjusted retroactively to give
effect to this split.
Net Income (Loss) Per Share
Net income (loss) per share is calculated utilizing the treasury stock method.
All per share amounts are based upon weighted average common shares outstanding
during the period including the dilutive effect of common stock options and
warrants, if any.
Adoption of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Management evaluates the recoverability of
goodwill and other long-lived assets and several factors used in the valuation
including, but not limited to, management's future operating plans, recent
operating results and projected cash flows. The impact of adopting this SFAS had
no impact on the Company's operating results.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which the Company was required to adopt in the first quarter of
fiscal 1996. SFAS No. 123 establishes accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. Under SFAS No. 123, the Company may either adopt the new
fair-value-based accounting method or
F-9
continue the intrinsic-value-based method under APB 25, "Accounting for Stock
Issued to Employees," and provide pro forma disclosures of net earnings and
earnings per share as if the accounting provisions of SFAS No. 123 had been
adopted. The Company adopted only the disclosure requirements of SFAS No. 123;
therefore, such adoption had no effect on the Company's consolidated operating
results.
3. PUBLIC OFFERING AND PRO FORMA INFORMATION:
Public Offering
On May 15, 1996, the Company sold 787,200 shares of common stock in a public
offering at a price of $5 per share. The offering was registered under the
Securities Act of 1933. Net proceeds to the Company, after deducting offering
expenses, were approximately $3,215,000. Upon the closing of the offering,
offering costs deferred prior to the offering were reclassified to stockholders'
equity and the Company converted to C Corporation status and recorded deferred
income tax assets of $173,566 (see Note 12). All S Corporation earnings were
reclassified to additional paid-in capital.
Pro Forma Income Statement Data
For informational purposes, the accompanying statements of operations for the
two years in the period ended December 31, 1996, include an unaudited pro forma
adjustment for the income taxes that would have been recorded if the Company had
not been an S Corporation, based on the tax laws in effect during the respective
period.
The differences between the federal statutory income tax rate and the pro forma
income tax rate for all periods presented are as follows:
Year Ended
December 31
------------------------
1995 1996
---------- ----------
Federal statutory tax rate (34.0)% (34.0)%
State income taxes, net of federal benefit (5.0) (5.1)
Non-deductible expenditures 4.7 4.2
Valuation allowance for state net
operating losses -- 5.1
Other 3.4 --
-------- --------
(30.9)% (29.8)%
======== ========
Pro Forma Net (Loss) Per Share
Pro forma net (loss) per share was calculated by dividing pro forma net (loss)
by the weighted average number of shares of common stock outstanding for the
respective periods, adjusted for the dilutive effect of common stock equivalents
that consist of stock options. Pursuant to the requirements of the Securities
and Exchange Commission, common stock issued by the Company during the twelve
months immediately preceding the initial public offering, plus the number of
common equivalent shares that were authorized and will become issuable during
the same period pursuant to the grant of common stock options, have been
included in the calculation of the shares used in
F-10
computing pro forma net (loss) per share as if they were outstanding for all
periods presented using the treasury stock method and the public offering price
of $5.00 per share.
4. STATEMENT OF CASH FLOWS INFORMATION:
The following noncash transactions are reflected in the Company's financial
statements as noted below:
Year Ended December 31
----------------------------
1995 1996
------------ ---------
Stockholder distributions declared but not paid $ 102,157 $ --
Deferred offering costs incurred but not paid 266,180 --
Capital lease obligation -- 125,469
5. INVENTORIES:
December 31
1996
------------
Raw materials $ 304,361
Work-in-process 709,302
Finished goods 1,992,054
-------------
$ 3,005,717
=============
6. PROPERTY AND EQUIPMENT:
Property and equipment is made up of the following at December 31, 1996:
Automobiles $ 58,303
Fixtures and equipment 1,038,944
Leasehold improvements 488,507
-------------
1,585,754
Less- Accumulated depreciation
and amortization (472,343)
-------------
Net property and equipment $ 1,113,411
=============
Depreciation and amortization expense was $133,192 and $180,776 for the years
ended December 31, 1995 and 1996, respectively.
F-11
7. FACTORING AND FINANCING AGREEMENTS:
During 1995, the Company utilized a business manager receivable purchase line of
credit agreement with a bank which permitted borrowings against receivables of
up to $1 million for a term of one year. On February 9, 1996, the Company
entered into a one-year business manager agreement with another bank. The
agreement provides for the assignment of all receivables held by the previous
bank up to $1 million and was increased to $1.5 million in July 1996. This line
has been extended through December 1997.
