SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 0-20769
CABLE & CO. WORLDWIDE, INC.
(Name of small business issuer in its charter)
Delaware 22-3341195
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
724 Fifth Avenue, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (212) 489-9686
Securities registered pursuant to Section 12(b) of the Exchange Act:
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Warrants
(Title of Class)
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 disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained 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 its most recent fiscal year. $13,878,016.
The number of shares of Common Stock held by nonaffiliates of the registrant (as
determined for the purpose of this Form 10-KSB only) as of March 31. 1998 was
30,670,252, with an approximate aggregate market value of $2,606,971 (based upon
the average of the bid and asked prices of such shares as of such date). The
number of shares of the Common Stock of the issuer outstanding as of March 31,
1998 was 43,048,164 .
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TABLE OF CONTENTS
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Page
Number
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Item Number and Caption
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PART I
Item 1. Description of Business ...................................... 3
Item 2. Description of Properties .................................... 13
Item 3. Legal Proceedings ............................................ 13
Item 4. Submission of Matters to a Vote of Securityholders ........... 13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters ..... 14
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation ..................................... 15
Item 7. Financial Statements ......................................... 21
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ..................................... 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.. 21
Item 10. Executive Compensation ....................................... 23
Item 11. Security Ownership of Certain Beneficial Owners and Management 26
Item 12. Certain Relationships and Related Transactions ............... 27
Item 13. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ..................................................... 29
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PART I
Item 1. Description of Business
The Company designs, manufactures, imports and markets on a wholesale basis
a broad range of men's casual and dress footwear bearing the Cable & Co.(R)
trademark, the Bacco Bucci(R) trademark, the XBacco trademark and the Alberto
Salvucci trademark. The Company's products are designed to appeal to fashion
conscious consumers. The retail price of the men's shoes sold under the Cable &
Co. trademark ranges from $139 to $175 for casual shoes and from $175 to $220
for dress shoes. The retail price of the men's casual shoes sold under the Bacco
Bucci trademark ranges from $130 to $145. The Company has recently developed a
new line of men's casual shoes known as XBacco. The retail price of the shoes
sold under the XBacco label is approximately $120. The retail price of the men's
dress shoe sold under the Alberto Salvucci trademark ranges from $350 to $380.
The Company markets its products to approximately 1,800 department and specialty
store locations in the United States, including (i) major department stores and
specialty stores, such as Bloomingdales, Dillard Department Stores, Inc.,
Nordstrom, Inc. and R.H. Macy & Co., Inc., (ii) upscale specialty retailers,
such as Saks Fifth Avenue, Lord & Taylor and Parisian, and (iii) upscale shoe
and apparel merchants.
In August 1997 the Company acquired the rights to the Bacco Bucci trademark
from D&D Design and Details Limited ("D&D Design"), an entity controlled by
Alberto Salvucci, the Chairman of the Board of Directors and a principal
stockholder of the Company. Prior to August 1997, the Company licensed the right
to use the Bacco Bucci trademark from D&D Design. In August 1997, the Company
also acquired the Cable & Co. trademark from Cable & Co. S.R.L., an entity
controlled by Mr. Salvucci, in many major countries throughout the world. Prior
to August 1997, the Company owned the rights to the Cable & Co. trademark only
in the Western Hemisphere.
The Company believes that its footwear is comfortable, fashionable and
practical. The Company incorporates technically sophisticated designs into the
construction of its footwear, which is intended to be worn with casual or
business attire. The Company sells approximately 40 styles of men's shoes each
season bearing the Cable & Co. trademark, approximately 20 styles under the
Bacco Bucci trademark and approximately 10 styles under the Alberto Salvucci
trademark. The Company anticipates selling approximately 15 styles of men's
casual shoes each season under the XBacco trademark.
The Company plans to increase revenues by increasing sales to existing
accounts, establishing new accounts, developing high quality shoes with styling
and design detail to sell at competitive prices, expanding the Company's
marketing programs and globalizing the sales of the Cable & Co., Bacco Bucci and
XBacco brands. The Company also intends to explore additional opportunities to
license rights to related products such as belts, wallets, accessories and other
small leather goods. There can be no assurance that the Company will be able to
achieve such objectives.
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The Company was formed on November 10, 1994 to acquire (the "Acquisition")
certain net assets of Hongson, Inc. used in the sale and marketing of footwear
bearing the Cable & Co. trademark (the "Acquired Net Assets"). See
"-Acquisition."
The Company's principal executive office is located at 724 Fifth Avenue,
New York, New York 10019, and its telephone number is (212) 489-9686.
Acquisition of Trademarks
In August 1997, the Company purchased all of the rights to the Bacco Bucci
trademark, from D&D Design, an entity controlled by Alberto Salvucci, the
Chairman of the Board of Directors and a principal stockholder of the Company.
The rights sold to the Company include trademarks registered in the United
States, Canada, Italy, Austria, China, France, Germany, Portugal, Russia, Spain,
Switzerland, Hong Kong, India, Korea, Sri Lanka, Taiwan and the United Kingdom
together with any other rights owned by D&D Design whether or not registered
throughout the world. Prior to the acquisition, the Company held a license for
the rights to the Bacco Bucci trademark in North, Central and South America. The
purchase price for the Bacco Bucci trademark consists of $3,150,000 of which
$400,000 has been paid, and the balance of which is payable in installments.
Payments of $350,000 and $400,000 are due in September 1998 and January 1999,
respectively. The remaining balance is payable in four installments of $500,000
in January 2000 through January 2003. In addition, the Company has agreed to pay
to D&D Design annual royalties of 7% of net sales for a period of five years for
all goods bearing the Bacco Bucci trademark sold outside North, Central and
South America, commencing on the date the Company commences exploiting the Bacco
Bucci trademark in each country, but expiring no later than December 31, 2007.
The Company also issued to D&D Design an aggregate of 11,973,411 shares of
Common Stock.
The Company also acquired in many major countries throughout the world
outside of the Western Hemisphere all of the rights to the Cable & Co. trademark
from Cable & Co. S.R.L., an entity controlled by Mr. Salvucci. Prior to the
acquisition, the Company owned the rights to the Cable & Co. trademark in the
Western Hemisphere. The rights sold to the Company include trademark
registrations in the following countries, among others: Austria, Belgium,
France, Germany, India, Russia, Italy, Netherlands, Spain, Sweden and
Switzerland. The rights also include all of the rights owned by Cable & Co.
S.R.L. in Africa, Asia Minor, Australia, all of Europe and other parts of the
world, except United Kingdom and parts of Asia. The purchase price for the
rights to the Cable & Co. trademark include the shares of Common Stock discussed
above, the 7% royalties payable with respect to the Bacco Bucci trademark,
together with a payment of $100,000, which amount has been paid to Cable & Co.
S.R.L.
The purchase price, including costs and expenses, for the Bacco Bucci and
Cable & Co. trademarks is approximately $5,413,000, resulting in an annual
charge to earnings of approximately $270,000. For financial statement purposes,
the Company has valued the shares of Common Stock at $2,694,017, which
represents a discount to the market price, to reflect the restrictions on
transfer
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under the Securities Act of 1933, as amended (the "Securities Act"). In
addition, the Company has discounted the future payments of the purchase price
for the Bacco Bucci trademark. The purchase price is being amortized over a
period of 20 years. The Company believes that the impact on gross profit will
not be significant.
For the year ended December 31, 1997, the Company's net sales were
$13,878,016 and the Company paid or accrued to Cable & Co. S.R.L. and D&D Design
an aggregate of $726,685 or 5.2% of net sales for commissions. If the Company
had acquired the rights to the Bacco Bucci trademark on January 1, 1997, the
amounts payable to D&D Design and Cable & Co. S.R.L. would be the same for the
year ended December 31, 1997, since the royalties for 1997 on the Bacco Bucci
footwear were waived. For the year ended December 31, 1996, the Company's net
sales were $13,522,166 and the Company paid and accrued to D&D Design and Cable
& Co. S.R.L. an aggregate of $661,818 or 4.9% of net sales for royalties and
commissions. If the Company had acquired the rights to the Bacco Bucci and Cable
& Co. trademarks as of January 1, 1996, the amount payable to D&D Design and
Cable & Co. S.R.L. on a pro forma basis would have been $550,107 or 4.1% of net
sales for the year ended December 31, 1996.
Management believes that the purchase of the Bacco Bucci and Cable & Co.
trademarks is an integral part of the Company's plans for expansion. The
purchase of the Bacco Bucci trademark will result in savings on the annual
royalties payable to D&D Design with respect to sales of Bacco Bucci footwear in
North, Central and South America. For the year ended December 31, 1996, the
royalties paid to D&D Design with respect to sales of Bacco Bucci footwear were
$111,711. No royalties were paid for the year ended December 31, 1997. The
Company's strategy includes expanding sales of the Bacco Bucci footwear. In the
event that sales of the Bacco Bucci footwear increase significantly, of which
there can be no assurance, the Company believes that the amount saved by the
Company in royalty payments would be substantial. The Company also plans to sell
footwear bearing the Cable & Co. and Bacco Bucci trademarks outside of the
Western Hemisphere, which rights the Company did not possess prior to the recent
acquisitions. The Company anticipates utilizing a network of distributors and
licensees to sell its footwear outside the United States. However, the network
is not established and there can be no assurance that the Company will do so.
The Company has had discussions to sell Bacco Bucci and Cable & Co. footwear in
the Middle East, Turkey, Russia and India and has opened an office in Milan,
Italy to assist the Company in commercial globalization of the Company's
footwear. However, no definitive agreements have been reached. In addition, the
Company intends to sell Bacco Bucci footwear in the United Kingdom. However, no
definitive agreements have been reached.
The fees payable to D&D Design and Cable & Co. S.R.L. commencing January 1,
1998 are summarized in the table below:
Brand Fee(1) Royalty
- ----- ------ -------
Cable & Co. 6.5% of the cost of goods Not applicable
shipped to the Company
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Bacco Bucci (outside of 6.5% of the cost of goods 7%(2)
North, Central, South shipped to the Company
America)
Bacco Bucci (North, Central, 6.5% of the cost of goods Not applicable
South America) shipped to the Company
- ------------------
(1) Does not include (i) the reimbursement of out-of-pocket travel,
manufacturing and other expenses borne by Cable & Co. S.R.L. and D&D
Design.
(2) For the sale of goods bearing the Bacco Bucci trademark for a period of
five years outside of North, Central and South America, commencing on the
date that the Company commences exploiting the Bacco Bucci trademark in
each country, but expiring no later than December 31, 2007.
In the year ended December 31, 1996, the Company paid a fashion and design
advisory fee of $86,000 to D&D Design for Cable & Co. and Bacco Bucci footwear.
The fee was paid for fashion and design advisory services which were provided to
the Company. During the year ended December 31, 1997, the Company paid fashion
and design advisory fees to D&D Design of $58,000.
As a result of the acquisition of the Bacco Bucci trademark, the Company
will no longer be obligated to pay royalties of 3% per year with respect to net
sales of Bacco Bucci footwear in North, Central and South America. However, it
is anticipated that the Company will continue to pay commissions to D&D Design
and Cable & Co. S.R.L. as directed by Alberto Salvucci, at the rate of 6.5%, in
the aggregate, of the cost of goods shipped to the Company. The Company will
also be obligated to pay royalties to D&D Design equal to 7% of net sales of
products bearing the Bacco Bucci trademark outside of North, Central and South
America for a period of five years commencing on the date the Company commences
exploiting the Bacco Bucci trademark in each country, but expiring no later than
December 31, 2007 It is also anticipated that the Company will pay commissions
on the purchase of Cable & Co. footwear to entities controlled by Mr. Salvucci
at a rate of 6.5% of the cost of goods shipped to the Company.
Distribution and Wholesale Operations
The Company's products are distributed to approximately 800 customers for
sale in approximately 1,800 store locations in the United States. During the
year ended December 31, 1997, approximately 25% of the Company's net sales were
made to two customers, including 14% to one customer. The Company markets its
products to (i) major department stores and specialty stores, such as
Bloomingdales, Dillard Department Stores, Inc., Nordstrom, Inc. and R.H. Macy &
Co., Inc., (ii) upscale specialty retailers, such as Saks Fifth Avenue, Lord &
Taylor and Parisian, and (iii) upscale shoe and apparel merchants. Out-of-season
products are sold primarily through selected discounters.
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The Company's strategy has been to provide marketing and management support
to its customers by producing what management believes to be strong image
advertising campaigns. The Company markets its product line and introduces new
styles at industry footwear shows, which occur during the year in Las Vegas and
New York, and at regional shows throughout the year. These trade shows afford
the Company an opportunity to assess demand for its products. After each trade
show, the Company's agents and corporate account specialists visit customers to
review the Company's product lines and to secure purchase commitments. The
Company also facilitates sales by offering what management believes are
creative, quality products and maintaining adequate inventory levels of new
products as well as products included in the Company's "open stock" program. The
Company's "open stock" program enables customers to order individual pairs of
shoes from the Company's inventory, primarily through an electronic data
interchange system. See "- Management Information Systems."
Substantially all of the Company's footwear is sold in North America,
predominantly in the United States and, to a lesser extent, in Canada.
Design
The Company believes that its success will depend in substantial part on
its ability to originate and define fashion trends and to anticipate and react
to changing consumer demands in a timely manner. To meet this objective, the
Company retains Cable & Co. S.R.L. and D&D Design, both of which are controlled
by Alberto Salvucci, Chairman of the Board, a director and a principal
stockholder of the Company, to provide design, production and production control
services. The process of designing and introducing a new product takes
approximately three to four months. The Company's management works with Cable &
Co. S.R.L. and D&D Design to create designs which they believe fit the Company's
image, reflect current or approaching trends and can be manufactured on a
cost-effective basis. Once the initial designs are complete, prototypes are
developed, fit trials are conducted and the prototypes are reviewed and refined
prior to commencement of production.
