AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1999
REGISTRATION NO. 333-80761
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMENDMENT NO. 3
----------------------
HAT WORLD CORPORATION
(Exact name of small business issuer as specified in charter)
MINNESOTA 46-0452694 5699
(State or other Jurisdiction (I.R.S. Employer (Primary Standard
of incorporation or Identification No.) Industrial Classification
organization) Code Number)
4912 S. Minnesota Avenue
Sioux Falls, South Dakota 57108
(605) 336-0551
(Address and telephone number of principal executive office and place
of business)
----------------------
Charles Clayton
527 Marquette
Minneapolis, MN 55402
(612) 338-3738
(Name and address and telephone number of agent for service)
----------------------
Copies to:
<TABLE>
<S> <C> <C>
Harold M. Golz Anthony B. Petrelli Ward E. Terry, Jr.
EBI Securities Corporation Neidiger, Tucker, Bruner, Inc. Clanahan, Tanner, Downing
6300 S. Syracuse Way, Suite 645 1675 Larimer St., Ste. 300 & Knowlton, P.C.
Englewood, CO 80111 Denver, CO 80202 730 17th Street, Suite 500
(303) 694-0295 (303) 825-1825 Denver, CO 80202
(720) 359-9500
</TABLE>
----------------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
----------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock $.01 par value (2)..................... $7,406,000 $ 3,511.24
- -------------------------------------------------------------------------------------------------------
Total $ 3,511.24
=======================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(b) under the Securities Act of
1933.
(2) Includes shares that the representatives of the underwriters have the
option to purchase from Hat World Corporation to cover over-allotments, if
any, equal to fifteen percent (15%) of the initial shares.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a), OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>
Prospectus
920,000 SHARES
HAT WORLD CORPORATION
[LOGO]
HATWORLD
COMMON STOCK
This is our initial public offering. We are offering all of the 920,000
shares. The share price is $7.00. No public market currently exists for our
shares.
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
PER SHARE TOTAL
-------------- --------------
Public offering price $ 7.00 $ 6,440,000
Underwriting discounts $ .63 $ 579,600
------------- -------------
Proceeds to Hat World $ 6.37 $ 5,860,400
Solely to cover any over-allotments, we have granted the representatives of
the underwriters a 45-day option to purchase up to 138,000 additional shares of
common stock on the same terms. This is a firm commitment offering.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY REPRESENTATION TO
THE CONTRARY.
NEIDIGER, TUCKER, BRUNER, INC.
EBI SECURITIES CORPORATION
JOSEPH STEVENS & COMPANY, INC.
CAPITAL WEST SECURITIES, INC.
PROSPECTUS DATED SEPTEMBER 30, 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
A REGISTRATION STATEMENT RELATING TO THESE SHARES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SHARES UNTIL THE
REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SHARES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SHARES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[PHOTOS]
<PAGE>
HAT WORLD CORPORATION PROSPECTUS
PROSPECTUS DELIVERY OBLIGATIONS TABLE OF CONTENTS
Until October 25, 1999 (25 days
after the date of this prospectus) all PAGE
dealers making transactions in the ----
common stock, whether or not Prospectus Summary ............. 2
participating in this distribution, may Risk Factors ................... 4
be required to deliver a prospectus. Additional Information ......... 7
This is in addition to the obligation of Use of Proceeds ................ 8
dealers to deliver a prospectus when Dividend Policy ................ 8
acting as underwriters and with respect Capitalization ................. 9
to their unsold allotments or Dilution ....................... 10
subscriptions. Selected Financial Data ........ 11
Management's Discussion ........ 12
Business ....................... 15
Management ..................... 28
Certain Transactions ........... 34
Principal Stockholders ......... 35
Description of Capital Stock ... 36
Shares Eligible for Future Sale 37
Underwriting ................... 38
Legal Matters .................. 40
Experts ........................ 40
Index to Financial Statements ..F-1
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
We are a leading specialty retailer of sports related headwear. Our stores
offer a large selection of licensed, baseball-style caps featuring logos of
college and professional sports teams such as baseball, basketball, football,
hockey, and motorsports. Our stores are located primarily in enclosed malls in
the eastern half of the continental United States. At the date of this
prospectus, we had 96 stores in 25 states.
Our operating subsidiary was incorporated in Minnesota on June 1, 1995. Our
operations and distribution center are located in Indianapolis, Indiana. On
April 26, 1999, we incorporated our holding company, also in Minnesota. The
office for our holding company, investor relations, financial and accounting
departments is at 4912 South Minnesota Avenue, Sioux Falls, South Dakota 57108.
Our telephone number is (605) 336-0551.
THE OFFERING
Common stock offered by Hat World ..... 920,000 shares
Common stock to be outstanding
after this offering................... 4,063,446 shares
Use of proceeds........................ To open and operate additional stores,
to pay indebtedness, to make
complementary acquisitions or
investments, and for working capital,
and other general purposes including
enhancements to our e-commerce site.
Proposed Nasdaq National Market
symbol................................ HATS
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY FINANCIAL DATA
The following table summarizes the financial data for our business.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -----------------------------
1997 1998 1998 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................ $ 3,761,107 $ 10,975,102 $ 3,159,810 $ 7,518,135
Net income (loss) ........................ $ 275,558 $ 642,569 $ (44,290) $ (459,038)
=========== ============ =========== ===========
Earnings (loss) per share, diluted ....... $ 0.13 $ 0.22 $ (0.02) $ (0.15)
=========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -----------------------------
1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores:
Opened during period .................... 1 4 13 35 14 27
Closed during period .................... 0 0 0 0 0 0
Open at end of period ................... 1 5 18 53 32 80
Comparable store sales increases ......... N/A N/A 6.4% 12.4% 13.3% 9.9%
Net sales increases ...................... N/A 778% 300% 192% 308% 138%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....................................................... $ 13,405 $5,616,205
Working capital (deficit) ....................................................... (1,041,681) 4,561,119
Stockholders' equity ............................................................ 4,916,458 10,519,258
</TABLE>
The as adjusted column reflects our receipt of the estimated net proceeds from
the sale of 920,000 shares of common stock at an initial public offering price
of $7.00 per share, and after deducting underwriting discounts and other
estimated offering expenses and prior to use of net proceeds.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE
RISKS, TOGETHER WITH ALL THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS,
BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
DIFFICULTIES IN MANAGING OUR GROWTH WILL AFFECT OUR OPERATING RESULTS AND MAY
CAUSE OUR STOCK PRICE TO DECLINE.