Borrowings are collateralized by a stockholder guarantee and a first lien on all
accounts receivable, inventory, equipment, fixtures and deposit accounts. The
Company can borrow up to 90% of these receivables. This amount can be adjusted
at the discretion of the bank. The remainder is held in escrow until collected.
Restricted cash of $40,346 was held in escrow at December 31, 1996. Interest is
charged at 1.75% of all receivables assigned to the bank for collection.
Interest expense under these agreements was $107,247 and $116,681 during 1995
and 1996, respectively. The Company is responsible to reimburse the bank for all
uncollectible accounts previously assigned to the bank for collection. The
accounts receivable assigned to the bank for collection and amounts borrowed
from the bank are included in accounts receivable and receivable purchase line
of credit, respectively, until collected by the bank.
8. LINE OF CREDIT:
In December 1994, the Company obtained a $300,000 line of credit from a bank.
Borrowings on the facility bore interest at prime plus .75%. In February 1995,
the Company entered into a new agreement with the bank for a $500,000 line that
expired March 9, 1996, and the $300,000 line of credit was repaid. Borrowings on
this new facility bore interest at prime plus .75% (9.25% at December 31, 1995).
On February 9, 1996, the Company entered into a $1 million revolving note with
the bank for the purchase of inventory. Borrowings are limited to 50% of
finished goods and 25% of work in process inventory levels. Borrowings on this
facility bear interest at prime plus .75% (9.0% at December 31, 1996). Interest
is payable monthly and principal is payable on demand or in full on February 9,
1997, if no demand has been made. In 1997, this line was extended through April
1998.
At December 31, 1996, $1,000,000 was outstanding under this line and interest
expense under these lines of $44,700, and $62,239 was incurred during 1995, and
1996, respectively. The weighted average interest rate was 9.59%, and 9.18% in
1995 and 1996, respectively. See Note 7 for guarantee and collateral, also,
applicable to this line of credit.
F-12
9. LONG-TERM DEBT:
December 31
1996
----------
Note payable to a current stockholder of the Company $ 450,000
Note payable to a former stockholder of the Company, for
treasury stock purchased, due in 1997 24,557
Obligations under capital leases 152,537
Other 49,586
----------
676,680
Less- Current portion 193,698
----------
Long-term debt, net of current portion $ 482,982
============
In January 1996, the Company's majority stockholder withdrew $450,000 of the
taxed but undistributed S corporation earnings. The stockholder loaned these
funds back to the Company on an unsecured basis and has waived the right to
receive any further distributions of S corporation earnings other than to pay
taxes on S corporation earnings. The Company borrowed these funds from the
stockholder and issued a promissory note in the amount of $450,000 and bearing
interest at 7%. Interest is payable monthly, and the principal is due on demand
subject to certain limitations, as defined, including limiting payment to
$100,000 in any 12-month period.
The Company has entered into capital leases for various pieces of equipment that
expire in 1998 and 1999, with aggregate monthly payments of $6,070 at December
31, 1996. The capitalized costs of $206,780 are included in fixtures and
equipment with accumulated amortization of $51,615 at December 31, 1996. The
present value of the minimum lease payments is as follows:
December 31
1996
------------
Total minimum lease payments $ 184,424
Less- Amount representing interest (31,887)
------------
Present value of net minimum lease payments $ 152,537
============
F-13
Maturities as of December 31, 1996, are as follows:
Long-Term Capital
Debt Leases
------------ -----------
1997 $ 139,765 $ 53,933
1998 113,911 58,659
1999 111,377 39,945
2000 109,090 --
2001 50,000 --
------------ -----------
$ 524,143 $ 152,537
=========== ===========
10. STOCKHOLDERS' EQUITY:
In September 1995, the sole stockholder contributed 304,000 shares of common
stock to the Company, and the Company granted 304,000 shares of common stock to
an officer. The market value of the common stock on the date of grant was $1.58
per share, which resulted in $480,320 compensation expense charged. The Company
also recorded an increase in paid-in capital for the compensation expense. In
addition, the Company agreed to reimburse the officer for any and all taxes that
may be imposed as a result of this grant. This reimbursement of $392,989 was
deemed additional compensation expense at the date of grant. The reimbursement
was paid in 1996. All shares granted were restricted and are subject to purchase
by the Company for total consideration of $1.00 in the event the officer
voluntarily terminates his employment or is terminated for cause within two
years.