Manufacturing
In the second quarter of 1997, the Company commenced manufacturing
approximately 45% of its footwear in a leased facility in Montegranaro, Italy.
The Company believes that the manufacturing of its footwear has decreased
production costs by approximately 10%. The Company intends to manufacture
approximately 75% of its footwear by December 31, 1998, although there can be no
assurance thereof. Cable & Co. S.R.L. and D&D Design maintain an office in
Montegranaro, Italy and monitor the production, quality and timely distribution
of the Company's products.
The footwear marketed by the Company is produced primarily in Italy because
management believes that Italian manufacturers can satisfy the Company's quality
control requirements. For the year ended December 31, 1997, the Company produced
approximately 22% of its footwear and 86% of the balance were purchased from two
manufacturers in Italy. The Company is generally the largest customer of these
manufacturers and has established long-standing relationships with most of them.
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In advance of the Fall and Spring selling seasons, the Company's management
works with Cable & Co., S.R.L. and D&D Design to develop new products for
industry trade shows and with manufacturers to determine production costs,
materials, minimum quantities and component requirements for new styles. Based
on indications of interest obtained at trade shows and initial purchasing
commitments from retailers, the Company places production orders with its
manufacturers. To maintain inventory positions, the Company places manufacturing
orders prior to receiving firm commitments. Once an order has been placed,
delivery time ranges from four weeks to four months depending on whether the
construction is new or is currently in production. The Company, primarily
through Cable & Co., S.R.L. and D&D Design, monitors product quality through
inspections at the factories throughout the production process and upon receipt.
To reduce the risk of inventory overstocking, the Company monitors sales data on
a weekly basis.
Advertising and Marketing
The Company markets its products based on the products' respective design
and quality specifications. The Company's advertisements appear in men's fashion
publications and related general interest publications, including GQ, Details,
Out, Swing, and CI. The Company spent approximately $1,352,000 on advertising
during the year ended December 31, 1996 and approximately $1,168,000 during the
year ended December 31, 1997. In order to strengthen brand awareness of its
products and increase sales, the Company intends to continue to be actively
involved in the development of marketing and merchandising programs. As part of
this effort, the Company provides cooperative marketing programs, sales
incentives and sales promotions for its customers.
The Company has an in-house direct teleservicing department which is
responsible for maintaining and servicing the Company's present customers,
referring retail customers to local retail stores to purchase advertised and
non-advertised products and providing product information. Currently, this
function is performed during normal business hours using a toll free telephone
number.
Product Delivery
Once manufacturing is completed overseas, the Company's products are
inspected, packed and shipped by air and maritime vessel to the United States.
Thereafter, the products are transported by truck to an independent warehouse
facility. The products are then transported to the Company's customers. By
maintaining significant inventory positions, the Company strives to fill "open
stock" customer orders within 72 hours. While the Company's "open stock" program
requires an increased investment in inventories, management believes that
filling orders on a timely basis is an invaluable service for its customers and
provides the Company with a distinct competitive advantage.
Management Information Systems
Information systems are essential to the Company's ability to maintain its
competitive position and to support continued growth. The Company's management
information system was designed to provide, among other things, comprehensive
order processing, production, accounting and
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management information for the importing, distribution and marketing aspects of
the Company's business. The Company has installed an electronic data interchange
system which provides a computer link between the Company and certain of its
customers that enable both the customer and the Company to monitor purchases,
shipments and invoicing.
Trademarks
Cable & Co.(R) is a registered trademark of the Company in the United
States, Canada and several Central and South American countries, Austria,
Belgium, France, Germany, India, Russia, Italy, Netherlands, Spain and
Switzerland. The registered trademark includes footwear and related products.
The Bacco Bucci trademark has been registered in United States, Canada, Italy,
Austria, China, France, Germany, Portugal, Russia, Spain, Switzerland, Hong
Kong, India, Korea, Sri Lanka, Taiwan and the United Kingdom. The Company is in
the process of filing trademark applications for the XBacco trademark and for
the Alberto Salvucci trademark. Additional trademark registration applications
which may be filed by the Company with the United States Patent and Trademark
Office and in other countries may or may not be granted and the breadth or
degree of protection of the Company's existing or future trademarks may not be
adequate. Moreover, the Company may not be able to defend successfully any of
its legal rights with respect to its present or future trademarks. The failure
of the Company to protect its legal rights to its trademarks from improper
appropriation or otherwise may have a material adverse affect on the Company.
Competition
Competition in the footwear industry is intense. The Company's products
compete with other branded products within their product category. Depending on
the product category involved, the Company competes on the basis of style,
price, quality, comfort and brand prestige and recognition, among other
considerations. The Company competes with numerous manufacturers, importers and
distributors of footwear and accessories for the limited shelf-space available
for displaying such products to the consumer. Moreover, the general availability
of contract manufacturing capacity allows relatively easy access by new market
entrants. The Company believes that its ability to deliver quality merchandise
in a timely manner is a critical competitive factor, particularly in connection
with the introduction of new product lines. The Company's ability to manufacture
a portion of its products and to maintain existing relationships and develop new
relationships with foreign manufacturers is another important element in its
ability to compete. Some of the Company's competitors are substantially larger,
have achieved greater recognition for their brand names, have captured greater
market share and have substantially greater financial, distribution, marketing
and other resources than the Company.
Government Regulation
The Company is subject to the risks of doing business abroad, including,
but not limited to, fluctuations in exchange rates and changes in regulations
relating to imports, including quotas, duties, taxes and other charges.
Political and economic instability in countries where the Company's products
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are manufactured or sold may have a material adverse affect on the Company's
business, prospects, financial condition, and results of operations.
In order to reduce the risk of exchange rate fluctuations and to cover the
currency risk in each season's outstanding purchase orders, the Company enters
into forward exchange contracts to protect gross profit margins on most, but not
all, of its foreign currency transactions. The Company has an aggregate of
$6,000,000 of foreign exchange lines of credit available. At any one point
during the year, the Company generally has $5,500,000 to $6,000,000 of forward
foreign exchange contracts outstanding. The Company cannot anticipate all of its
currency needs and, therefore, cannot fully hedge against such fluctuations.
Thus, changes in exchange rates could adversely affect the costs of goods
purchased by the Company.
Although the goods sold by the Company are not currently subject to quotas,
countries in which the Company's products are manufactured may, from time to
time, impose new or adjust prevailing quotas or other restrictions on exported
products and the United States may impose new duties, tariffs and other
restrictions on imported products, any of which could materially adversely
affect the Company's operations and its ability to import its products and,
accordingly its business, prospects, financial condition, and results of
operations. In accordance with the 1993 Harmonized Tariff Schedule, a fixed duty
structure is in effect for the United States. The Company pays import duties on
its products ranging from approximately 8.5% to 10%, depending on the principal
component and whether the product is men's or women's footwear. Other
restrictions on the importation of footwear are periodically considered by the
United States Congress and no assurance can be given that tariffs or duties on
the Company's goods may not be raised, resulting in higher costs to the Company,
or that import quotas respecting such goods may not be imposed or made more
restrictive.
The Company imports a large portion of its products from Italy. Italy is on
the "watch list" maintained by the USTR for purposes of monitoring protection of
intellectual property rights. According to the USTR, its consultations with
Italy have contributed to an improved and stronger legal framework for the
protection of intellectual property rights. If the USTR were to determine that
Italy's actions, policies or practices with respect to intellectual property
rights are actionable, sanctions against imports from Italy, including higher
duties, could be imposed.
Licensing
The Company intends to explore opportunities to license rights to related
products, such as belts, wallets, accessories and other small leather goods.
There can be no assurance that the Company will enter into any such licenses on
favorable terms or not at all. On July 1, 1997, the Company entered into a
license agreement (the "License Agreement") with Roffe Accessories, Inc.
("Roffe"), whereby the Company granted a license to Roffe to use the Cable & Co.
trademark in North America for silk neckwear for a period of three years.
Pursuant to the License Agreement, Roffe shall pay to the Company a royalty
equal to 5% of the first $500,000 of gross sales and 6% thereafter, together
with a fee equal to 2% of gross sales to be utilized for advertising expenses.
The License Agreement provides for minimum sales of $400,000 in the first year,
$600,000 in the second year and $1,100,000
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in the third year. In the event that Roffe does not achieve the minimum annual
sales and does not pay to the Company the required royalties, the Company has
the right to terminate the License Agreement.
Seasonality
The Company's business is subject to seasonal fluctuations. Historically, a
significant portion of the Company's sales are realized during the spring and
fall fashion seasons, the Company's first and third fiscal quarters, and levels
of sales are generally lower during the winter and summer fashion seasons, the
Company's second and fourth quarters, respectively. Fourth quarter sales are the
most volatile, and inventories are based upon anticipating sales at the retail
level and maintaining a sufficient amount of the styles and designs which are
required at the retail level. If the Company's sales were to be substantially
below seasonal norms during the spring and fall fashion seasons, the Company's
business, prospects, financial condition, and results of operations would be
materially and adversely affected. The Company must make decisions regarding how
much inventory to maintain well in advance of anticipated sale. Deviations in
actual sales from projected demand for products could have a material adverse
affect on the Company's business, prospects, financial condition and results of
operations.
Backlog
As of December 31, 1997 and March 31, 1998, the Company had unfilled
customers orders of approximately $2,489,000 and $4,669,000, respectively. The
Company's backlog is affected by a number of factors, including seasonality and
customer purchases of its products through the Company's "open stock" program.
Employees
As of January 1, 1998, the Company had 39 full-time employees of which 13
were involved in sales and 26 in general management and administration. In
addition, the Company utilizes the services of three independent exclusive sales
agents on a regular basis. The Company considers its relations with its
employees, none of whom are covered by collective bargaining agreements, to be
excellent.
In addition, the Company has an ongoing need to expand its management,
marketing and support staff, particularly in light of its expansion plans.
Competition for personnel having the qualifications required by the Company is
intense and no assurance can be given that the Company will be successful in
recruiting or retaining such personnel when needed on competitive terms, or at
all.
Insurance
The Company maintains insurance coverage including workers' compensation
coverage, and liability insurance in respect of hazards on the Company's
business premises. The Company carries a general liability policy which provides
for coverage of $1,000,000 per occurrence and $2,000,000
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in the aggregate. The Company believes that its policy and its limits are
consistent with those of other similarly situated footwear manufacturers.
Acquisition
On January 16, 1995, the Company entered into an asset purchase agreement
(the "Asset Purchase Agreement") providing for the purchase from Hongson, Inc.
of the Acquired Net Assets. The net purchase price for the Acquired Net Assets
was $1,401,787. The Company believes that the assets of Hongson, Inc. have been
liquidated and that Hongson, Inc. is no longer doing business. In connection
with the Acquisition, Harry Chen, a principal stockholder of Hongson, Inc., was
issued 266,880 shares of Common Stock for an aggregate purchase price of $100.
As a condition of the Asset Purchase Agreement, David Albahari, Alan
Kandall, Alberto Salvucci, Harry Chen and the Company entered into a
stockholders agreement (the "Stockholders Agreement") with respect to their
shares of Common Stock. Pursuant to the Stockholders Agreement, Mr. Salvucci,
Mr. Kandall and Mr. Albahari (the "Management Group") agreed not to sell their
shares of Common Stock for a period of nine months if the Company either merged
with an entity having a publicly traded class of securities or registered its
shares under the Securities Act without the consent of the Company's investment
advisor or underwriter, respectively. The Management Group also placed an
aggregate of 320,256 shares of Common Stock in escrow, which were not to be
released to the Management Group unless the Company satisfied certain
performance criteria (the "Escrow Shares"). The Stockholders Agreement was to
expire on the earlier of a merger of the Company, the date upon which the
Company consummated an initial public offering or on the fifteenth anniversary
of the Stockholders Agreement. In January 1996, the Company terminated the
Stockholders Agreement and released all of the Escrow Shares to the Management
Group, although the terms for the release of the Escrow Shares had not yet been
satisfied, in anticipation of the Company's initial public offering.
In October 1995, the Company purchased all of Mr. Chen's remaining interest
in the Company, namely, 266,880 shares of Common Stock, and 21,660 shares of
Preferred Stock, which Mr. Chen purchased for $250,000 in 1995 as a part of a
private placement of the Company's Series A Preferred Stock (the "1995
Financing"), for consideration of $400,000. $132,500 of such consideration was
attributable to the 266,880 shares of Common Stock and $267,500 of such
consideration was attributable to the 21,660 shares of Preferred Stock and the
accrued dividends thereon. The Company allocated the $132,500 it paid for Mr.
Chen's 266,880 shares of Common Stock to the net purchase price paid for the
Acquired Net Assets in the Acquisition.
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<PAGE>
Item 2. Description of Properties
The Company, through its wholly-owned subsidiary Cable & Company
Enterprises, Ltd., leases approximately 4,500 square feet at 724 Fifth Avenue,
New York, New York at a monthly base rental of $9,750, which increases to
$10,500 per month commencing in May 2000. The lease expires on July 31, 2005 and
the space is utilized as the Company's executive office and showroom. In
addition, the Company, through Cable & Company Enterprises, Ltd., leases
approximately 2,800 square feet of office space in Edison, New Jersey at a
monthly base rental of $4,086, which amount increases each year of the lease to
a maximum of $4,981 in September 1999. The lease expires on September 30, 2000.
The Company leases a factory in Montegrenaro, Italy. The lease expires in March
2003 and the annual rental is approximately $16,900. The Company believes that
such facilities are satisfactory and satisfy the Company's current requirements
and that additional facilities are readily available at commercial rentals, if
required.