We do not know if we will be able to effectively or successfully manage our
growth, and if we do not, our operational and financial performance and our
stock price may suffer. We intend to pursue an expansion strategy involving
opening more stores than we have in recent years, and our future operating
results will depend to a substantial extent upon our ability to open and operate
new stores successfully. We do not know whether our new stores will be as
profitable or generate sales comparable to our existing stores.
We will also enter certain new markets in new regions and larger urban
areas that may present competitive and merchandising challenges that are
different from those that we have encountered in our existing markets.
IF WE MAKE MISTAKES IN JUDGING CONSUMER PREFERENCES, OUR SALES, PROFIT MARGINS
AND STOCK PRICE COULD GO DOWN.
Any failure to anticipate and respond to changing consumer preferences
could lead to lower sales, excess inventory and lower margins, any of which
could have a material, adverse effect on our business, financial condition and
results of operations. All of our products are subject to changing consumer
preferences. Consumer preferences and demand could shift to types of headwear
other than those sold by us.
Any shift could have a material adverse effect on our operating results.
Our future success will depend on our ability to anticipate and respond to
changes in consumer preferences. We may not be able to anticipate or respond to
changes on a timely basis, or at all.
ANY TROUBLE DEALING WITH A FEW KEY VENDORS COULD SLOW THE SUPPLY OF VITAL
PRODUCTS, WHICH WOULD ADVERSELY AFFECT SALES, REDUCE OPERATING PERFORMANCE AND
HURT OUR STOCK PRICE.
We buy significant amounts of our products from five vendors with whom we
have no long-term purchase commitments or exclusive contracts. If we experience
problems with respect to vendor fulfillment and retention or if any of our key
vendors experience business interruptions, we may have difficulty in obtaining
desired merchandise on acceptable terms.
SYSTEM FAILURES, DELAYS AND CAPACITY RESTRAINTS COULD ADVERSELY AFFECT OUR
OPERATIONAL AND FINANCIAL PERFORMANCE AND CAUSE OUR STOCK PRICE TO DECLINE.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Our principal computer center and
communications systems are located at our operations headquarters in
Indianapolis, Indiana. Any systems interruptions that cause malfunctions or
result in slower response times could result in losses of data and revenue.
Any of these losses could materially and adversely affect our business,
financial condition and operating results. Interruptions could result from
natural disasters as well as power loss, telecommunications failure and similar
events. We do not presently have a formal disaster recovery plan and our
insurance may not be sufficient to cover losses from these events.
In addition, we rely on our existing management information systems for
operating and monitoring all major aspects of our business, including sales,
warehousing, distribution, purchasing, inventory control, merchandise planning
and replenishment, as well as various financial functions.
Any failure by us to upgrade such systems or unexpected difficulties
encountered with such systems as our business expands, or in general any
disruption in these systems, could adversely affect our results of operations
and financial performance.
ANY FACTORS NEGATIVELY AFFECTING OUR BUSINESS DURING THE FOURTH QUARTER IN ANY
YEAR, INCLUDING UNFAVORABLE ECONOMIC CONDITIONS, COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND MAY CAUSE
CONSIDERABLE FLUCTUATIONS IN OUR STOCK PRICE.
The market value of our common stock will likely vary significantly in
response to changes in
4
<PAGE>
our quarterly results of operations. We have experienced, and expect to continue
to experience, substantial seasonal fluctuations in our sales and operating
results, which are typical of many mall-based specialty retailers and common to
most retailers generally. Due to the importance of the fall selling season,
which includes Thanksgiving, Christmas and the peak selling period of major team
sports, the fourth calendar quarter has historically contributed, and is
expected to continue to contribute, a substantial majority of our operating
income and net income for the entire year.
We expect this pattern to continue during the current fiscal year and
anticipate that in subsequent years the fourth quarter will continue to
contribute disproportionately to our operating results, particularly during
November and December.
Our quarterly results of operations may also fluctuate significantly as a
result of a variety of other factors, including the timing and pre-opening
expenses of new stores, the relative proportion of new stores to mature stores,
net sales contributed by new stores, increases or decreases in comparable store
sales, adverse weather conditions, shifts in the timing of holidays and changes
in our product mix.
OUR REGIONAL MARKET CONCENTRATION SUBJECTS US TO REGIONAL CONDITIONS WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE MARKET PRICE OF OUR STOCK.
Our results of operations are more subject to the regional economic
conditions, weather and population changes and other factors specific to our
particular regions than the operations of more geographically diverse
competitors. Most of our stores are located in the eastern half of the
continental United States and, in some cases, are clustered in groups. Our
current expansion plans anticipate that many of our new stores will be located
in the states where we already have operations or in contiguous states.
In addition, changes in regional factors which reduce the appeal of our
stores and merchandise to local consumers could have a material adverse effect
on our business, results of operations and financial condition.
VARIATIONS IN OUR COMPARABLE STORE SALES RESULTS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FLUCTUATE SIGNIFICANTLY.
Numerous factors affect comparable store sales results, including among
others, weather conditions, retail trends, the retail sales environment,
economic conditions and our success in executing our business strategy. Our
comparable store sales results have experienced monthly fluctuations. In
addition, it is possible that opening new stores in existing markets may result
in decreases in comparable store sales for existing stores in such markets.
Comparable store sales may decrease in the future. The perception of analysts
and other investors of our performance compared to our prior performance and
that of competitors and other retailers may affect our stock price.
AS A "BRICK AND MORTAR" RETAILER, WE HAVE A STRONG COMMITMENT TO MALL-BASED
LOCATIONS AND ANY SIGNIFICANT IMPACT FROM INTERNET SALES OR A DECLINE IN
POPULARITY OF MALL SHOPPING COULD HURT OUR PERFORMANCE AND STOCK PRICE.
Internet commerce, though now a small component of retailing, is expected
to grow at a rapid rate. Our Internet commerce site is new. We do not know the
impact that our or competitive Internet commerce may have on sales in our mall
stores.
Our future operating results will depend on many factors that are beyond
our control, including the overall level of mall traffic and general economic
conditions affecting consumer confidence and spending. Substantially all of our
existing stores are located in enclosed malls. As a result, we must rely, in
part, on the ability of mall anchor tenants and other tenants to generate
customer traffic in the vicinity of our stores.
Enclosed shopping malls may not continue to attract a sufficient number of
shoppers for our business or malls in which we have stores may fail to attract
strong anchors, which could have a material, adverse effect on our business,
results of operations and financial performance.