11. SAVINGS PLAN AND STOCK OPTIONS PLAN:
In March 1995, the Company established the Blue Fish 401(k) Savings and
Investment Plan. All employees who have attained age 21 and completed 1,000
hours of service in a plan year are eligible to participate. Employees can
contribute up to 10% of their compensation subject to certain limitations.
Employer contributions are discretionary. During 1995 and 1996, the Company
accrued $43,722 and $45,667 as estimated contributions.
In September 1995, the Company adopted the Blue Fish Clothing, Inc. 1995 Stock
Option Plan. A total of 570,000 shares of common stock have been reserved for
issuance to the Company's employees, officers, directors (who are employees) and
consultants. Qualified and nonqualified stock options will be granted at the
discretion of the Compensation Committee (subject to certain plan limitations)
at exercise prices at least equal to the fair market value of the common stock
for qualified incentive stock options. The Company issued nine-year options to
purchase 209,000 shares of common stock to certain officers and key employees
during 1995 and 26,300 to employees and consultants during 1996.
F-14
Information with respect to the 1995 Stock Option Plan is as follows:
<TABLE>
<CAPTION>
Aggregate Option Price
Shares Price Per Share
-------------- -------------- ------------------
<S> <C> <C> <C>
Outstanding, January 1, 1995 -- $ --
Granted 209,000 876,000 $ 4.00 - $5.00
Exercised -- -- --
Canceled -- -- --
-------------- --------------
Outstanding, December 31, 1995 209,000 876,000 4.00 - 5.00
Granted 26,300 187,100 7.00 - 7.25
Exercised (12,000) (52,000) 4.00 - 5.00
Canceled (42,000) (184,000) 4.00 - 5.00
-------------- --------------
Outstanding, December 31, 1996 181,300 $ 827,100 4.00 - 7.25
============== ==============
</TABLE>
At December 31, 1996, there were 322,700 options available for future grant
under the 1995 Stock Option Plan. In addition, there were 62,460 exercisable
options at prices ranging from $4.00 to $7.00 per share. The aggregate exercise
price of these options was $266,420. The weighted average remaining contractual
life of these options is approximately 8 years.
In September 1995, the Company adopted the Blue Fish Clothing, Inc. 1995
Non-Employee Directors' Stock Option Plan. A total of 75,000 shares of common
stock have been reserved for issuance to directors who are not employees of the
Company. Non-employee directors will receive non-qualified stock options to
purchase an amount of shares equal to $7,500 at the then fair market value on
January 1 of each year commencing January 1, 1996, and options to purchase
shares equal to $2,500 at the then prevailing fair market value for each
committee on which they serve. On January 1, 1996 and 1997, the Company granted
options to purchase 2,500 shares and 2,700, respectively to each of the
nonemployee directors at $5 and $4.63, respectively per share. The options
were fully vested on date of grant. No options have been exercised through
December 31, 1996.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), in accounting for its
stock options granted to employees and directors. Under APB No. 25, no
compensation expense is recognized because the exercise price of the Company's
stock options equals the market price of the underlying stock on the date of the
grant. If compensation cost for these plans had been determined under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss per share
for 1995 and 1996 would have been reduced to the following pro forma amounts:
1995 1996
------------ -----------
Pro forma net loss--as reported $ (161,823) $ (193,145)
Pro forma net loss--as adjusted (268,367) (295,670)
Pro forma net loss per share--as reported (.04) (.04)
Pro forma net loss per share--as adjusted (.07) (.07)
F-15
The fair value of the options were estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 5.9% and 6.6%; no dividend yield for both years; expected volatility of
52% for both years; and a weighted average expected life of the options of 7
years.
Because the accounting under SFAS No. 123 has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
12. INCOME TAXES:
Reference is made to footnotes 2 and 3 which discuss the Company's accounting
policies for income taxes, the termination of its S corporation election in May
1996 and the pro forma income tax disclosure as a result of the public offering.