Item 3. Legal Proceedings
The Company effected an underwritten initial public offering of its
securities on June 5, 1996 (the "IPO"). On July 15, 1997, as part of an inquiry
into the activities of a principal underwriter of the IPO, the Commission issued
an Order of Private Investigation relating to such underwriter and three
companies, including the Company, in which the underwriter had acted as
principal underwriter. Prior to the Commission issuing its Order of Private
Investigation, and since November 19, 1996, the Company and its officers and
directors have fully cooperated with the Commission in connection with its
present inquiry.
In addition, the Company received a grand jury subpoena which the Company
believes is in connection with an investigation of the underwriter pending in
the United States District Court for the Southern District of New York. The
Company has been advised by the Assistant United States Attorney conducting the
Grand Jury investigation that the Company is not the subject or target of such
investigation.
Item 4. Submission of Matters to a Vote of Securityholders
None.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
[to be updated]
Market Information
The Common Stock was quoted on the NASDAQ SmallCap Market through February
10, 1998 under the symbol "CCWW" when it was delisted from trading. The Common
Stock commenced trading on the NASD's Electronic Board thereafter. The following
table sets forth the range of high and low bid quotations as reported by The
NASDAQ SmallCap Market for the Common Stock, for the quarters indicated. The
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commissions and may not represent actual transactions.
Common Stock
High Low
1996
Second Quarter 10 1/2 8 1/2
Third Quarter 11 1/4 2 1/4
Fourth Quarter 2 15/16 3/4
1997
First Quarter 1 11/32 5/16
Second Quarter 13/16 7/32
Third Quarter 15/32 9/32
Fourth Quarter 15/32 3/32
Holders
As of December 31, 1997, the Company had approximately 89 record holders of
its Common Stock and 1,333 beneficial holders of its Common Stock as of
September 26, 1997.
Dividends
The Company has not paid any dividends on its Common Stock since its
inception. The Company has no intention of paying any cash dividends on its
Common Stock in the foreseeable future, as it intends to use any earnings to
generate increased growth. The payment by the Company of cash dividends, if any,
in the future rests within the discretion of its Board of Directors and, among
other things, will depend upon the Company's earnings, capital requirements and
financial condition, as well as other relevant factors. The Company's loan
agreements with Heller Financial, Inc., prohibit the payment of dividends if
such payment would cause the Company to violate any of the Company's financial
covenants.
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<PAGE>
Sales of Unregistered Securities
In a private placement under Section 4(2) and regulation D, in December
1997, Mathers Associates loaned the Company $400,000. The loan is payable in
December 1998 together with interest thereon at the rate of 10% per annum. The
loan is accelerated and payable in full in the event that the Company
consummates a financing which results in gross proceeds of at least $2,000,000.
As part of the transaction, 790,807 shares of Common Stock are issuable to
Susquehanna Holdings Corp. ("Susquehanna"). The Company also issued to
Susquehanna a warrant which entitles Susquehanna to purchase the number of
shares of Common Stock equal to 1.75% of the Company's outstanding securities
less 790,807 shares of Common Stock at a purchase price of $.01 per share. The
warrant expires on the earlier of December 15, 1999 or on the date that the
Company consummates debt or equity financings, singly or in the aggregate of at
least $12,500,000.
Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in the Form 10-KSB and in future filings by the Company with the
Securities and Exchange Commission, the words or phrases, "will likely result"
and "the Company expects" "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which speak
only as of the date made. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
has no obligation to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect anticipated or unanticipated
events or circumstances occurring after the date of such statements.
General
The Company designs, manufactures, imports and markets on a wholesale basis
a broad range of footwear bearing the Cable & Co. trademark, Bacco Bucci
trademark and XBacco trademark. The Company markets its products to
approximately 1,800 department and specialty store locations in the United
States. Prior to August 1997, the Company had licensed the right to use the
Bacco Bucci name from D&D Design, an entity controlled by Alberto Salvucci, a
principal stockholder of the Company, the Chairman of the Board, and a director.
In August 1997, the Company acquired the rights to the Bacco Bucci trademark
from D&D Design. In addition, in August 1997, the Company acquired the rights to
the Cable & Co. trademark from Cable & Co. S.R.L., an entity also controlled by
Mr. Salvucci, in many major countries throughout the world.
The Company plans to increase revenues by increasing sales to existing
accounts, establishing new accounts and developing high quality shoes with
styling and design detail to sell at competitive prices and expanding the
Company's marketing programs, introducing a new product line under the XBacco
trademark and to globalize the Cable & Co. and Bacco Bucci brands. The Company
also intends to explore opportunities to license rights to related products such
as bags, belts, ties, wallets, accessories and other small leather goods.
However, there can be no assurance that the Company will be able to achieve such
objectives.
On June 23, 1997, the Company entered into an agreement with Roffe
Accessories Inc., as licensee, to manufacture a line of Cable & Co. neckwear,
effective July 1, 1997. The company anticipates that the neckwear line will be
in stores for Spring 1998 season.
Net Sales
The Company's net sales for the year ended December 31, 1997 were
$13,878,016 as compared to net sales of $13,522,166 for the year ended December
31, 1996, an increase of 2.6%. The Company believes that the increase in net
sales is primarily attributable to the increase in net sales of men's footwear
bearing the Bacco Bucci trademark. Net Sales of the mens footwear bearing the
Bacco Bucci trademark for the year ended December 31, 1997 was $4,876,726 as
compared to net sales of $3,580,722 for the year ended December 31, 1996, an
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<PAGE>
increase of 36.2%. The increase is primarily attributable to the increase in net
sales to existing customers as well as an increase in the number of customers.
The increase in net sales is also attributable to net sales of $14,335 of mens
footwear bearing the Alberto Salvucci trademark. This footwear is a new line
which was introduced during the fourth quarter of 1997. Net sales of the men's
footwear bearing the Cable & Co. trademark for the year ended December 31, 1997
was $8,986,955 as compared to net sales of $9,475,909 for the year ended
December 31, 1996, a decrease of 5.2%. The Company believes that the decrease is
primarily attributable to a decrease in net sales of $598,000 as a result of a
major pre-season promotion, during the year ended December 31, 1996, which did
not occur in 1997. The balance of the decrease was primarily attributable to a
52.2% increase in returns, from $1,227,177 for the year ended December 31, 1996
to $2,322,933 for the year ended December 31, 1997. The increase in returns is
due to lower than anticipated sell-through at retail of certain styles during
previous seasons. During the year ended December 31, 1996, the Company suspended
the production and marketing of the women's footwear bearing both the Cable &
Co. trademark and the Bacco Bucci trademark. As a result of the suspension of
the womens' footwear bearing the Cable & Co. trademark and the Bacco Bucci
trademark, there were no sales of womens' footwear bearing the Cable & Co.
trademark and Bacco Bucci trademark for the year ended December 31, 1997 as
compared to net sales of $465,535 for the year ended December 31, 1996. The
Company does not plan to reintroduce the women's footwear bearing either the
Cable & Co. trademark or the Bacco Bucci trademark prior to fiscal 1999 in order
to continue focusing the Company's resources on the development of the Bacco
Bucci product line.
Cost of Goods Sold
The Company's cost of goods sold for the year ended December 31, 1997 was
$9,348,135 as compared to $10,211,283 for the year ended December 31, 1996, a
decrease of 8.5%. The Company believes that such decrease is primarily
attributable to the decrease in the cost of the merchandise purchased for the
year ended December 31, 1997. The Company believes that the primary reasons for
the decrease in the cost of the merchandise purchased was a 11.1% decrease in
the average price of the goods at the factory level, which is attributable to
the Company redesigning the shoes as well as a portion of the shoes being
manufactured at the Company's facility in Italy. The Company's gross profit as a
percentage of net sales was 32.6% for the year ended December 31, 1997 as
compared to 24.5% for the year ended December 31, 1996. The Company believes
that such an increase is primarily attributable to a more favorable exchange
rate between the dollar versus the lira, lower freight rates, a greater
percentage of shipments made by boat versus air, lower manufacturing costs
attributable to the opening of the Company's factory in April 1997, the redesign
of the shoes and a decrease in the quantity and size of markdown sales taken on
men's footwear bearing the Cable & Co. trademark. The favorable exchange rate
between the dollar versus the lira created a foreign currency transaction gain
of approximately $131,000 for the year ended December 31, 1997, as compared to a
foreign currency transaction loss of approximately $217,000 for the year ended
December 31, 1996. Markdown sales for the mens footwear bearing the Cable & Co.
trademark for the year ended December 31, 1997, was 12.6% of net sales as
compared to 14.7% of net sales for the year ended December 31, 1996, yielding a
gross profit margin of 8.1% and (5.9)% respectively.
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<PAGE>
Noncash Compensatory Charges
For the year ended December 31, 1997 the Company incurred noncash
compensatory charges of $1,660,637. Of such amount (i) $498,047 is attributable
to shares of common stock issued pursuant to consulting agreements entered into
in May 1997, and (ii) $1,162,500 is attributable to shares of common stock
issued in January 1996 pursuant to an international consulting agreement. The
consulting agreements entered into in May 1997 were being amortized over a 12
month period. In December 1997, the Company determined that it was no longer
receiving consulting services and expensed. the remaining balance of $207,520.
The initial amount of the international consulting agreement was $1,685,000 and
was being amortized over a 36 month period. In September 1997 the Company
determined that it was no longer receiving consulting services and expensed the
remaining balance of $741,340.
For the year ended December 31, 1996 the Company incurred noncash
compensatory charges of $2,811,481. Of such amount (i) $522,410 is attributable
to shares of common stock issued pursuant to an international consulting
agreement, (ii) $1,345,075 is attributable to an aggregate of 320,256 shares of
common stock held by David Albahari, the Company's former President and Chief
Executive Officer, Alan Kandall, the Company's President and Chief Executive
Officer, and Alberto Salvucci, the Chairman of the Board, which shares were
released from escrow pursuant to the Stockholders Agreement, and (iii) $943,996
is attributable to an aggregate of 224,761 shares of Common Stock issued to Mr.
Albahari, Mr. Kandall and Mr. Salvucci.
Operating Expenses
The Company's selling and general and administrative expenses for the year
ended December 31, 1997 were $7,054,692, 50.8% as a percentage of net sales, as
compared to selling and general and administrative expenses for the year ended
December 31, 1996 of $6,617,228, 48.9% as a percentage of net sales. The Company
believes that the increase in selling and general and administrative expenses is
primarily attributable to the increase in payroll, travel and entertainment
expenses, show expenses, professional fees and amortization expense. Payroll and
travel and entertainment expenses for the year ended December 31, 1997 were
$2,082,068, 15.0% of net sales as compared to payroll and travel and
entertainment expenses for the year ended December 31, 1996 $1,557,736, 11.5% of
net sales. The increase in payroll and travel and entertainment expenses is
primarily attributable to the expansion of the sales staff, by approximately ten
people, in order to increase revenues in existing accounts, expand the customer
base and continue to develop the Bacco Bucci product line. Show expenses for the
year ended December 31, 1997 were $325,611, 2.3% of net sales as compared to
show expenses for the year ended December 31, 1996 $243,692, 1.8% of net sales.
The show expenses increased due to the Company participating in more shows in
1997, adding a display booth for the mens footwear bearing the Bacco Bucci
trademark and increased attendance of an expanded sales staff at the shows.
Professional fees for the year ended December 31, 1997 were $585,734, 4.2% of
net sales as compared to professional fees for the year ended December 31, 1997
529,541, 3.9% of net sales. The increase in professional fees is primarily
attributable to the increase in fees incurred in connection with being a public
Company for the entire year of 1997, as compared to 1996 when the company was
only public for part of the year. Amortization
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<PAGE>
expense increased due to the Company purchasing the Bacco Bucci and Cable & Co.
trademarks in August 1997 for a purchase price of approximately $5,400,000. The
trademarks are being amortized over a period of 20 years. For the year ended
December 31, 1997, $115,000 of amortization expense was incurred. In addition,
royalty fees decreased as a result of the purchase of the Bacco Bucci trademark
in August 1997. In 1997, the Company was no longer required to pay royalty fees
on sales of Bacco Bucci footwear in the western hemisphere. Shipping expenses
and advertising expenses decreased as compared to the year ended December 31,
1996. Shipping costs for the year ended December 31, 1997 were lower as a result
of the Company entering into a new warehousing lease during 1997, with lower
warehousing rates. Advertising expenses for the year ended December 31, 1997
were $1,167,858, 8.4% of net sales as compared to advertising expenses for the
year ended December 31,1996 of $1,351,976, 10.0% of net sales. The decrease in
advertising expenses is primarily attributable to the decrease in media
advertisements as a result of the Company changing the advertising campaigns
during the second half of 1997.
Interest Expense and Bridge Note Discount
The Company's interest expense for the year ended December 31, 1997 was
$724,464 as compared to interest expense for the year ended December 31, 1996 of
$577,579, an increase of 25.4%. The Company believes that the increase is
primarily attributable interest of approximately $89,000 in connection with the
purchase of the Bacco Bucci trademark and the Cable and Co. trademark. In
addition, the Company believes the increase in interest expense is due to the
increased borrowing in relation to higher levels of inventory.
For the year ended December 31, 1996, the Company incurred a charge of
$738,000 in relation to the discount on the Bridge Notes payable. A total
discount of $738,000 was recorded in February 1996 and was being amortized over
a 12 month period. The Company repaid the Bridge Notes in June 1996. Upon
repayment of the Bridge Notes, the Company fully amortized the remaining
discount of $453,050
Termination Agreements
In October 1997, the Company entered into an agreement as of July 21, 1997,
to terminate an employment agreement between the Company and David Albahari the
former President, Chief Executive Officer and a director of the Company. As part
of the termination agreement, Mr Albahari is to receive $250,000 commencing July
1, 1997 through September 30, 1998, as well as reimbursement for certain legal
and other expenses. Included in the $250,000 payments are payments in connection
with a non-competion agreement, effective from July 1, 1997 through June 30,
1998, in the amount of $50,000. Additionally, the Company issued Mr. Albahari
options to purchase 901,756 shares of Common Stock at a purchase price of $0.01
per share. The 901,756 options were recorded at a value of $309,979. In October
1997, Mr. Albahari converted these options into shares of common stock.