OUR FINANCIAL PERFORMANCE AND STOCK PRICE COULD BE HURT BY OUR DEPENDENCY ON
FOREIGN-SOURCED MERCHANDISE, FOREIGN TRADE PRACTICES AND ECONOMIC CONDITIONS.
Changes in foreign governments, regulations and political stability may
cause disruption of trade from the countries in which the suppliers of our
vendors are located. Such disruptions could adversely affect sales and financial
performance. Some of our vendors are importers of merchandise manufactured by or
for them in the Far East. Risks involved in buying products
5
<PAGE>
manufactured abroad include fluctuations in the value of currencies and
increases in customs duties and related fees resulting from position changes by
the United States Customs Service. Our vendors are also subject to import
controls and trade barriers (including the unilateral imposition of import
quotas), loss of most-favored-nation trading status, restrictions on the
transfer of funds, labor disputes, work stoppages and strikes, negative
publicity from certain work or trade practices and economic uncertainties.
FAILURE TO PROTECT TRADEMARKS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS AND
ANY INFRINGEMENT OF THE PROPRIETARY RIGHTS OF THIRD PARTIES COULD IMPACT OUR
COMPETITIVENESS, FINANCIAL PERFORMANCE AND STOCK PRICE.
Any infringements of our trademarks, trade secrets and intellectual
property could have a material, adverse effect on our business, financial
condition and operating results. We seek to protect our rights, but our efforts
may be inadequate and may not prevent others from claiming violations by us of
their proprietary rights. The unauthorized misappropriation of our proprietary
rights could have a material, adverse effect on our business, financial
condition and operating results. Trade secret, copyright and trademark laws
offer only limited protection.
Further, we may not be able to use our U.S. trademarks in other countries
where we may expand. Trademark, copyright and trade secret protection may not be
available in those countries. Policing unauthorized use of our proprietary
information is difficult. If we resort to legal proceedings to enforce our
proprietary rights, the proceedings could be burdensome and expensive, and the
outcome could be uncertain.
We may also be subject to claims alleging infringement by us of third party
proprietary rights. If we were to discover that any of our products infringed
third party rights, we may not be able to obtain permission to use such rights
on reasonable terms. This inability may require us to expend significant
resources to make our products non-infringing or to discontinue the use of such
products.
Any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Further, a party making such a claim could
secure a judgment that requires us to pay substantial damages or that prevents
us from using or selling our products.
WE MAY MAKE ACQUISITIONS THAT WILL EXPOSE US TO NEW RISKS AND UNCERTAINTIES,
DILUTE OUR STOCKHOLDERS' OWNERSHIP, CAUSE US TO INCUR DEBT AND ASSUME
CONTINGENT LIABILITIES.
We may acquire or make investments in additional complementary businesses,
technologies, services or products if appropriate opportunities arise. This
acquisition and investment strategy has the following risks:
* We may not be able to identify suitable acquisition or investment
candidates at reasonable prices;
* We may make errors in determining which business opportunities are
complementary or appropriate;
* We may not be able to successfully integrate services, products or
personnel of any acquisition or investment into our operations;
* Acquisitions and investments may cause a disruption in our ongoing
business, distract our management and other personnel and make it
difficult to maintain our standards, controls and procedures;
* We may acquire unknown liabilities in these acquisitions or
investments;
* Costs associated with these acquisitions, including the amortization
of intangible assets, will adversely affect profitability;
* We may acquire companies or make investments in markets in which we
have little experience;
* As consideration for such acquisitions, we may be required to issue
additional shares of our capital stock. This would have a dilutive
effect upon our existing shareholders' stock ownership; and
* We may be required to assume or incur substantial indebtedness in
connection with any acquisition or in order to fund the operation or
existing commitments of the acquired company.
WE MAY ENCOUNTER INTERNET REGULATORY UNCERTAINTIES IN OUR ATTEMPT TO ESTABLISH
ONLINE SALES, WHICH COULD RAISE OUR COSTS AND HURT OUR FINANCIAL PERFORMANCE
AND STOCK PRICE.
Few laws or regulations are currently directly applicable to certain
activities on the Internet. However, because of the Internet's
6
<PAGE>
popularity and growth, new laws and regulations may be adopted.
Such government regulation may impose additional burdens on our business.
They may also impede the growth in Internet use and thereby decrease the demand
for our products and services via the Internet.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and no one knows what their marketplace impact will be. Any new
legislation or regulation regarding the Internet, or application of existing
laws and regulations, to the Internet, could materially affect us.
CONFLICTS WITH OTHER WEB SITE ADDRESSES MAY CAUSE OUR INTERNET SALES TO SUFFER
AND NEGATIVELY AFFECT OUR OVERALL PERFORMANCE AND STOCK PRICE.
We may not be able to prevent third parties from acquiring web site
addresses that are similar to our addresses, which could materially and
adversely affect our business, financial condition and operating results. We
currently hold various Internet web site addresses related to our business.
Governmental agencies and their designees generally regulate the acquisition and
maintenance of web site addresses.
The regulation of web site addresses in the United States and foreign
countries is subject to change. As a result, we may not be able to acquire or
maintain relevant web site addresses in all countries where our services and
products are made available through the Internet. Furthermore, the relationship
between regulations governing such addresses and laws protecting trademarks is
unclear.
OUR CURRENT DIRECTORS AND OFFICERS CONTROL HAT WORLD AND ANALYSTS AND OTHER
INVESTORS MAY DISAGREE WITH THEIR DECISIONS, CAUSING OUR STOCK PRICE TO SUFFER.
After this offering, our officers and directors will control a minimum of
71% of our outstanding common stock. As a result, they may be able to exercise a
controlling influence over matters requiring approval of our shareholders,
including the election of directors, and over our business and affairs.
Investors in this offering will not be able to exercise control. This would
include determinations with respect to mergers and other business combinations,
and the acquisition and disposition of our assets.
IF WE ARE UNABLE TO RENEW OUR STORE LEASES AS THEY REACH THEIR MATURITY, OUR
FUTURE PERFORMANCE MAY BE ADVERSELY AFFECTED AND YOUR STOCK VALUE MAY DECLINE.
The store leases for the 96 retail store locations where we are currently
located provide for a fixed term ranging for most leases from seven to eight
years, at which time they expire. Because the leases do not contain provisions
for renewal options, there is no guarantee that the leases for favorable and
highly profitable store locations will be renewed. Any failure to renew leases
expiring in the same years in the future could materially, adversely affect our
financial condition and operations.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed, with the Securities and Exchange Commission, Washington, DC,
a registration statement on Form SB-2 under the Securities Act with respect to
the common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, the exhibits and schedules.