Income tax (benefit) for the year ended December 31, 1996, is comprised of the
following:
Current provision (benefit) $ --
Deferred provision (benefit) (64,429)
-----------
(64,429)
Reinstatement of deferred income tax assets (173,566)
-----------
$ (237,995)
===========
The reconciliation of the statutory federal rate to the Company's effective
income tax rate on the (loss) for the year ended December 31, 1996, is as
follows:
Year Ended
December 31,
1996
--------------
Statutory tax rate (34.0)%
Reinstatement of deferred income tax assets (63.1)
Loss allocated to S corporation 12.8
State taxes, benefit (13.0)
Valuation allowance 8.2
Other 2.6
--------------
(86.5)%
==============
F-16
The deferred tax effects of temporary differences giving rise to the Company's
deferred income tax assets at December 31, 1996, are as follows:
Deferred tax assets:
Net operating loss carryforward $ 230,997
Depreciation 17,804
Accruals and reserves not currently deductible
for tax 54,091
Valuation allowance-state tax (47,323)
----------
255,569
Other deferred tax liabilities (17,574)
----------
$ 237,995
==========
A valuation allowance has been provided for a portion of the net deferred tax
assets relating primarily to the state net operating loss carryforwards. Based
on the Company's historical levels of taxable income, as adjusted for the
nonrecurring charges in 1995 and future projections, management believes it is
more likely than not that the Company will realize the benefit of the net
deferred tax assets, including the Federal net operating loss carryforward,
existing at December 31, 1996. Furthermore, management believes the existing net
deductible temporary differences will reverse during periods in which the
Company generates net taxable income. There can be no assurance, however, that
the Company will generate taxable earnings or any specific level of continuing
earnings in the future. The Federal net operating loss carryforward expires in
2011.
13. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases its retail, production, office facilities and other equipment
under various noncancelable operating leases. Operating leases generally range
from 5 to 10 years.
Rental expense, including certain maintenance expenditures, was $203,635 and
$395,151 for the years ended December 31, 1995 and 1996, respectively. Future
minimum rental payments due under noncancelable operating leases (including one
store scheduled to open in 1997) are as follows:
1997 $ 655,506
1998 600,620
1999 509,538
2000 404,165
2001 308,368
Thereafter 1,403,292
------------
Total minimum lease payments $ 3,881,489
============
In addition to the above commitment, one store location is currently operating
under a month-to-month lease.
In December 1996, the Company entered into a lease for a new Corporate facility.
The lease obligation is scheduled to begin in January 1998 once construction is
completed and the
F-17
facility is ready for occupancy. The lease is a 15-year lease with an option to
buy. Minimum lease payments are due monthly and begin at $267,120 per year and
increase 3% per year throughout the term. The option to buy can be exercised
during 2003 for $4,000,000 as adjusted by the change in the consumer price
index.
Employment Agreement and Covenant Not to Compete
Effective January 1, 1994, the Company entered into a three-year employment
agreement and covenant not to compete with an officer that provides for annual
compensation of $105,000 per year plus a 3% annual bonus based on Company net
after tax profits (as defined) plus an additional 1% bonus that is calculated
annually and due in five annual installments beginning January 1, 1999, if still
an employee of the Company at that date.
Other
From time to time the Company is named as a defendant in legal actions arising
from its normal business activities. Although the amount of any liability that
could arise with respect to currently pending actions cannot be accurately
predicted, in the opinion of the Company, any such liability will not have a
material adverse effect on the financial position or operating results of the
Company.
14. RELATED-PARTY TRANSACTIONS:
The Company leases one of its store locations from the father of the principal
stockholder under a ten-year operating lease for approximately $35,000 per year.
The Company also leases additional office space from this individual on a month
to month basis for approximately $11,000 per year.
F-18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on June 19, 1997.
BLUE FISH CLOTHING, INC.
By: /s/ Jennifer Barclay
---------------------------------
Jennifer Barclay
Chairman of the Board of Directors
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Jennifer Barclay Chairman of the Board of Directors June 19, 1997
- ----------------------------- (Principal Executive Officer)
Jennifer Barclay
/s/ Marc Wallach President and Chief Executive Officer June 19, 1997
- ------------------------------ (Principal Executive Officer and Director)
Marc Wallach
/s/ Richard Swarttz Vice President of Finance, Chief Financial June 19, 1997
- ------------------------------ Officer, and Treasurer
Richard Swarttz (Principal Financial Officer and Principal
Accounting Officer)
/s/ Gary Hirshberg Director June 19, 1997
- ------------------------------
Gary Hirshberg
/s/ Ben Cohen Director June 19, 1997
- ------------------------------
Ben Cohen
</TABLE>