In December 1997, the Company entered into an agreement, between the
Company and a former sales representative. As part of the termination agreement,
the former sales representative is to receive $70,000 commencing July 1, 1997
through June 30, 1998.
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<PAGE>
The total non-recurring expense of $682,152 recognized in connection with
the termination agreements for the year ended December 31, 1997 includes (i)
$200,000, which represents the total cash payments of $250,000 to David Albahari
less $50,000 allocable to the non-competition agreement, (ii) $309,979, which
represents the value of the 901,756 options, issued to David Albahari, to
purchase shares of common stock (iii) $102,173 in legal and other expenses and
(iv) $70,000, which represents total cash payments to the former sales
representative.
Liquidity and Capital Resources
The Company has funded its requirements for working capital and capital
expenditures from net cash provided through various borrowings, including
borrowings under its credit facility with Heller Financial, Inc. ("Heller"), a
$1,800,000 private placement (the " Bridge Financing"), a public offering of the
Company securities, an off shore financing, and a July 1997 private placement.
As of December 31, 1997, the Company had working capital deficiency of
$3,411,034 and a debt to equity ratio of 5.3 to 1.0.
The Company's obligations to Heller include a collateral installment note
in the original principal amount of $1,000,000 of which $166,667 was outstanding
as of December 31, 1997. The collateral installment note is payable in 36
monthly installments of $27,777 and bears interest at 3% above the prime rate of
Chase Manhattan Bank, N.A. ("Chase"). In addition, the Company may borrow from
Heller the lesser of 50% of the Company's eligible inventory or $2,000,000 (the
"Inventory Loan"). At December 31, 1997 Heller has advanced the Company $818,239
in excess of the inventory line. The Inventory Loan bears interest at 1.5% above
Chase's prime rate. The Company also finances its accounts receivable under a
factoring agreement with Heller. Pre- approved accounts are factored without
recourse to the Company and non-approved accounts are factored with recourse. At
December 31, 1997, $931,423 of the $2,421,191 (38.5%) of factored accounts
receivable, were factored with recourse. Heller is entitled to a fee equal to
1.0% of all accounts receivable purchased. Moreover, advances by Heller bear
interest at rates equal to Chase's prime rate (8.5% at December 31, 1997) plus
1.0% to 1.5%. Under the credit facility, all of the Company's obligations to
Heller may not exceed $6,000,000. At December 31, 1997 Heller has advanced the
Company $975,986 in excess of its credit line. In addition, at December 31,
1997, the factor had advanced the Company $3,675,450 in excess of its borrowing
base.
The Company has a letter of credit line with Heller up to a maximum of
$750,000. At December 31, 1997, the Company has outstanding letters of credit in
the amount of $537,000, $400,000 of which is serving as collateral for foreign
currency contracts and $137,000 is serving as collateral for lease security
deposits.
At December 31, 1997, the Company was not in compliance with certain
covenants and the Company has received a notice of default from Heller. In the
event that Heller demands payment of the outstanding obligations or does not
advance additional funds to the Company, substantial doubt would exist with
regard to the Company's ability to continue as a going concern.
On April 3, 1997, the Company became a 99% owner of a newly formed
corporation, Cable & Company 1955 SPA, located in Italy. Cable & Company 1955
SPA, leases a manufacturing facility in Montegranaro, Italy to manufacture the
Company's footwear bearing the Cable & Co trademark. Alberto Salvucci, the
Chairman of the board and stockholder of the Company, owns the remaining 1% of
Cable & Company 1955 SPA. The total investment during the year ended December
31, 1997 was $252,747.
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In July 1997, the Company completed a private placement, whereby it issued
13,690,000 shares of common stock at a price of $.10 per share. The gross
proceeds received in such an offering was $1,369,000.
In August 1997 the Company purchased all of the rights to the Bacco Bucci
trademark, an intangible asset, from D&D Design and Details Limited ("D&D
Design"), an entity controlled by Alberto Salvucci, the Chairman of the Board, a
director, and a principal stockholder of the Company.
The purchase price for the Bacco Bucci trademark consists of $3,150,000, of
which $400,000 was paid during the year ended December 31, 1997, and the balance
shall be payable in installments. Payments of $350,000 and $400,000 are due in
September 1998 and January 1999, respectively. The remaining balance is payable
in four equal installments of $500,000 in January 2000 through January 2003. In
addition, the Company has agreed to pay to D&D Design annual royalties of 7% of
net sales for a period of five years for all goods bearing the Bacco Bucci
trademark sold outside North, Central, and South America, commencing on the date
the Company commences exploiting the Bacco Bucci trademark in each country, but
expiring no later than December 31, 2007. The Company also issued to D&D Design
an aggregate of 11, 973, 411 shares of Common Stock.
The Company also acquired in many major countries throughout the world
outside of the Western Hemisphere, all of the rights to the Cable & Co.
trademark from Cable & Co. S.R.L., an entity controlled by Mr. Salvucci.
The purchase price for the rights to the Cable & Co. trademark include the
shares of Common Stock discussed above, the 7% royalties payable with respect to
the Bacco Bucci trademark, together with a payment of $100,000, which amount has
been paid to Cable & Co. S.R.L.
The Company believes that it has an immediate need for additional financing
of approximately $1,500,000. The Company also believes that additional financing
of approximately $6,500,000 will be required over the next two to four months to
finance the Companys plans for continued operations for at least the next twelve
months.
In order to obtain the financing necessary to provide the Company with
working capital and its expansion plans, the Company intends to raise
approximately $14,000,000 in additional financing of which $4,000,000 is
currently being offered in a private placement and the balance of which is
intended to be sought thereafter.
There can be no assurance that such financing will be consummated. If such
financing is not consumated substantial doubt would exist with regard to the
Company's ability to continue as a going concern.
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Item 7. Financial Statements.
See Index immediately following the signature page.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Directors and Executive Officers
The following table sets forth certain information concerning the directors
and executive officers of the Company.
Name Age Position
- ---- --- --------
Alberto Salvucci 43 Chairman of the Board and Director
Alan Kandall 54 Chief Executive Officer, President, and Director
Joel Brooks 39 Chief Financial Officer and Treasurer
Steven Katz 49 Director
Martin C. Licht 56 Secretary and Director
Michael Bartos 45 Executive Vice President
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The Company's officers are elected to serve in such capacities until the
earlier to occur of the election and qualification of their respective
successors or until their respective deaths, resignations or removals by the
Company's Board of Directors from such positions. The Company's directors are
elected to serve in such capacities until the earlier to occur of the election
and qualification of their respective successors or their respective deaths,
resignations or removals by the Company's stockholders from such positions.
The following is a brief summary of the background of each executive
officer and director:
Alberto Salvucci has been the Chairman of the Board since January 1997. Mr.
Salvucci has been the President of Cable & Co. S.R.L. since 1988. He has
provided design, production and production control services to the Company since
its inception and provided similar services to Hongson, Inc. commencing in 1989
through February 1995.
Alan Kandall has served as President and Chief Executive Officer since July
1997. In January 1997 Mr. Kandall was named Chief Operating Officer of the
Company. From February 1995 through July 1997, he served as the Executive Vice
President, Chief Financial Officer, and Treasurer of the Company. He has been a
member of the Board of Directors since the Company's inception. From April 1993
through February 1995, Mr. Kandall was the Chief Financial Officer of Hongson,
Inc., which the Company believes has been liquidated and is no longer doing
business. From June 1992 to March 1993, Mr. Kandall was the Chief Financial
Officer of Publix Corp, an apparel company. From January 1992 through May 1992,
Mr. Kandall was the Chief Financial Officer of Orle, Inc., a women's apparel
company. From 1988 through 1991, Mr. Kandall was the Chief Financial Officer of
Barbizon Corporation, a women's apparel company.
Joel Brooks has served as Chief Financial Officer and Treasurer since July
1997. From February 1995 until July 1997, Mr. Brooks was the comptroller for the
Company. From April 1994 to February 1995, Mr. Brooks was the comptroller for
Hongson, Inc. From April 1992 to March 1994, Mr. Brooks was the comptroller for
USA Detergents, Inc. From 1989 to March 1992, Mr. Brooks was an accountant with
Goldstein Golub Kessler & Company, P.C., independent certified public
accountants.
Steven Katz has been the president of Steven Katz & Associates, Inc., a
management consulting firm, located in Milltown, New Jersey, which specializes
in strategic planning and corporate development since December 1984. Mr. Katz
has been a member of the Board of Directors since July 1997.
Martin C. Licht has served as Secretary and a member of the Company's Board
of Directors since its inception. He has been a practicing attorney since 1967
and is a partner of the law firm of McLaughlin & Stern, LLP. Mr. Licht is also a
director of Natural Health Trends Corp., which is traded on the Nasdaq SmallCap
Market.
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Michael Bartos has been an Executive Vice President of the Company since
December 1997. From January 1996 to November 1997, Mr. Bartos was the director
of Branded Operations for Dynasty Footwear. From November 1994 to November 1995,
Mr. Bartos was President of Outfitter, LLC. From January 1993 to October 1994,
Mr. Bartos was President of Hongson, Inc. From December 1983 to January 1993,
Mr. Bartos was Executive Vice President of Hongson, Inc.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e), promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"), during the Company's
fiscal year ended December 31, 1997, and (ii) Forms 5 and amendments thereto
and/or written representations furnished to the Company by any director, officer
or ten percent security holder of the Company (collectively "Reporting Persons")
stating that he or she was not required to file a Form 5 during the Company's
fiscal year ended December 31, 1997, it has been determined that no Reporting
Person is delinquent with respect to his or her reporting obligations set forth
in Section 16(a) of the Exchange Act, except that no filings were made by
Suquehanna Holdings Corp.
Item 10. Executive Compensation
Directors' Compensation
Except for directors' fees of $15,681 paid to Steven Katz in fiscal 1997,
directors of the Company did not receive any fixed compensation for their
services as directors. However, the Board of Directors may authorize the payment
of a fixed sum to non-employee directors for their attendance at regular and
special meetings of the Board as is customary for similar companies. Directors
will be reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to the Company. For the fiscal year ended December
31, 1997, except for the payments to Steven Katz, the Company did not pay its
directors any cash or other form of compensation for acting in such capacity.
For the fiscal year ended December 31, 1997, directors who were also executive
officers of the Company received cash compensation for acting in the capacity of
executive officers. See "Management - Executive Compensation" and "- Stock
Options."
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Executive Compensation
Summary Compensation Table
The following table provides a summary of cash and non-cash compensation
for the years ended December 31, 1995, 1996 and 1997 with respect to the
following officers of the Company:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Securities
Restricted Underlying
Other Annual Stock Options
Name and Principal Positions Year Salary($) Bonus($) Compensation($)(1) Award(s)($) SARs(#)
---------------------------- ---- -------- ------------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
David Albahari (3) .................... 1997 $203,308 -- $180,600(5) -- $309,979(6)
1996 $200,000 $763,026(2) -- -- --
1995 $200,000 -- -- -- --
Alan Kandall (4) ...................... 1997 $183,982 -- -- -- --
1996 $150,000 $763,022(2) -- -- --
1995 150,000 -- -- -- --
<CAPTION>
Long-Term Compensation
----------------------
LTIP All Other
Name and Principal Positions Payouts($) Compensation
---------------------------- ---------- ------------
<S> <C> <C>
David Albahari (3) .................... -- --
-- --
-- --
Alan Kandall (4) ...................... -- --
-- --
-- --
</TABLE>
- ----------
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Represents 74,921 shares of Common Stock and 74,920 shares of Common Stock
issued to Mr. Albahari and Mr. Kandall, respectively, together with 106,752
shares of Common Stock released from escrow for each of Mr. Kandall and Mr.
Albahari, based upon a fair market value of $4.20 per share which was
ascribed to such shares for financial statement purposes on the date of
issuance and the date of the release from escrow.
(3) Mr. Albahari was the President and Chief Executive Officer of the Company
from January 1, 1995 through July 21, 1997.
(4) Mr. Kandall was the Executive Vice President, Chief Financial Officer and
Treasurer from January 1, 1996 through July 21, 1997 and Chief Executive
officer and President from July 21, 1997 to the present.
(5) Consists of $150,000 payable to Mr. Albahari in 1998, which has been
accrued by the Company and $30,600 of expenses paid by the Company in 1997.
(6) Consists of options to purchase 901,756 shares of Common Stock at an
exercise price of $.01 per share.
Employment Agreements
The Company has entered into an employment agreement with Alan Kandall
expiring in June 2002, under which he will receive an annual salary of $200,000,
except for 1998 for which Mr. Kandall has agreed to reduce his salary by 12,500
per quarter. The agreement provides that the executive will be eligible to
receive short-term incentive bonus compensation, the amount of which, if any,
will be determined by the Board of Directors based on the employee's
performance, contributions to the Company's success and the Company's
profitability. The employment agreement also provides for termination based on
death, disability, voluntary resignation or material failure in performance. The
employment agreement does not provide for severance payments upon termination
-24-
<PAGE>
unless the executive is terminated without cause, in which case the executive
will receive severance payments until the later of two and a half years from the
date of termination or June 30, 2002. The agreement contains non-competition
provisions that preclude Mr. Kandall from competing with the Company for a
period of two years from the date of termination of employment.