For further information, about our common stock and us, please refer to the
registration statement, exhibits and schedules. Statements made in this
prospectus as to the contents of any contract, agreement or other documents
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved.
The registration statement, exhibits and schedules may be inspected without
charge and copied at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material may be obtained at prescribed rates from such
offices upon the payment of the fees proscribed by the SEC. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330.
7
<PAGE>
The SEC maintains a web site that contains registration statements,
reports, proxy and other information regarding registrants that file
electronically with the SEC. The address for the Internet site is
http://www.sec.gov.
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $5,602,800 or $6,443,220 if the representatives of the
underwriters exercise their over-allotment option in full. Each of these amounts
is based upon an initial public offering price of $7.00 per share.
We expect to use the net proceeds of this offering for the following
purposes:
* to repay a bridge loan of $2.0 million (interest at .25% above the
prime rate to a bank plus 4% to the affiliated guarantor, matures
September 30, 1999) which was used to fund the opening of new stores;
* to fund the expansion of new stores after the offering, estimated at
$2.1 million, which would increase to $2.9 million if the
over-allotment option is exercised in full;
* to make complementary acquisitions or investments, estimated at $1.0
million; and
* for working capital and other general corporate purposes, including
enhancements to our e-commerce site, estimated at $.5 million.
We have not identified specific uses for all of the proceeds from this
offering, and management will have broad discretion over their use and
investment. As noted above, we may acquire or invest in complementary
businesses, and a portion of the net proceeds may be used for such acquisitions
or investments. However, we currently have no understandings, commitments or
agreements for any material acquisition or investment.
Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing investment grade securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock.
We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
8
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
* on an actual basis; and
* on an as-adjusted basis to reflect our receipt of the estimated net
proceeds from the sale of 920,000 shares of common stock at an initial
public offering price of $7.00 per share, after deducting underwriting
discounts and estimated offering expenses.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,143,446 shares issued and outstanding;
4,063,446 shares issued and outstanding as adjusted ..... $ 31,436 $ 40,636
Additional paid in capital ............................... 4,383,230 9,976,830
Retained earnings ........................................ 501,792 501,792
---------- -----------
Stockholders' Equity ..................................... $4,916,458 $10,519,258
========== ===========
</TABLE>
We expect there will be 4,063,446 shares of common stock outstanding after
this offering. In addition to the shares outstanding after the offering, we may
issue additional shares of common stock under the following plans and
arrangements:
* 433,500 shares issuable upon the exercise of stock options outstanding
under the 1999 Stock Option Plan at a weighted average exercise price
of $5.61 per share;
* 446,500 shares available for issuance under the same Plan;
* 40,000 shares issuable upon the exercise of a warrant that we have
agreed to issue after the offering as partial consideration for a loan
guarantee. The warrant will be for two years after the effective date
of the offering and will have an exercise price of $8.75 per share;
* 36,000 shares issuable upon the exercise of options granted to
directors (4,000 shares per director), exerciseable for a period of
three years at a price of $8.75 per share; and
* 92,000 shares issuable upon the exercise of warrants to be issued to
the representatives of the underwriters of this offering. The warrants
are to be exercisable for a period of four years commencing one year
after the effective date of the offering and shall be exercisable at
$8.75 per share.
9
<PAGE>
DILUTION
As of June 30, 1999, the net tangible book value was $4,894,562 or $1.56
per common share. Net tangible book value per common share represents the amount
of our total tangible assets less total liabilities, divided by the number of
common shares outstanding.
After giving effect to the sale of the 920,000 shares of common stock
offered at initial public offering price of $7.00 per share, and after deducting
the underwriting discounts and estimated offering expenses payable by us, our as
adjusted net tangible book value at June 30, 1999 would have been $2.58 per
share. This represents an immediate increase in the as adjusted net tangible
book value of $1.02 to existing stockholders and an immediate dilution in as
adjusted net tangible book value of $4.42 per share to purchasers of common
stock in this offering. Dilution per share represents the difference between the
price per share paid by public investors and the as adjusted net tangible book
value per share at June 30, 1999. The following table illustrates this per share
dilution as of June 30, 1999.
Initial public offering price per share ............... $ 7.00
Net tangible book value before the offering .......... $ 1.56
Increase to existing shareholders after offering ..... 1.02
-------
As adjusted net tangible book value per share after
the offering. ......................................... 2.58
-------
Dilution per share to new investors ................... $ 4.42
=======
The following tables set forth, as of June 30, 1999, after giving effect to
the sale of the number of common shares, and without adjustment for the
underwriting discount and other expenses related to this offering, the number
and percentage of shares of common stock purchased from the Company, the amount
and percentage of cash consideration paid and the average price per share paid
by the new investors pursuant to this offering and by existing shareholders.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing stockholders ... 3,143,446 77% $ 4,414,666 41% $ 1.40
New investors ........... 920,000 23% 6,440,000 59% $ 7.00
--------- --- ----------- ---
Total .................. 4,063,446 100% $10,854,666 100%
========= === =========== ===
See "Capitalization" for information about shares issuable and reserved for
stock options and warrants that would also effect dilution.
10
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-1. The
statements of operations data are set forth below for the years ended December
31, 1997 and 1998 and the six months ended June 30, 1998 and 1999. These figures
are derived from and qualified by reference to our financial statements included
elsewhere in this prospectus. The results are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------
1997 1998 1998 1999
----------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales .................................... $ 3,761,107 $ 10,975,102 $3,159,810 $7,518,135
Gross profit ................................. 2,054,081 6,077,172 1,720,676 4,171,846
Income (loss) from operations ................ 480,674 1,014,493 (71,322) (638,353)
Income (loss) before income taxes ............ 470,858 1,008,269 (80,528) (765,063)
Provision (benefit) for income taxes ......... 195,300 365,700 (36,238) (306,025)
----------- ------------ ---------- ----------
Net income (loss) ............................ $ 275,558 $ 642,569 $ (44,290) $ (459,038)
=========== ============ ========== ==========
Earnings (loss) per share, basic ............. $ 0.13 $ 0.23 $ (0.02) $ (0.15)
=========== ============ ========== ==========
Earnings (loss) per share, diluted ........... $ 0.13 $ 0.22 $ (0.02) $ (0.15)
=========== ============ ========== ==========
Weighted average shares outstanding .......... 2,074,902 2,820,890 2,545,816 3,143,446
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- -----------------------------
1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores:
Opened during period .................... 1 4 13 35 14 27
Closed during period .................... 0 0 0 0 0 0
Open at end of period ................... 1 5 18 53 32 80
Comparable store sales increases .......... N/A N/A 6.4% 12.4% 13.3% 9.9%
Net sales increases ....................... N/A 778% 300% 192% 308% 138%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....................................................... $ 13,405 $5,616,205
Working capital (deficit) ....................................................... (1,041,681) 4,561,119
Total assets .................................................................... 10,724,461 16,327,261
Stockholders' equity ............................................................ 4,916,458 10,519,258
</TABLE>
The as adjusted column reflects our receipt of the estimated net proceeds
from the sale of 920,000 shares of common stock at an initial public offering
price of $7.00 per share, after deducting underwriting discounts and other
estimated offering expenses and prior to use of net proceeds.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains certain forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "estimates," "anticipates,"
"intends," "plans," and similar expressions. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of various factors.