In October 1997, the Company entered into an agreement as of July 21, 1997,
to pay David Albahari, the former President, Chief Executive Officer and a
director of the Company, $200,000 per year commencing July 1997 through
September 30, 1998, and to reimburse Mr. Albahari for certain expenses. The
employment agreement between the Company and Mr. Albahari was terminated
pursuant to such agreement. The Company also issued Mr. Albahari options to
purchase 901,756 shares of Common Stock at a purchase price of $0.01 per share.
In October 1997 Mr. Albahari exercised the options.
Stock Options
Except for 901,756 granted to Mr. Albahari, no options were granted to,
held or exercised by, any of the Company's officers during the fiscal year ended
December 31, 1997. The Company has adopted the 1996 Stock Option Plan (the
"Plan") under which up to 280,000 options to purchase shares of Common Stock may
be granted to key employees, consultants and members of the Board of Directors
of the Company. The exercise price of the options will be determined by the
Stock Option Committee selected by the Board of Directors, but the exercise
price will not be less than 85% of the fair market value of the Common Stock on
the date of grant. No options have been granted to date. Options granted under
the Plan may be either (i) options intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"), or (ii) non-qualified stock options. Incentive stock
options may be granted under the Plan to employees, including officers and
directors who are employees. Non-qualified options may be granted to employees,
officers, directors and consultants of the Company.
The Plan is administered by the Board of Directors. Under the Plan, the
Board of Directors has the authority to determine the persons to whom options
will be granted, the number of shares to be covered by each option, whether the
options granted are intended to be incentive stock options, the manner of
exercise, and the time, manner and form of payment upon exercise of an option.
Incentive stock options granted under the Plan may not be granted at a
price less than the fair market value of the Common Stock on the date of grant
(or less than 110% of fair market value in the case of employees holding 10% or
more of the voting stock of the Company). Non-qualified stock options may be
granted at an exercise price established by the Stock Option Committee selected
by the Board of Directors, but may not be less than 85% of fair market value of
the shares on the date of grant. Incentive stock options granted under the Plan
must expire not more than ten years from the date of grant, and not more than
five years from the date of grant in the case of incentive stock options granted
to an employee holding 10% or more of the voting stock of the Company. To the
extent that the aggregate fair market value, as of the date of grant, of the
shares for which incentive stock options become exercisable for the first time
by an optionee during the calendar year exceeds $100,000, the
-25-
<PAGE>
portion of such option which is in excess of the $100,000 limitation will be
treated as a non-qualified stock option.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as to the Common Stock
ownership of each of the Company's directors, executive officers, all executive
officers and directors as a group and all persons known by the Company to be the
beneficial owners of more than five percent of the Common Stock.
Approximate
Name and Address of Number of Percentage of
Beneficial Owner Shares(1) Common Stock
- ---------------- --------- ------------
Alan Kandall 404,063 *
c/o Cable & Co. Worldwide, Inc.
724 Fifth Avenue
New York, New York 10019
Alberto Salvucci 12,377,474(2) 28.2%
c/o Cable & Co. Worldwide, Inc.
724 Fifth Avenue
New York, New York 10019
Steven Katz 0 *
Briar Ridge Plaza
440 S. Main Street
Milltown, New Jersey 08850
Joel Brooks 29,375 *
c/o Cable & Co. Worldwide, Inc.
724 Fifth Avenue
New York, New York 10019
Martin C. Licht(3) 0 *
c/o McLaughlin & Stern, LLP
260 Madison Avenue
New York, New York 10016
Michael Bartos 0 *
c/o Cable & Co. Worldwide, Inc.
724 Fifth Avenue
New York, New York 10019
Susquehanna Holding Corp.(4) 2,540,807 5.8%
230 Mathers Road
Ambler, Pennsylvania 19002
-26-
<PAGE>
All present officers 12,810,912 29.2%
and directors as a group
(6 persons)
(1) Securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Commission. Accordingly, they may include securities as
to which the individual has or shares voting or investment power or has the
right to acquire under outstanding stock options within 60 days after the
date of this table. Except as otherwise noted, each individual or entity
has sole voting and investment power over the securities listed.
(2) Includes 11,973,411 shares of Common Stock owned by D&D Design, which is
controlled by Mr. Salvucci.
(3) Does not include shares of Common Stock owned by Mr. Licht's three adult
children. Mr. Licht's three adult children each have sole voting and
dispositive power with respect to their securities.
(4) Does not include an indeterminate number of shares of Common Stock issuable
upon the exercise of a warrant granted in December 1997. See "Certain
Transactions."
* Represents less than 1% of the applicable number of shares of Common Stock
outstanding.
Item 12. Certain Relationships and Related Transactions
In August 1997, the Company purchased the rights to the Cable & Co. and
Bacco Bucci trademarks from Cable & Co. S.R.L. and D&D Design, respectively.
Alberto Salvucci, the Chairman of the Board of Directors and a principal
stockholder of the Company, controls D&D Design and Cable & Co. S.R.L. Prior to
the acquisition, the Company held a license for the rights to the Bacco Bucci
trademark in North, Central and South America. The purchase price for the Bacco
Bucci trademark consists of $3,150,000 of which $400,000 has been paid, and the
balance of which is payable in installments. Payments of $350,000 and $400,000
are due in September 1998 and January 1999, respectively. The remaining balance
is payable in four installments of $500,000 in January 2000 through January
2003. In addition, the Company has agreed to pay to D&D Design annual royalties
of 7% of net sales for a period of five years for all goods bearing the Bacco
Bucci trademark sold outside North, Central and South America, commencing on the
date the Company commences exploiting the Bacco Bucci trademark in each country,
but expiring no later than December 31, 2007. The Company also issued to D&D
Design an aggregate of 11,973,411 shares of Common Stock in connection with the
acquisition.
The Company also acquired in many major countries throughout the world
outside of the Western Hemisphere, all of the rights to the Cable & Co.
trademark from Cable & Co. S.R.L., an entity controlled by Mr. Salvucci. Prior
to the acquisition, the Company owned the rights to the Cable & Co. trademark in
the Western Hemisphere. The purchase price for the rights to the Cable & Co.
trademark include the shares of Common Stock discussed above, the 7% royalties
payable with respect
-27-
<PAGE>
to the Bacco Bucci trademark, together with a payment of $100,000, which amount
has been paid to Cable & Co. S.R.L.
The purchase price, including costs and expenses, for the Bacco Bucci and
Cable & Co. trademarks is approximately $5,413,000, resulting in an annual
charge to earnings of approximately $270,000. For financial statement purposes,
the Company has valued the shares of Common Stock at $2,694,017, which
represents a discount to the market price, to reflect the restrictions on
transfer under the Securities Act. In addition, the Company has discounted the
future payments of the purchase price for the Bacco Bucci trademark. The
purchase price is being amortized over a period of 20 years.
For the year ended December 31, 1996, the Company paid an aggregate of
$226,931 to D&D Design and Cable & Co. S.R.L. with respect to sales and
purchases of Bacco Bucci footwear which is comprised of $115,220 of commissions
and $111,711 of royalties. In addition, for such period the Company paid to D&D
Design $86,000 for fashion and design advisory fees for Bacco Bucci and Cable &
Co. footwear. For the year ended December 31, 1997, the Company paid and accrued
an aggregate of $246,498 to D&D Design and Cable & Co. S.R.L. with respect to
purchases of Bacco Bucci footwear which is solely commissions. In addition, for
the year ended December 31, 1997, the Company paid to D&D Design $58,000 of
fashion and design advisory fees for Bacco Bucci and Cable & Co. footwear. No
royalties for sales of Bacco Bucci footwear were paid during the year ended
December 31, 1997. For the year ended December 31, 1996, the Company paid an
aggregate of $434,887 to Cable & Co. S.R.L. and D&D Design with respect to
purchases of Cable & Co. footwear which is solely for commissions. For the year
ended December 31, 1997, the Company paid and accrued an aggregate of $474,712
to Cable & Co. S.R.L. and D&D Design with respect to purchases of Cable & Co.
footwear which is solely for commissions. For the year ended December 31, 1997,
the Company paid and accrued an aggregate of $5,475. It is anticipated that the
Company will continue to pay commissions on the purchase of Cable & Co. and
Bacco Bucci footwear to entities controlled by Mr. Salvucci at a rate of 6.5% of
the cost of goods shipped to the Company.
In October 1997, the Company entered into an agreement as of July 21, 1997
to pay David Albahari, the former President, Chief Executive Officer and a
director, $200,000 per year commencing July 1997 through September 30, 1998, and
to reimburse Mr. Albahari for certain expenses. The Company also issued Mr.
Albahari options to purchase 901,756 shares of Common Stock at a purchase price
of $0.01 per share, which were exercised in October 1997. In connection with the
issuance of the options, the Company recorded an expense of $309,978.
In February 1995, Mr. Albahari, Mr. Kandall and Mr. Salvucci each purchased
329,143 shares of Common Stock from the Company for $50,000 each. As a condition
of the Asset Purchase Agreement, David Albahari, Alan Kandall, Alberto Salvucci,
Harry Chen and the Company entered into the Stockholders Agreement with respect
to their shares of Common Stock. Pursuant to the Stockholders Agreement, Mr.
Salvucci, Mr. Kandall and Mr. Albahari agreed not to sell their shares of Common
Stock for nine months if the Company either merged with an entity having a
publicly traded class of securities or registered its shares under the
Securities Act without the consent of the
-28-
<PAGE>
Company's investment advisor or underwriter, respectively. The Management Group
also placed an aggregate of 320,256 shares of Common Stock in escrow which were
not to be released to the Management Group unless the Company satisfied certain
performance criteria. The Stockholders Agreement was to expire on the earlier of
a merger of the Company, the date upon which the Company consummated the sale of
its securities pursuant to a registration statement filed under the Securities
Act or on the fifteenth anniversary of the Stockholders Agreement. In January
1996, the Company terminated the Stockholders Agreement and released all of the
Escrow Shares to the Management Group, although the terms for the release of the
Escrow Shares had not yet been satisfied.
In February 1996, the Company issued an aggregate of 224,761 shares of
Common Stock to Messrs. Kandall, Albahari and Salvucci, of which 74,921 shares
of Common Stock were issued to Mr. Albahari and 74,920 shares of Common Stock
were each issued to Mr. Kandall and Mr. Salvucci as additional compensation..
Mr. Kandall, the President and Chief Executive Officer of the Company,
has guaranteed certain of the Company's obligations aggregating approximately
$69,310 as of December 31, 1997 for leasing computer hardware and telephone
equipment. The Company has paid Mr. Licht and law firms of which Mr. Licht was a
member legal fees of $428,408 in 1996 and $347,105 in 1997, and accrued $226,228
for 1997. On May 1, 1997, the Company entered into a consulting agreement with
Susquehanna Holding Corp. ("Susquehanna"). Pursuant to the consulting agreement
(the "Susquehanna Consulting Agreement"), the Company issued 500,000 shares of
Common Stock to Susquehanna. In July 1997 as part of a private placement,
Susquehanna purchased 1,250,000 shares of Common Stock at $.10 per share. In
November 1997, the Company amended the Susquehanna Consulting Agreement and
agreed to pay to Susquehanna the sum of $7,500 per month for a period of three
years and issued a warrant to Norbert Zeelander to purchase 1,000,000 shares of
Common Stock at a purchase price of $.15 per share, which is exercisable until
November, 2002. In December 1997, Mathers Associates loaned the Company
$400,000. The loan is payable in December 1998 together with interest thereon at
the rate of 10% per annum. The loan is accelerated and payable in full in the
event that the Company consummates a financing which results in gross proceeds
of at least $2,000,000. In connection with the loan, 790,807 shares of Common
Stock are issuable to Susquehanna. The Company also issued to Susquehanna a
warrant which entitles Susquehanna to purchase the number of shares of Common
Stock equal to 1.75% of the Company's outstanding securities less 790,807 shares
of Common Stock at a purchase price of $.01 per share. The warrant expires on
the earlier of December 15, 1999 or on the date that the Company consummates
debt or equity financings, singly or in the aggregate of at least $12,500,000.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
-29-
<PAGE>
Number Description of Exhibit
1. Financial Statements
See Index immediately following the signature page.
2. Exhibits Included Herein
See Exhibit Index on page 25 hereof for the exhibits filed as part of
this Form 10-KSB.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
(c) Exhibit Index
Number Description of Exhibit
- ------ ----------------------
2.1 -- Assignment of Trademark dated July 29, 1997 between D & D Design
Details Limted and the Company.**
2.2 -- Assignment of Trademark dated July 29, 1997 between Cable &Co. SRL and
the Company**
2.3 -- Asset Purchase Agreement dated January 16, 1995 between Hongson, Inc.,
as seller and Cable & Co. Worldwide, Inc., as buyer.*
3.1 -- Certificate of Incorporation of the Company, as amended.*
3.2 -- By-Laws of the Company.*
4.1 -- Form of Warrant Agreement between the Company and American Stock
Transfer & Trust, as warrant agent.*
4.2 -- Specimen Certificate of the Company's Common Stock.*
4.3 -- 1996 Stock Option Plan.*
4.4 -- Specimen Certificate of the Company's Warrant.*
10.1 -- Employment Agreement dated as of July 1, 1997 between the Company
and Alan Kandall.*
10.2 -- Agreements between the Company and Heller Financial, Inc.*
10.3 -- Agreement dated as of the 26th day of January 1996 between U.K. Hyde
Park Consultants, Ltd. and the Company.*
10.4 -- Lease dated July 28, 1995 between Raritan Plaza I Associates, L.P., as
landlord, and Cable & Company Enterprises, Ltd., as tenant.*
-30-
<PAGE>
Number Description of Exhibit
- ------ ----------------------
10.5 -- Lease dated May 16, 1995 between 724 Fifth Avenue Realty Co., as
landlord, and Cable & Co. Enterprises Ltd., as tenant.*
10.6 -- Agreement dated as of July 21, 1997 between the Company and David
Albahari **
10.7 -- License Agreement dated July 1, 1997 Between the Company & Roffe
Aecessories, Tnc.**
10.8 -- Assignment of Trademark dated July 29, 1997 between D & D Design and
Details Limited and the Company**.