GENERAL
Our operating subsidiary, Hat World, Inc. was incorporated on June 1, 1995.
We made this company a subsidiary of a new holding company, Hat World
Corporation, which was incorporated on April 26, 1999. We have generated net
income each year that we have been in business, and sales and net income have
grown each year.
Our annual sales increases have been mainly due to having more stores each
year. Total same store sales have also increased since inception. Price
increases for our merchandise have been much less a factor in the sales
increases.
Sales are seasonal due to holiday shopping and peak selling periods of
major team sports. For example, in the fourth quarter, in addition to Christmas
sales, the National Football League (NFL), the National Basketball Association
(NBA), the National Hockey League (NHL) and both college basketball and football
are in season. For a typical store we expect 19% of annual sales to occur in the
first quarter, 21% in the second, 23% in the third and 37% in the fourth
quarter. At the store level, profits generally follow these same percents.
However, it has historically taken until the fourth quarter to generate net
profits, due to the burden of selling, general and administrative and other
expenses at the company level.
RESULTS OF OPERATIONS
From the calendar year ended December 31, 1996 to December 31, 1998 our net
sales increased at a compounded annual rate of 341.5%. Net income increased from
$53,632 in 1996 to $642,569 in 1998, or at a compounded annual rate of 1098.1%.
FIRST SIX MONTHS OF 1999 COMPARED TO FIRST SIX MONTHS OF 1998
The number of our stores increased to 80 from 32.
NET SALES. Net sales increased by $4,358,325, or 138%, to $7,518,135 for
the six months ended June 30, 1999 compared to $3,159,810 for the six months
ended June 30, 1998. This increase in net sales was due to the addition of 48
new stores and a same-store sales increase of 9.9%.
COST OF SALES. Cost of sales increased by $1,907,155, or 133%, to
$3,346,289 for the six months ended June 30, 1999 compared to $1,439,134 in
1998. Principal reasons for this increase were the rise in the number of stores
and the volume of merchandise sold. As a percentage of net sales, cost of sales
decreased to 44.5% in 1999 compared to 45.5% in 1998. The decrease, as a
percentage of sales, was due to our increasing buying power to negotiate lower
prices from vendors, which resulted in higher gross margins.
OPERATING EXPENSES. Operating expenses increased by $3,018,201, or 168%,
to $4,810,199 in 1999 from the 1998 level of $1,791,998. This increase was due
to the increased cost of opening and operating the additional stores.
Rent and common area maintenance expenses are included in operating
expenses, are relatively fixed in nature, and remained relatively stable as a
percent of sales from 1999 compared to 1998.
Depreciation and amortization increased by $273,121, or 176%, to $428,194
for the six months ended June 30, 1999 from the 1998 level of $155,073. This
increase was primarily due to the investment in 48 new stores.
12
<PAGE>
OTHER. Due to the decrease in cash levels attributed to new store financing
and the existence of short-term debt, interest expense exceeded interest income
for the first six months of 1999 compared to the first six months of 1998. As a
percentage of sales, interest income, net and other income, were immaterial for
both periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The number of our stores increased to 53 from 18.
NET SALES. Net sales increased by $7,213,995, or 192%, to $10,975,102 for
the year ended 1998 compared to $3,761,107 for the year ended 1997. This
increase in net sales was due to the addition of 35 new stores, a same-store
sales increase of 12.4%.
COST OF SALES. Cost of sales increased by $3,190,904, or 187%, to
$4,897,930 in 1998 compared to $1,707,026 in 1997. Principal reasons for this
increase were the rise in the number of stores and the volume of merchandise
sold. As a percentage of net sales, these expenses decreased to 44.6% in 1998
compared to 45.4% in 1997. The decrease, as a percentage of sales, was due to
our increasing buying power to negotiate lower prices from vendors, which
resulted in higher gross margins.
OPERATING EXPENSES. Operating expenses increased by $3,489,272, or 222%, to
$5,062,679 in 1998 from the 1997 level of $1,573,407. This increase was due to
the cost of opening and operating the additional stores. As a percentage of net
sales, these expenses increased to approximately 46.1% in 1998 compared to 41.8%
in 1997. The increase in general and administrative expenses as a percentage of
sales is primarily attributable to the increased staff needed to open the 35 new
stores as well as additional staff needed to maintain product flow to the
additional stores.
Rent, rent support and the cost of the merchandising department are
included in operating expenses, are relatively fixed in nature, and remained
relatively stable as a percent of sales from 1998 compared to 1997.
Depreciation and amortization increased by $323,216, or 234%, to $461,233
in 1998 from the 1997 level of $138,017. This increase was primarily due to the
investment in 35 new stores and the relocation of 3 stores.
OTHER. Due to the decrease in cash levels attributed to new store financing
and the existence of long-term debt, interest expense exceeded interest income
in 1998. As a percentage of sales, interest income, net and other income, were
immaterial for both 1998 and 1997.
INCOME TAXES. Income taxes increased by $170,400 to $365,700 in 1998
compared to $195,300 in 1997. Our effective tax rate decreased 5.2% from 1998
compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically provided cash flow which, together with
our credit facilities and equity financing, have provided adequate liquidity to
meet our operational needs. Cash and cash equivalents, including short-term
investments, totaled $433,354 at the end of 1998.
Net cash provided by operating activities amounted to ($348,572) in 1998
compared to $556,330 in 1997. The decrease in 1998 was primarily due to
additional inventory purchased to support the 35 new locations in 1998 and
anticipated store openings for early 1999. Our current ratio, current assets
over current liabilities, was 1.96 for 1998 and 1.52 for 1997.