10.9 -- Assignment of Trademark dated July 29, 1997 brtween Cable & Co. SRL
and the Company**.
10.10 -- Agreement dated May 15, 1996 among D&D Design and Details Limited, Pio
Alberto Salvucci and Cable & Co. Worldwide, Inc.
21.1 -- List of Subsidiaries.*
27.1 -- Financial Data Schedule.
99.1 -- Cable& Co. Trademark Registration from the United States Patent and
Trademark Office.*
- -------------
* Previously filed with Registration Statement No. 333-3000.
** Previously filed with Registration Statement No. 333-3079.
-31-
<PAGE>
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.
Dated: April 14, 1998 CABLE & CO. WORLDWIDE, INC.
By: /s/ Alan Kandall
---------------------------------
Alan Kandall, President and
Chief Executive Officer
By: /s/ Joel Brooks
---------------------------------
Joel Brooks, Treasurer and
Chief Financial 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 in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Alberto Salvucci Chairman of the Board and Director April 14, 1998
- ------------------------------
Alberto Salvucci
/s/ Alan Kandall President, Chief Operating Officer April 14, 1998
- ------------------------------
Alan Kandall and Director
/s/ Martin C. Licht Secretary and Director April 14, 1998
- ------------------------------
Martin C. Licht
/s/ Steven Katz Director April 14, 1998
- ------------------------------
Steven Katz
</TABLE>
-32-
<PAGE>
CABLE & CO. WORLDWIDE, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
================================================================================
Independent Auditor's Report F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5 - F-6
Statement of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-20
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Cable & Co. Worldwide, Inc.
We have audited the accompanying consolidated balance sheet of Cable & Co.
Worldwide, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cable & Co.
Worldwide, Inc. and Subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
then ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 18 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has current liabilities in excess of current assets and is not
in compliance with the covenants of its factoring agreement which raises
substantial doubt about its ability to continue as a going concern. Management's
plan in regard to these matters is also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 26, 1998
F-2
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (Note 6)
Current Assets:
Cash $ 132,264
Accounts receivable, less allowances for doubtful accounts and sales discounts of $280,000 887,158
Inventory (Notes 1 and 2) 5,442,465
Prepaid expenses and other current assets (Notes 3 and 19) 1,266,519
Deferred income tax asset, net of valuation allowance of $4,000,000 (Note 15) --
- -----------------------------------------------------------------------------------------------------------
Total current assets 7,728,406
Property and Equipment, net (Notes 1, 4 and 9) 1,219,236
Trademarks and Trade Names, net of accumulated amortization of $290,521 (Note 1) 6,294,043
Other Intangible Assets, net of accumulated amortization of $39,294 (Note 1) 12,464
Other Assets 516,222
- -----------------------------------------------------------------------------------------------------------
Total Assets $ 15,770,371
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Due to factor (Note 6) $ 6,975,986
Accounts payable 1,585,605
Accrued expenses and other current liabilities (Notes 5 and 14) 1,225,746
Notes payable (Note 7) 967,752
Current portion of installment payable - trademark (Note 8) 334,030
Current portion of capitalized lease obligations (Notes 4 and 9) 36,646
Income taxes payable 13,675
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 11,139,440
Installment Payable - trademark - net of current portion (Note 8) 1,878,155
Capitalized Lease Obligations - net of current portion (Notes 4 and 9) 64,262
Deferred Rent (Note 10) 95,140
Other Liabilities 13,502
Deferred Income Tax Liability (Note 15) 94,000
- -----------------------------------------------------------------------------------------------------------
Total liabilities 13,284,499
- -----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Notes 1 and 10)
Minority Interest in Cable & Company 1955 SPA (Note 1) 2,404
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity: (Notes 1 and 12)
Preferred stock - $.01 par value; authorized 1,416,347 shares; no shares issued --
Common stock - $.01 par value; authorized 50,000,000 shares; issued 43,048,164 shares 430,482
Additional paid-in capital 15,353,760
Treasury stock - 35,000 common shares, at cost (29,676)
Accumulated deficit (13,292,505)
Cumulative foreign currency translation adjustment 21,407
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity 2,483,468
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 15,770,371
===========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 13,522,166 $ 13,878,016
Cost of goods sold (Note 14) 10,211,283 9,348,135
- --------------------------------------------------------------------------------------------
Gross profit 3,310,883 4,529,881
Noncash compensatory charges (Notes 1 and 12) (2,811,481) (1,660,637)
Selling expenses (Note 1) (4,217,605) (4,469,085)
General and administrative expenses (Note 1) (2,441,082) (2,600,238)
Commission income 41,459 15,000
- --------------------------------------------------------------------------------------------
Loss from operations (6,117,826) (4,185,079)
Interest expense (Notes 6, 7 and 9) 577,579 724,464
Termination agreements (Note 17) -- 682,152
Bridge note discount (Note 12) 738,000 --
- --------------------------------------------------------------------------------------------
Loss before provision for income taxes (7,433,405) (5,591,695)
Provision for income taxes (Note 15) 24,900 59,000
- --------------------------------------------------------------------------------------------
Net loss (7,458,305) (5,650,695)
Dividends on preferred stock (Note 12) 27,248 --
- --------------------------------------------------------------------------------------------
Net loss applicable to common stock $ (7,485,553) $ (5,650,695)
- --------------------------------------------------------------------------------------------
Net loss per common share (Note 1) $ (2.79) $ (.25)
============================================================================================
Weighted average number of common shares outstanding (Note 1) 2,682,820 22,247,148
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1996 and 1997
- ------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 -- -- 1,007,445 $ 10,074 $ 34
Issuance of common stock and warrants
to purchase common stock (Note 12) -- -- 400,000 4,000 1,721,000
Deferred consulting costs (Note 12) -- -- -- -- (1,685,000)
Amortization of deferred consulting costs
(Note 12) -- -- -- -- 522,410
Release of escrow shares (Note 12) -- -- -- -- 1,345,075
Issuance of common stock (Note 12) -- -- 224,761 2,248 941,748
Issuance of common stock and warrants in
private placement (Note 12) -- -- 180,000 1,800 (192,800)
Discount on bridge notes (Note 12) -- -- -- -- 738,000
Issuance of common stock and warrants in
initial public offering (Note 12) -- -- 1,119,500 11,195 4,673,318
Issuance of common stock upon redemption
of preferred stock - Series A -- -- 462,531 4,625 (4,625)
Issuance of preferred stock - Series B 3,653 $ 37 -- -- 2,050,489
Purchase of treasury stock -- -- -- -- --
Cash dividend preferred stock - Series A -- -- -- -- --
Net loss -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,653 37 3,394,237 33,942 10,109,649
<CAPTION>
Years ended December 31, 1996 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Treasury Stock Currency Stock-
Number Accumulated Translation holders'
of Shares Amount Deficit Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 -- -- $ (103,109) -- $ (93,001)
Issuance of common stock and warrants
to purchase common stock (Note 12) -- -- -- -- 1,725,000
Deferred consulting costs (Note 12) -- -- -- -- (1,685,000)
Amortization of deferred consulting costs
(Note 12) -- -- -- -- 522,410
Release of escrow shares (Note 12) -- -- -- -- 1,345,075
Issuance of common stock (Note 12) -- -- -- -- 943,996
Issuance of common stock and warrants in
private placement (Note 12) -- -- -- -- (191,000)
Discount on bridge notes (Note 12) -- -- -- -- 738,000
Issuance of common stock and warrants in
initial public offering (Note 12) -- -- -- -- 4,684,513
Issuance of common stock upon redemption
of preferred stock - Series A -- -- -- -- --
Issuance of preferred stock - Series B -- -- -- -- 2,050,526
Purchase of treasury stock 20,000 $ (18,053) -- -- (18,053)
Cash dividend preferred stock - Series A -- -- (80,396) -- (80,396)
Net loss -- -- (7,458,305) -- (7,458,305)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 20,000 (18,053) (7,641,810) -- 2,483,765
(continued)
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1996 and 1997
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
Number Number Paid-in
of Shares Amount of Shares Amount Capital
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchase of treasury stock -- -- -- -- --
Issuance of common stock upon
conversion of preferred stock (Note 12) (3,653) $ (37) 11,213,760 $ 112,138 $ (112,101)
Issuance of common stock (Note 12) -- -- 1,875,000 18,750 479,297
Deferred consulting costs (Note 12) -- -- -- -- (498,047)
Amortization of deferred consulting
costs (Note 12) -- -- -- -- 1,660,637
Issuance of common stock in connection
with private placement (Note 12) -- -- 13,690,000 136,900 1,232,100
Private placement costs (Note 12) -- -- -- -- (393,019)
Issuance of common stock in connection
with purchase of trademark (Note 12) -- -- 11,973,411 119,734 2,574,283
Issuance of options in connection with
termination agreement (Notes 12 and 17) -- -- -- -- 309,979
Issuance of common stock upon exercise
of options (Notes 12 and 17) -- -- 901,756 9,018 (9,018)
Cumulative foreign currency translation
adjustment (Note 1) -- -- -- -- --
Net loss -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - 0 - $ - 0 - 43,048,164 $ 430,482 $ 15,353,760
===========================================================================================================================
<CAPTION>
Years ended December 31, 1996 and 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Foreign
Treasury Stock Currency Stock-
Number Accumulated Translation holders'
of Shares Amount Deficit Adjustment Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Purchase of treasury stock 15,000 $ (11,623) -- -- $ (11,623)
Issuance of common stock upon
conversion of preferred stock (Note 12) -- -- -- -- --
Issuance of common stock (Note 12) -- -- -- -- 498,047
Deferred consulting costs (Note 12) -- -- -- -- (498,047)
Amortization of deferred consulting
costs (Note 12) -- -- -- -- 1,660,637
Issuance of common stock in connection
with private placement (Note 12) -- -- -- -- 1,369,000
Private placement costs (Note 12) -- -- -- -- (393,019)
Issuance of common stock in connection
with purchase of trademark (Note 12) -- -- -- -- 2,694,017
Issuance of options in connection with
termination agreement (Notes 12 and 17) -- -- -- -- 309,979
Issuance of common stock upon exercise
of options (Notes 12 and 17) -- -- -- -- --
Cumulative foreign currency translation
adjustment (Note 1) -- -- -- $ 21,407 21,407
Net loss -- -- $ (5,650,695) -- (5,650,695)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 35,000 $ (29,676) $(13,292,505) $ 21,407 $ 2,483,468
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(7,458,305) $(5,650,695)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 225,403 453,341
Provision for doubtful accounts and sales discounts 484,875 --
Provision for deferred income taxes 24,900 41,000
Noncash compensatory charges 2,811,481 1,660,637
Issuance of options in connection with termination agreement -- 309,979
Amortization of discount on bridge notes 738,000 --
Noncash advertising expense -- 56,495
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 65,534 (787,027)
(Increase) decrease in inventory 136,467 (3,315,079)
(Increase) decrease in prepaid expenses and other current assets 171,213 (736,552)
Increase in other intangibles (963) (8,450)
Increase in other assets -- (9,207)
Increase (decrease) in accounts payable (367,461) 686,943
Increase (decrease ) in accrued expenses and other current liabilities (118,712) 572,930
Increase (decrease) in income taxes payable (14,300) 13,675
Increase in deferred rent 30,090 19,668
Increase in other liabilities -- 13,502
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,271,778) (6,678,840)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (281,103) (506,507)
Purchase of trademarks -- (79,115)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash used in investing activities (281,103) (585,622)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Advances from (repayments to) factor, net (1,796,746) 6,247,061
Repayment of short-term note payable (130,000) --
Principal payments under capital lease obligations (27,617) (31,971)
Principal payments on long-term note payable (333,333) (333,333)
Principal payments of long-term note payable trademark -- (427,308)
Proceeds received from notes payable -- 801,085
Redemption of redeemable preferred stock - Series A (500,000) --
Net repayment on bridge notes financing (227,000) --
Net proceeds from issuance of common stock 4,724,513 975,981
Net proceeds from issuance of preferred stock 2,050,526 --
Net proceeds from issuance of common stock and warrants 36,000 --
Proceeds from issuance of stock of consolidated subsidiary to
minority interest -- 2,404
Cash dividend paid - preferred stock - Series A (80,396) --
Purchase of treasury stock (18,053) (11,623)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,697,894 7,222,296
- ------------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes -- 21,407
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 145,013 (20,759)
Cash at beginning of year 8,010 153,023
- ------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 153,023 $ 132,264
====================================================================================================================================
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 580,174 $ 638,983
====================================================================================================================================
Income taxes $ 27,036 $ 2,408
====================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRINCIPAL BUSINESS ACTIVITY:
Cable & Co. Worldwide, Inc. ("Cable"), which was incorporated November 10, 1994,
is a manufacturer, designer, importer and wholesaler of men's shoes. Sales are
made primarily to major department and specialty stores located in the United
States.
The accompanying consolidated financial statements include the accounts of Cable
& Co. Worldwide Inc., its wholly owned subsidiary Cable & Co. Enterprises Ltd.
and its majority owned foreign subsidiary Cable & Company 1955 SPA (collectively
referred to as the "Company"). All intercompany accounts and transactions have
been eliminated in consolidation. The operations of Cable & Company 1955 SPA are
included from April 3, 1997, the date of formation.
The Company translates assets and liabilities of the foreign subsidiary at
prevailing period-end rates of exchange, and income and expense accounts at the
weighted-average rates during the period. Translation adjustments arising from
conversion of the foreign subsidiary's financial statements at December 31,
1997, aggregating $21,407, are included in the stockholders' equity.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require the use of estimates by management.
In 1995, the Company acquired the Cable & Company product line from Hongson Inc.
The stockholders of the Company, including the Company's management, entered
into a stockholders' agreement ("Stockholders' Agreement") with respect to their
shares of common stock at the time of this acquisition. Pursuant to the
Stockholders' Agreement, the Company's management placed an aggregate of 320,256
shares of common stock in escrow. In January 1996, the Company terminated the
Stockholders' Agreement and released all of the shares held in escrow. As a
result of this release the Company has recorded a noncash compensatory charge in
the amount of $1,345,075.
On April 3, 1997, the Company formed an Italian corporation, Cable and Company
1955 SPA ("CCSPA"). CCSPA leases a manufacturing facility in Montegranaro,
Italy, to manufacture the Company's footwear bearing the Cable & Co. trademark.
The Company owns 99% of the issued and outstanding common stock of CCSPA.
Alberto Salvucci, the Chairman of the Board and a stockholder of the Company,
owns the remaining 1% of CCSPA. The total investment, which was paid during the
year ended December 31, 1997, was $252,747.
In August 1997, the Company purchased all of the rights to the Bacco Bucci
trademark from D&D Design and Details Limited ("D&D Design"), an entity
controlled by Mr. Salvucci. The rights sold to the Company include trademarks
registered in the United States, Canada, Italy, Austria, China, France, Germany,
Portugal, Russia, Spain, Switzerland, Hong Kong, India, Korea, Sri Lanka, Taiwan
and the United Kingdom together with any other rights owned by D&D Design
whether or not registered throughout the world. Prior to the acquisition, the
Company held a license for the rights to the Bacco Bucci trademark in North,
Central and South America.
The Company also acquired, in many countries throughout the world outside the
Western Hemisphere, all of the rights to the Cable & Co. trademark from Cable &
Co. S.R.L., an entity controlled by Alberto Salvucci. Prior to the acquisition,
the Company owned the rights to the Cable & Co. trademark in the Western
F-8
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Hemisphere. The rights sold to the Company include trademark registrations in
the following countries among others: Austria, Belgium, France, Germany, India,
Russia, Italy, Netherlands, Spain, Sweden and Switzerland. The rights also
include all of the rights owned by Cable & Co. S.R.L. in Africa, Asia Minor,
Australia, Europe and other parts of the world, except the United Kingdom and
Asia.
The cost of acquiring the Bacco Bucci and Cable & Co. trademarks totaled
approximately $5,413,000. The trademarks are being amortized by the
straight-line method over 20 years. The purchase price included a note payable
in the amount of approximately $2,639,000. The Company also issued to D&D Design
an aggregate of 11,973,411 shares of common stock. The Company has valued these
shares of common stock at approximately $2,694,000. Additionally, the Company
incurred legal and other fees in connection with the purchase of the trademarks
of approximately $80,000. In addition, the Company has agreed to pay D&D Design
annual royalties of 7% of net sales for a period of five years for all goods
bearing the Bacco Bucci trademark sold outside North, Central, and South
America, commencing on the date the Company commences using the Bacco Bucci
trademark in each country, but expiring no later than December 31, 2007.
At each balance sheet date the Company evaluates the period of amortization of
intangible assets. The factors used in evaluating the period of amortization
include: (i) current operating results, (ii) projected future operating results,
and (iii) any other material factors that affect the continuity of the business.
Revenue is recognized when merchandise is shipped.
Finished goods inventory is stated at the lower of cost (first-in, first-out
method) or market. Raw material inventory is stated at lower of cost
(weighted-average method) or market.
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the assets. Amortization of leasehold
improvements is provided for by the straight-line method over the terms of the
respective leases.
Intangible assets consisting of debt issue costs, trademarks, at cost, and
organization costs are amortized using the straight-line method over 3 to 20
years.
Foreign currency transaction (losses) and gains of approximately $(217,000) and
$131,000 for the years ended December 31, 1996 and 1997, respectively, are
included in cost of goods sold.
Advertising costs are charged to operations as incurred. Total advertising
expense for the years ended December 31, 1996 and 1997 was approximately
$1,352,000 and $1,168,000, respectively, and is included in selling expenses.
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation. In accordance with
the provisions of SFAS No. 123, the Company has elected to apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock options issued to employees.
F-9
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In 1997, the Company adopted SFAS No. 128, Earnings per Share. The adoption of
this statement does not change net loss per common share for the year ended
December 31, 1996. Net loss per common share is computed using the
weighted-average number of shares outstanding.
In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. In February 1998, the FASB
issued SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits. The Company is required to adopt these statements in
1998. SFAS No. 130 establishes new standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 requires disclosure of
certain information regarding operating segments, products and services,
geographic areas of operation and major customers. SFAS No. 132 revises
employer's disclosures about pensions and other postretirement benefit plans.
Adoption of these statements is expected to have no significant impact on the
Company's consolidated financial position, results of operations or cash flows.
2. INVENTORY:
Inventory consists of the following:
Raw materials $ 228,445
Work-in-process 105,730
Finished goods 5,108,290
- --------------------------------------------------------------------------------
$5,442,465
================================================================================
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets consist of the following:
Barter credits $ 207,258
Foreign taxes receivable 487,183
Deferred offering costs 184,820
Prepaid expenses 387,258
- --------------------------------------------------------------------------------
$1,266,519
================================================================================
F-10
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
Estimated
Useful Life
- --------------------------------------------------------------------------------
Leasehold improvements $341,313 Term of lease
Furniture and fixtures 87,928 6.5 to 10 years
Computer and office equipment 650,486 4 to 10 years
Display booths 340,648 10 years
Shoe molds 37,638 3 years
Automobiles 13,885 5 years
Machinery and equipment 202,329 12.5 years
- --------------------------------------------------------------------------------
1,674,227
Less accumulated depreciation and amortization (454,991)
- --------------------------------------------------------------------------------
$1,219,236
================================================================================
Depreciation and amortization expense amounted to $153,927 and $266,419 for the
years ended December 31, 1996 and 1997, respectively.
Property and equipment includes assets acquired under capital leases amounting
to $170,155 and related accumulated depreciation of $47,639.
Approximately $216,000 of the Company's property and equipment (net of $67,000
of accumulated depreciation) is located in Italy.
Accrued expenses and other current liabilities consist of the following:
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued inventory purchases$ 412,287
Accrued professional fees 257,964
Accrued termination agreement costs 268,431
Accrued interest 97,504
Other current liabilities 189,560
- --------------------------------------------------------------------------------
$1,225,746
================================================================================
6. DUE TO FACTOR:
The Company finances all accounts receivable under an agreement with a factor.
Certain preapproved accounts receivable are factored on a nonrecourse basis.
Nonapproved accounts are factored with recourse. Under the terms of this
agreement, the Company is advanced funds against receivables assigned to the
factor and additional funds which are collateralized by inventory and
substantially all other assets. These advances may not exceed $6,000,000. The
factor is responsible for servicing the factored receivables and charges the
Company a fee on the net cash advances equal to the prime rate (8.5% at December
31, 1997) plus 1% to 1.5% per annum, plus additional fees based on the gross
amount of receivables serviced by the factor. At December 31, 1997, the factor
advanced to the Company $975,986 in excess of its credit line. In addition, at
December 31,
F-11
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1997, the factor advanced to the Company $3,675,450 in excess of its borrowing
base.
The factoring agreement contains covenants that require the Company to meet
certain financial ratios and maintain certain levels of working capital and net
worth.
At December 31, 1997, the Company was not in compliance with certain covenants
and the Company has received a notice of default from the factor. In the event
that the factor demands payment of the outstanding obligations, or does not
advance additional funds to the Company, substantial doubt would exist with
regard to the Company's ability to continue as a going concern.
Due to factor consists of the following:
Outstanding accounts receivable assigned to factor
without recourse $ 1,489,768
Cash advances from factor (8,465,754)
- --------------------------------------------------------------------------------
$ 6,975,986
================================================================================
The fair value of the amount due to factor approximates the carrying amount due
to the short-term nature of the instrument.
7. NOTES PAYABLE:
Notes payable consist of :
Installment note payable to factor with interest
at the prime rate plus 3% and is subject to the
same collateral and covenants as the factoring
agreement $166,667
Note payable to Mathers Associates, bearing interest at a rate of
10% per annum, due at the earlier of December 18, 1998 or the
Company's receipt of gross proceeds of $2,000,000 from a debt or
equity financing 400,000
Two notes payable to a bank bearing interest at a rate of 7.5% 197,295
Two bank export loans bearing interest at a rate of 6.75%. The
bank advances the Company 80% of its outstanding receivable
balance for specific invoices 203,790
- --------------------------------------------------------------------------------
$967,752
================================================================================
The estimated fair values of the notes payable approximate their carrying
amounts due to the short-term nature of the instruments.
F-12
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INSTALLMENT PAYABLE - TRADEMARK:
The installment payable - trademark represents the amount payable to D&D Design
for the purchase of the Bacco Bucci and Cable & Co. trademarks. An interest rate
of 8.5% has been imputed to determine the present value of the payable.
Payments, including imputed interest, are due as follows:
Year ending December 31,
1998 $ 350,000
1999 400,000
2000 500,000
2001 500,000
2002 500,000
2003 500,000
- --------------------------------------------------------------------------------
$2,750,000
================================================================================
The fair value of the installment payable approximates the carrying amount based
on borrowing rates available to the Company for similar loans.
9. CAPITALIZED LEASE OBLIGATIONS:
The Company acquired equipment under leases that have been accounted for as
capital leases.
Minimum future lease payments are as follows:
Year ending December 31,
1998 $ 49,314
1999 45,096
2000 27,522
- --------------------------------------------------------------------------------
121,932
Less amount representing interest 21,024
- --------------------------------------------------------------------------------
Present value of minimum lease payments 100,908
Current portion 36,646
- --------------------------------------------------------------------------------
Long-term portion $ 64,262
================================================================================
Certain leases are guaranteed by a stockholder and former stockholder of the
Company. At December 31, 1997 guarantees approximated $69,000. The Company has
indemnified the former stockholder pursuant to a termination agreement (see Note
17).
F-13
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. COMMITMENTS AND CONTINGENCIES:
The Company leases office, manufacturing, warehouse and showroom facilities
under noncancelable operating leases. The leases provide for escalation based on
increases in real estate taxes and other expenses. Additionally, the Company
leases equipment under noncancelable operating leases. Future minimum aggregate
annual rental payments are as follows:
Year ending December 31,
1998 $ 291,490
1999 291,488
2000 246,588
2001 156,696
2002 151,452
Thereafter 337,519
- --------------------------------------------------------------------------------
$1,475,233
================================================================================
Rent expense charged to operations under the office, manufacturing, warehouse
and showroom leases amounts to approximately $187,000 and $197,000 for the years
ended December 31, 1996 and 1997, respectively.
Rent expense recognized annually differs from rent paid as a result of free rent
periods and scheduled rent increases provided for in the office and showroom
leases. Accordingly, the Company has recorded deferred rent of $95,140 at
December 31, 1997, which will be charged to operations over the term of the
leases.
The Company has a letter of credit line with the factor up to a maximum of
$750,000. At December 31, 1997, the Company has outstanding letters of credit in
the amount of $537,000, $400,000 of which is serving as collateral for foreign
currency contracts and $137,000 of which is serving as collateral for lease
security deposits.
The Company has foreign exchange lines of credit with three financial
institutions up to a maximum of $6,000,000. The Company enters into foreign
currency forward contracts to manage foreign currency exchange risk associated
with inventory purchases denominated in Italian lira. The contracts are recorded
at market value and any gains and losses are included in operations. At December
31, 1997, the Company has open foreign currency contracts to purchase
9,490,979,375 Italian lire for $5,449,100 expiring at various dates from January
1, 1998 to September 1, 1998. These financial instruments may give rise to off-
balance-sheet risk. Risks arise from potential counterparty nonperformance and
from changes in the market value of the underlying currency.
The Company has entered into an employment agreement with its President through
June 30, 2002 that provides for minimum annual salaries and incentive bonus
compensation based upon the performance of the employee and the Company. The
agreement also provides for severance due to termination without cause, in which
case the employee will receive severance payments until the later of two and a
half years or June 30, 2002. At December 31, 1997, the total commitment
excluding incentives was $500,000.
F-14
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. RETIREMENT PLAN:
The Company has a defined contribution plan under Section 401(k) of the Internal
Revenue Code, wherein qualified employees may contribute a percentage of their
pretax eligible compensation to the plan. The Company may make matching
contributions at the discretion of the Board of Directors. No Company
contributions were made to the plan for the years ended December 31, 1996 and
1997.
Two officers of the Company serve as trustees of the plan.
12. STOCKHOLDERS' EQUITY:
In January 1996, the Company entered into a three-year international consulting
agreement with U.K. Hyde Park Consultants, Ltd. ("Hyde Park"). In addition, Hyde
Park purchased 400,000 shares of common stock and warrants to purchase up to
450,000 shares of common stock for a note in the amount of $40,000 which was
subsequently paid in March 1996. The warrants are identical to the warrants
issued in conjunction with the March 28, 1996 private placement (see below).
The Company has valued these shares of common stock and warrants to purchase
shares of common stock at $1,725,000. The difference between this amount and the
repurchase price of $40,000 was being recognized ratably as a noncash
compensatory charge over the life of the agreement. In September 1997, the
Company determined that Hyde Park was no longer providing consulting services to
the Company under the terms of the agreement. As a result, the Company expensed
the remaining balance of $741,340.