At the end of 1998, we had available a $650,000 credit line with a bank to
finance our working capital requirements. This facility was to mature on March
30, 1999; however, in March 1999 we obtained a $3,500,000 credit line with a
different bank. On April 21, 1999, we received an additional $2,000,000 credit
line with the new bank in the form of a bridge loan. This bridge loan is
guaranteed by Bluestem Capital Partners I. For the guarantee, we will pay
Bluestem an additional interest payment of 4% over the bank rate plus a warrant
to buy additional shares. The warrant is for the purchase of 40,000 shares of
our common stock at 125% of the initial public offering price. The warrant is
exercisable for two years following the effective date of the offering.
At the end of 1998, we increased our investment in inventories to
$2,682,854, or 246%, from the 1997 balance of $775,701. The increase in
inventories was due to our opening and operating 35
13
<PAGE>
additional stores in 1998 compared to 1997, a 194% increase. It was also due to
inventory purchases made near the end of 1998 for new store openings planned for
early 1999. As a result, inventory turnover decreased from 3.5 times in 1997 to
2.9 times in 1998. We believe inventories are appropriate given the increase in
the number of stores and the level of sales currently being achieved.
During 1998, we continued to expand and relocate our store base.
Significant capital projects included the opening of 35 new stores and
relocating 3 stores. Funds expended for capital improvements totaled $3,072,226
in 1998 compared to $969,805 in 1997. In the year ending December 31, 1999,
capital expenditures are expected to be approximately $6,800,000 as we continue
to invest in our store base, technology, and enhancements to our new
distribution facility.
YEAR 2000 COMPLIANCE
We may realize exposure and risks if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. We expect to resolve Year
2000 compliance issues primarily through normal upgrades of our software or by
replacing existing software with Year 2000 compliant applications. The cost of
these upgrades or replacements is included in our capital expenditure budget and
is not expected to be material to our financial position or operating results.
However such upgrades and replacements may not be completed on schedule or
within estimated costs or may not successfully address our Year 2000 compliance
issues.
We use software and hardware developed by third parties both for our
network and internal information systems. We are currently conducting an
analysis to determine the extent to which vendors and suppliers have Year 2000
issues. If they are not yet Year 2000 compliant, we are asking them to provide a
description of their plans to become compliant.
Based on our work and assessments to date, we believe future costs relating
to the Year 2000 issue will not have a material impact on our consolidated
financial position, results of operations or cash flows. Because all our
computer equipment has been purchased in the past few years, it is compliant as
represented by computer vendors. We expect that the greatest exposure will be
short-term product delays from vendors due to their systems or their suppliers'
systems not being compliant. However, even then, we don't anticipate a
significant problem because we can more easily tolerate shipping delays in
January. We generally have some excess inventories in January, which is one of
the months we do sidewalk sales. Furthermore, if delays occur, we expect the
vendors will work to rectify their problems in order to resume shipments, and in
most cases we believe we will be able to purchase good substitutes from other
vendors.
We anticipate that we will incur little or no additional cost in becoming
ready for Year 2000 because all of our equipment is relatively new. Our future
cost is low because, as represented to us by our equipment vendors, the new
equipment is already compliant.
Recently we mailed Year 2000 preparedness questionnaires to our primary
vendors and suppliers and expect responses by October 1, 1999.
IMPACT OF INFLATION
Inflation has not affected us, as we have generally been able to pass along
inflationary increases in our costs through increased sales prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In Fiscal 1997, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which establishes
new guidelines for the calculation of earnings per share. Basic earnings per
share have been computed by dividing net income by the weighted-average number
of shares outstanding during the period. Diluted earnings per share have been
computed assuming the exercise of stock options as well as their related income
tax effects. Earnings per share for all periods have been restated to reflect
the provisions of this Statement.
14
<PAGE>
BUSINESS
OUR COMPANY
We are a specialty retailer of sports related headwear. We believe that our
stores carry the largest and most complete selection of quality licensed and
branded baseball-style hats in the markets we serve. Our products are emblazoned
with logos representing the major sports teams in both the professional and
college leagues such as baseball, basketball, football, and motorsports. We also
sell branded, lifestyle, fashion and novelty hats, seasonal hats such as
stocking caps and golf hats, hat accessories such as hat-bill benders, hat racks
and cleaning products. In addition, we sell other sports novelty items and
posters.
We opened our first store on November 3, 1995, in Lafayette, Indiana. We
grew to 5 stores in 1996, to 18 in 1997, to 53 stores in 1998 and to 96 stores
at the date of this prospectus. Our stores can be found primarily in enclosed
malls where our core customer, the young adult between the ages of 12 and 35,
shops frequently. Through our efficient store operations, focus on customer
service, and relationships with key vendors and mall developers, we believe that
we have grown to be the second largest sports-headwear specialty retailer in the
US and have been profitable annually since inception.
Hat World Corporation is a holding company that was incorporated in
Minnesota on April 26, 1999, in anticipation of this offering. We believe that
our holding company structure benefits us as we grow, especially if we acquire
other companies or operations. The holding company presently has only one active
operating subsidiary, Hat World, Inc., which was incorporated in Minnesota on
June 1, 1995.