On January 26, 1996, the Board of Directors increased the number of authorized
shares from 80,000 to 1,500,000 for preferred stock and from 120,000 to
10,000,000 for common stock. In conjunction with the increase, the Company
effected a 26.688-for-1 stock split effective January 26, 1996. All references
in the consolidated financial statements to number of shares and per share
amounts have been retroactively restated to reflect the increased number of
shares of preferred and common stock authorized, issued and outstanding.
In February 1996, the Company issued 224,761 shares of common stock to existing
stockholders. In connection with the issuance, a compensation charge of $943,966
($4.20 per share) was recorded.
On March 28, 1996, the Company completed a private placement, whereby it issued
36 units at a price of $50,000 per unit. Each unit consisted of a $49,000
promissory note, 5,000 shares of common stock and a warrant to purchase up to
5,000 shares of common stock, subject to adjustment, as defined at an exercise
price of $7.20 per share. The promissory notes, aggregating $1,764,000, bore
interest at an annual rate of 11% and were due upon the earlier of 12 months
from date of issuance or the Company's receipt of gross proceeds of at least
$4,080,000 from the sale of its debt and/or equity securities in a public or
private financing. The warrants are exercisable over a 3-year period, commencing
13 months from date of issuance. Upon the closing of the Company's IPO, the
terms of the warrants were adjusted to be identical to the terms of the warrants
issued in conjunction with the IPO (see below). Net proceeds received of
approximately $1,573,000 after deducting underwriting discounts and expenses of
approximately $227,000 were used to repay a term loan and reduce the amount due
to factor.
F-15
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In connection with the private placement, a discount of $738,000 was recorded
based upon the allocation of the proceeds between the bridge notes payable and
the common stock and warrants issued. This amount was calculated by attributing
a value of $4.20 per share of common stock and $.10 per warrant, less cash
received of $36,000. The discount has been fully amortized.
On June 5, 1996, 1,130,000 shares of the Company's common stock and common stock
purchase warrants were sold to the public, of which 950,000 shares of the
Company's common stock and 1,130,000 common stock purchase warrants were sold by
the Company and 180,000 shares of the Company's common stock were sold by the
March 28, 1996 private placement investors. The purchase price was $6.00 per
common share and $.10 per warrant. Each warrant entitles the holder to purchase
a share of the Company's common stock of $7.20 for a three-year period beginning
July 5, 1997. The warrants are redeemable at the Company's discretion at $.10
per warrant, subject to the closing bid price of the common stock. Net proceeds
to the Company of approximately $3,785,000, after deducting underwriting
discounts and expenses of approximately $2,028,000, were used to repay
$1,764,000 in promissory notes and related accrued interest of approximately
$70,000, to redeem 43,327 shares of Series A redeemable preferred stock, and to
pay related accrued dividends of approximately $80,000.
On July 10, 1996, the Underwriter purchased 169,500 shares of the Company's
common stock and 169,500 warrants at a price of $6.00 and $.10, respectively.
Net proceeds to the Company of approximately $900,000, after deducting
underwriting discounts and expenses of approximately $134,000, were used to
reduce the amount due to the factor.
On November 20, 1996, the Company completed a Regulation S offering whereby it
issued 3,653 shares of the Company's preferred stock Series B for a price of
$750 per share. Net proceeds to the Company of approximately $2,051,000, after
deducting underwriting discounts and expenses of approximately $689,000, were
used to reduce the amount due to the factor. In addition, the Company issued
warrants to purchase 200,000 shares of common stock at a price of $3.00 to the
underwriter of the Regulation S offering. The warrants expire October 31, 2001.
In 1997, the Company increased its authorized common stock from 10,000,000
shares to 50,000,000 shares.
During 1997, all of the 3,653 shares of preferred stock Series B were converted
into 11,213,760 shares of the Company's common stock.
In July 1997, the Company completed a private placement, whereby it issued
13,690,000 shares of common stock at a price of $.10 per share. Net proceeds to
the Company of approximately $976,000, after deducting underwriting discounts
and expenses of approximately $393,000, were used to purchase the rights to the
Bacco Bucci trademark as well as the additional rights to the Cable and Co.
trademark in other countries. The remaining funds were used to reduce the amount
due to the factor and to fund the Company's working capital requirements. In
addition, the Company issued warrants to purchase 75,000 shares of common stock
at a price of $.60 and 75,000 shares of common stock at a price of $.75 for
consulting services in connection with the private placement. The warrants
expire July 31, 2002.
F-16
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In May 1997, the Company entered into two one-year consulting agreements for an
aggregate of 1,875,000 shares of common stock. The Company has valued these
shares of common stock at $498,047. The value of these shares was being
recognized ratably as a noncash compensatory charge over the term of the
agreements. In November 1997, the Company amended one of the consulting
agreements effective January 1, 1998 and agreed to pay the sum of $7,500 per
month for a period of three years and issued a warrant to purchase 1,000,000
shares of common stock at a purchase price of $.15 per share, which is
exercisable until November 2002. Additionally, in December 1997, the Company
determined that it was no longer receiving consulting services on the other
consulting agreement. As a result, the remaining unamortized balance of $207,520
was expensed.
In October 1997, the Company entered into an agreement as of July 21, 1997 to
terminate an employment agreement between the Company and David Albahari, the
former President, Chief Executive Officer and a director of the Company. As part
of the termination agreement, the Company issued Mr. Albahari options to
purchase 901,756 shares of common stock at a purchase price of $.01 per share.
The issuance of the 901,756 options was recorded at the intrinsic value of
$309,979 which approximated the fair value. In October 1997, Mr. Albahari
converted these options into shares of common stock.
In December 1997, Mathers Associates loaned the Company $400,000 (see Note 7).
In order to induce Mathers Associates to make the loan, the Company agreed to
issue 790,807 shares of common stock to Susquehanna Holding Corp.
("Susquehanna"), a company related to Mathers Associates. The Company also
agreed to issue to Susquehanna a warrant which entitles Susquehanna to purchase
the number of shares of common stock equal to 1.75% of the Company's outstanding
securities less 790,807 shares of common stock at a purchase price of $.01 per
share. The warrant expires on the earlier of December 15, 1999 or on the date
that the Company consummates debt or equity financings, singly or in the
aggregate of at least $12,500,000. The shares and the warrant were not yet
issued as of December 31, 1997.
During January 1996, the Company adopted the 1996 Stock Option Plan (the
"Plan"). Under the Plan, options to purchase shares of the Company's common
stock are granted to key employees, consultants and members of the Board of
Directors at the discretion of the Stock Option Committee. The Plan provides for
the granting of options to purchase a maximum of 280,000 shares at an exercise
price to be determined by the Stock Option Committee. At December 31, 1997, the
Company has not granted any options under the Plan.
13. MAJOR CUSTOMERS:
One customer accounted for 18% of net sales for the year ended December 31, 1996
and two customers accounted for approximately 12% and 13% of net sales for the
year ended December 31, 1997.
14. RELATED PARTY TRANSACTIONS:
Included in costs of goods sold are commission charges from Cable & Co. S.R.L.
and D&D Design, companies whose controlling stockholder is both a stockholder of
the Company and the Chairman of the Board. These companies provide the Company
with design, production and production control services. Commissions are a
percentage of purchases and amounted to approximately $550,000 and
F-17
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
$727,000 for the years ended December 31, 1996 and 1997, respectively. The
amount due to these companies for commissions earned was $89,867 at December 31,
1997 and is included in accrued expenses and other current liabilities. As of
December 31, 1997, Cable & Co. S.R.L. owed the Company $70,000 for advertising
fees.
D&D Design charged the Company $86,000 and $58,000 for fashion advisory services
for the years ended December 31, 1996 and 1997, respectively. Additionally, D&D
Design charged the Company $112,000 for licensing fees for the year ended
December 31, 1996. These fees are included in selling expenses.
15. INCOME TAXES:
The components of deferred income taxes, resulting from the differences in the
bases of assets and liabilities for income tax and financial reporting purposes,
and other items are as follows:
Current Noncurrent
- --------------------------------------------------------------------------------
Allowance for doubtful accounts and sales
discounts $ (211,000) --
Charitable contribution carryforward 16,000 --
Net operating loss carryforward 4,195,000 --
Property and equipment -- $ (77,000)
Goodwill -- (40,000)
Deferred rent -- 23,000
Valuation allowance (4,000,000) --
- --------------------------------------------------------------------------------
$ - 0 - $ (94,000)
================================================================================
The provision for income taxes consists of the following:
Year ended December 31, 1996 1997
- --------------------------------------------------------------------------------
Current:
Federal -- --
State and local -- --
Foreign taxes -- $18,000
- --------------------------------------------------------------------------------
-- 18,000
- --------------------------------------------------------------------------------
Deferred:
Federal $21,000 34,000
State and local 3,900 7,000
- --------------------------------------------------------------------------------
24,900 41,000
- --------------------------------------------------------------------------------
$24,900 $59,000
================================================================================
F-18
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The difference between the income tax provision computed at the federal
statutory rate and the actual income tax provision is accounted for as follows:
Year ended December 31, 1996 1997
- --------------------------------------------------------------------------------
Income tax benefit computed using statutory
rate of 34% $(2,527,000) $(1,901,000)
Effect of nondeductible expenses 488,700 64,000
Foreign taxes -- 18,000
Change in valuation allowance 2,063,200 1,878,000
- --------------------------------------------------------------------------------
$24,900 $59,000
================================================================================
16. INSURANCE:
At December 31,1997, the Company is the beneficiary of a term insurance policy
on the life of its Chairman of the Board in the aggregate amount of $2,000,000.
17. TERMINATION AGREEMENTS:
In connection with the termination agreement described in Note 12, Mr. Albahari
is to receive $250,000 in the period commencing July 1, 1997 through September
30, 1998, as well as reimbursement for certain legal and other expenses. As part
of the termination agreement, Mr. Albahari has agreed to a noncompetition
agreement, effective from July 1, 1997 through June 30, 1998. Additionally, the
Company issued Mr. Albahari options to purchase 901,756 shares of common stock
at a purchase price of $.01 per share. The 901,756 options were recorded at a
value of $309,979. In October 1997, Mr. Albahari converted these options into
common stock.
In December 1997, the Company entered into an agreement with a former sales
representative. As part of the sales representative's termination agreement, the
former sales representative is to receive $70,000 in the period commencing
December 1, 1997 through June 30, 1998.
The total nonrecurring expense of $682,152 recognized in connection with the
termination agreements during the year ended December 31, 1997 includes (i)
$200,000 to David Albahari, which represents the total payments of $250,000 less
$50,000 allocated to the noncompetition agreement; (ii) $309,979, which
represents the value of the 901,756 options to purchase shares of common stock;
(iii) $102,173 in legal and other expenses; and (iv) $70,000, which represents
the total cash payments to the former sales representative.
18. GOING CONCERN:
As shown in the accompanying consolidated financial statements, the Company has
incurred net losses of $7,485,553 and $5,650,695 during the years ended December
31, 1996 and 1997, respectively. At December 31, 1997, the Company's current
liabilities exceeded its current assets by $3,411,034. These factors create an
uncertainty about the Company's ability to continue as a going concern.
Management recognizes that the Company must generate additional revenue or
reduce operating costs and may need additional financing to enable it to
continue its operations. The Company is reviewing alternatives for raising
additional capital including the potential private placement described in Note
19. However, no assurance can be given that the Company will achieve profitable
F-19
<PAGE>
CABLE & CO. WORLDWIDE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
operations, or that additional financing, if needed, can be obtained on terms
satisfactory to the Company, if at all, nor in an amount sufficient to enable
the Company to continue operations.
19. SUBSEQUENT EVENT:
The Company is attempting to raise approximately $4,000,000 in a private
placement. As of December 31, 1997, the Company had incurred and deferred
$184,820 of costs related to this prepaid private placement. These costs are
included in prepaid expenses and other current assets.
20. FOREIGN OPERATIONS:
In 1997, the Company operates principally in two geographic areas: the United
States and Italy. Following is a summary of information by area for 1997:
Net sales to unaffiliated customers:
United States $13,558,410
Italy 319,606
- --------------------------------------------------------------------------------
Net sales as reported in the accompanying consolidated
statement of operations $13,878,016
================================================================================
Intercompany sales:
United States --
Italy $1,998,175
- --------------------------------------------------------------------------------
Total intercompany sales $1,998,175
================================================================================
Income (loss) from operations:
United States $(4,219,886)
Italy 34,807
- --------------------------------------------------------------------------------
Loss from operations as reported in the accompanying
consolidated statement of operations $(4,185,079)
================================================================================
Identifiable assets:
United States $14,403,445
Italy 1,366,926
- --------------------------------------------------------------------------------
Total assets as reported in the accompanying
consolidated balance sheet $15,770,371
================================================================================
Intercompany sales are accounted for at cost and are eliminated in consolidation
in the accompanying consolidated statement of operations. Identifiable assets
are those that are identifiable with operations in each geographic area.
F-20
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 132,264
<SECURITIES> 0
<RECEIVABLES> 1,167,158
<ALLOWANCES> 280,000
<INVENTORY> 5,442,465
<CURRENT-ASSETS> 7,728,406
<PP&E> 1,674,227
<DEPRECIATION> 434,991
<TOTAL-ASSETS> 15,770,371
<CURRENT-LIABILITIES> 11,139,440
<BONDS> 1,942,417
0
0
<COMMON> 430,482
<OTHER-SE> 2,052,986
<TOTAL-LIABILITY-AND-EQUITY> 15,770,871
<SALES> 13,878,016
<TOTAL-REVENUES> 13,878,016
<CGS> 9,348,135
<TOTAL-COSTS> 4,469,085
<OTHER-EXPENSES> 4,928,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 724,464
<INCOME-PRETAX> (5,591,695)
<INCOME-TAX> 59,000
<INCOME-CONTINUING> (5,650,695)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,650,695)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
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