EXISTING AND UPCOMING STORE LOCATIONS
The following are our store locations, listed in the order in which they
were opened:
STORE OPENED DURING 1995
Tippecanoe Mall Lafayette, Indiana November 3, 1995
Total Stores Open: 1
STORES OPENED DURING 1996
Muncie Mall Muncie, Indiana February 29, 1996
Market Place Shopping Center Champaign, Illinois June 29, 1996
Washington Mall Indianapolis, Indiana November 7, 1996
White Oaks Mall Springfield, Illinois November 14, 1996
Total Stores Open: 5
STORES OPENED DURING 1997
Northgate Mall Cincinnati, Ohio March 5, 1997
Glenbrook Square Mall Ft. Wayne, Indiana April 11, 1997
Green Tree Mall Clarksville, Indiana May 5, 1997
Jefferson Mall Louisville, Kentucky June 27, 1997
Florence Mall Florence, Kentucky July 11, 1997
Castleton Square Mall Indianapolis, Indiana July 20, 1997
Indianapolis Airport Indianapolis, Indiana July 30, 1997
River Valley Mall Lancaster, Ohio September 4, 1997
Lafayette Square Mall Indianapolis, Indiana October 23, 1997
Eastland Mall Bloomington, Illinois October 24, 1997
Bashford Manor Mall Louisville, Kentucky October 29, 1997
Honey Creek Mall Terre Haute, Indiana November 1, 1997
Greenwood Park Mall Greenwood, Indiana November 2, 1997
Total stores open: 18
15
<PAGE>
STORES OPENED DURING 1998
Greenwood Mall Bowling Green, Kentucky February 13, 1998
Janesville Mall Janesville, Wisconsin March 5, 1998
Southpark Mall Moline, Illinois March 27, 1998
Salem Mall Dayton, Ohio April 1, 1998
Lansing Mall Lansing, Michigan April 3, 1998
Dayton Mall Dayton, Ohio April 3, 1998
Crossroads Center Waterloo, Iowa April 9, 1998
Regency Mall Racine, Wisconsin April 15, 1998
Midland Mall Midland, Michigan April 17, 1998
Fashion Square Mall Saginaw, Michigan April 18, 1998
East Towne Mall Madison, Wisconsin April 24, 1998
Knoxville Center Knoxville, Tennessee June 3, 1998
Cherryvale Mall Rockford, Illinois June 5, 1998
Lakeview Square Mall Battlecreek, Michigan June 9, 1998
College Square Mall Cedar Falls, Iowa July 1, 1998
Union Station St. Louis, Missouri July 9, 1998
Circle Centre Mall Indianapolis, Indiana July 14, 1998
Coral Ridge Mall Coralville, Iowa July 29, 1998
Kentucky Oaks Mall Paducah, Kentucky July 31, 1998
Governor's Square Mall Clarksville, Tennessee September 3, 1998
Grand Central Mall Parkersburg, West Virginia September 24, 1998
Morgantown Mall Morgantown, West Virginia September 25, 1998
Meadowbrook Mall Bridgeport, West Virginia October 21, 1998
Indian Mound Mall Heath, Ohio October 23, 1998
The Empire Sioux Falls, South Dakota October 28, 1998
Meridian Mall Okemos, Michigan November 6, 1998
Ohio Valley Mall St. Clairsville, Ohio November 17, 1998
Uniontown Mall Uniontown, Pennsylvania November 18, 1998
University Mall Carbondale, Illinois November 18, 1998
The Mall at Fairfield Commons Beavercreek, Ohio November 20, 1998
Anderson Mall Anderson, South Carolina November 21, 1998
Bellevue Center Nashville, Tennessee November 24, 1998
Hamilton Place Chattanooga, Tennessee November 25, 1998
New Towne Mall New Philadelphia, Ohio December 2, 1998
Charlottesville Fashion Square Charlottesville, Virginia December 8, 1998
Total stores open: 53
STORES OPENED DURING 1999
College Square Mall Morristown, Tennessee January 19, 1999
Foothills Mall Maryville, Tennessee January 21, 1999
University Mall Little Rock, Arkansas February 24, 1999
McCain Mall Little Rock, Arkansas February 25, 1999
Huntington Mall Barboursville, West Virginia March 3, 1999
Oak Court Mall Memphis, Tennessee March 5, 1999
Nittany Mall State College, Pennsylvania March 13, 1999
Spotsylvania Mall Fredericksburg, Virginia March 16, 1999
The Centre at Salisbury Salisbury, Maryland March 24, 1999
Crossroads Centre St. Cloud, Minnesota April 1, 1999
Tower Place Cincinnati, Ohio April 6, 1999
MetroCenter Mall Jackson, Mississippi April 7, 1999
The Pines Pine Bluff, Arkansas April 13, 1999
Northwoods Mall Charleston, South Carolina April 14, 1999
16
<PAGE>
Stones River Mall Murfreesboro, Tennessee May 11, 1999
Randhurst Mall Mt. Prospect, Illinois May 13, 1999
Lakeland Square Lakeland, Florida May 14, 1999
Wiregrass Commons Dothan, Alabama May 18, 1999
River Ridge Mall Lynchburg, Virginia May 19, 1999
Capital Mall Jefferson City, Missouri June 2, 1999
North Park Mall Joplin, Missouri June 3, 1999
Golf Mill Center Niles, Illinois June 11, 1999
Pierre Bossier Mall Shreveport, Louisiana June 12, 1999
South Park Mall Colonial Heights, Virginia June 16, 1999
Tallahassee Mall Tallahassee, Florida June 17, 1999
Chesterfield Town Centre Richmond, Virginia June 18, 1999
Concord Mall Elkhart, Indiana June 23, 1999
Chapel Hills Mall Colorado Springs, Colorado July 1, 1999
Coventry Mall Pottstown, Pennsylvania July 14, 1999
Century Plaza Birmingham, Alabama July 15, 1999
Dover Mall Dover, Delaware July 16, 1999
Westwood Mall Jackson, Michigan July 20, 1999
Oak Hollow Mall High Point, North Carolina July 21, 1999
Apple Blossom Mall Winchester, Virginia July 23, 1999
Lincoln Mall Matteson, Illinois July 27, 1999
Plymouth Meeting Mall Plymouth, Pennsylvania August 12, 1999
Colony Square Mall Zanesville, Ohio August 17, 1999
Crossroads Mall Oklahoma City, Oklahoma August 18, 1999
Northpark Mall Ridgeland, Mississippi August 25, 1999
Eastwood Mall Niles, Ohio September 2, 1999
New River Valley Mall Christianburg, Virginia September 7, 1999
Patrick Henry Mall Newport News, Virginia September 15, 1999
Cool Springs Galleria Franklin, Tennessee September 22, 1999
Total stores open: 96 to date
We have signed leases for the following locations, but have not yet moved
into the stores:
Chesapeake Square Chesapeake Bay, Virginia
Rivertown Crossings Grandville, Michigan
Francis Scott Key Mall Frederick, Maryland
Valley Mall Hagerstown, Maryland
Northwest Arkansas Mall Fayetteville, Arkansas
Central Mall Fort Smith, Arkansas
Crossroads Mall Omaha, Nebraska
In addition to the above, we anticipate opening additional stores in 1999
at locations to be identified.
INDUSTRY OVERVIEW
We compete in the large market for headwear and in the even larger market
for sports affinity products. Estimates of the sports related headwear market
segment vary widely, from $3 billion to over $9 billion in 1998. Recognizing
this wide range, our observation is that all specialty retailers of sports
related headwear represent a small fraction of the total market. This is because
the market for our products is highly fragmented, with competition coming from a
variety of retailers, including arena concessionaires, sporting goods stores,
department stores, discount stores, street vendors, catalog and internet
operations, and other specialty stores. We also believe that the specialty
retail format adds sales to the industry because we make the right products more
readily available to the consumer. Given the wide variance in estimates of the
existing market and our belief that we can increase the size of the market, we
believe our industry is sufficiently large for us to increase our market share.
17
<PAGE>
We believe that the sports related headwear industry is benefiting from
certain favorable demographic and sports trends and economic factors, as
follows:
* We believe the interest in traditionally popular sports has remained
relatively stable, though product selection has grown considerably. In
the U.S., these would include the major college and professional
sports, such as baseball, football, basketball and hockey. According
to the most recent data from the National Sporting Goods Association,
the four major professional sports leagues represented over half of
all sports logo clothing purchases in 1998. Hat Business Quarterly,
July 1997, reported that 1996 sales of the four major professional
sports accounted for $8.75 billion in U.S. retail sales;
* Interest in traditionally less popular sports has grown. In the U.S.,
these would include golf, professional wrestling, motorsports and
brands of local interest. For example, according to Sporting Goods
Business Magazine, May 17, 1999, ". . . NASCAR driver jackets have
become so hot among urban teens and young adults recently that they're
outselling a lot of popular urban brands." The growth of interest in
more sports increases the demand for all types of licensed products
associated with those sports, thereby increasing the product
assortment demands of consumers;
* Growth of interest in sports has been accompanied by growth in the
variety of sports related products. This growth enhances the need for
a "specialty retail presentation" of these products. According to
Barnard's Retail Trend Report, February 1999 edition, "The shift of
consumer dollars away from conventional department stores continues
unabated. . . . Successful apparel specialty stores target lifestyles
and the consumers that identify with them. Customers are made to feel
the stores exist for the express purpose of serving their specific
tastes. Large merchandise assortments and displays converge to yield
that effect";
* American teenagers, an important part of our target market, have more
disposable income than ever. According to USA Weekend's 12th Annual
Teen Survey, The Richest Generation Ever, dated May 2, 1999, "They're
not just rich -- they spend billions. Teens spent a record $141
billion last year, an average of $4,548 each -- and a gold mine that
has everyone from Hollywood executives to retailers scrambling to
produce new teen-targeted movies and magazines. Almost half the survey
respondents had spent at least $20 in stores within the previous
week";
* Low unemployment and a strong stock market boost consumer confidence
and retail spending; and
* Prevalence or awareness of skin cancer and debate about the effects of
pollution on the ozone layer of the earth's atmosphere has created
demand for skin care and sun-blocking products.
These demographic trends and economic factors have created a favorable
economic environment and market for headwear, and especially sports related
headwear. We believe that our retail store concept and Internet site are in good
positions to take advantage of these trends. We believe that due to the
proliferation of sports related headwear and the inability of non-specialty
retailers to carry the latest styles and varieties, there is considerable unmet
demand in the marketplace. By developing our specialty retail concept that
offers broad and deep product choices in sports related headwear, we position
ourselves to capture this demand. As a result, we expect that we will be able to
increase our sales, and subsequently, increase the size of our industry.
BUSINESS STRATEGY
Our goal is to be the leading specialty retailer of sports related
headwear. We define leading to include being a profitable, market-driven company
in which our employees enjoy their work. We believe the following elements of
our business strategy will continue to position us for growth:
CATEGORY-FOCUSED MERCHANDISING. Virtually all the products we sell are
available at other retailers. However, a consumer would have to shop many
different stores, and in some cases, other cities, to find the selection of
products that we carry. We offer a large selection at each location, at
attractive prices. We intend to be a leader in the sports-licensed headwear
category. We can do this
18
<PAGE>
by offering a broad range of products and by identifying fashionable merchandise
reflecting the latest trends. We must select and test-market products, and
monitor and react to individual and group item sales demands.
CONVENIENT LOCATIONS. Our stores are generally located in shopping centers
or malls. We prefer high traffic mall locations because a significant portion of
our business comes from convenience shopping. Our customers, heavily influenced
by the sports industry, want to buy hats but generally postpone purchasing until
the purchase opportunity is made easy and attractive. We provide this easy,
attractive buying opportunity through our convenient store locations, vast
product selection, and welcoming product display. We believe that high traffic
areas offer greater revenue potential than stand-alone locations where we would
be more dependent on the consumer making the store a shopping destination. We
must continue to locate our stores in areas with favorable demographic
characteristics.
TALENTED, MOTIVATED PERSONNEL. Generally, we have been able to attract high
quality personnel. We believe it is important that we recruit and hire
sports-minded, friendly managers and support personnel for our stores. A key
component of our business strategy is to make our stores a welcoming, fun
environment in which to work and shop. We believe sales increase in relation to
enjoyment of the buying experience. Enthusiasm for sports and our products is,
to some extent, conveyed by our personnel to the consumer, who is then more
motivated to purchase and enjoy our products.
GROWTH STRATEGY
At the date of this prospectus, we have opened 43 new stores in 1999, for a
total of 96 stores. We intend to open 14 additional stores in the remainder of
1999 and add 70 stores in each of the next two years. Our future expansion will
come from opening new stores and through acquisitions. In the U.S., we have
identified 1,800 potential shopping mall locations, 200 strip centers, 25
airports and 25 outlet centers that would be suitable for a traditional store.
Our growth strategy is as follows:
* maximize the value of our existing stores by investing in our people,
locations, inventory and systems;
* open new stores in desirable locations on reasonable terms based on
our review of the local market and demographics;
* explore new retail formats, including the kiosk format;
* build and improve our Internet web site;
* renegotiate and remodel desirable existing stores as leases expire;
* consider strategic acquisitions; and
* consider entering new business segments, such as embroidery and team
sales, as opportunities provide and resources allow.
Certain other elements of our growth strategy that are significant are as
follows:
IMPORTANCE OF BEING FIRST OR THE RACE FOR REAL ESTATE. As a single
classification store, we sell primarily hats and have strong appeal to mall
management companies for placement in their malls. Nothing prevents a mall
management company from adding more than one hat retailer to a mall; however,
the incentive diminishes as such stores are added. In other words, there is an
advantage to being first in the mall. The first store tends to have a
preferential market position. We believe there is also an advantage to be
perceived as the first of a kind in the minds of consumers, and this is
facilitated by being the first hat retailer in a consumer's local mall. We
believe our competitors also recognize these factors. As a result, there is
essentially a race for real estate between companies in our industry to obtain
mall locations.
We believe that we have developed strong relationships with mall management
companies for a number of reasons, as follows:
* we are a desirable mall tenant because we generate high sales
per-square-foot;
* other tenants welcome us because we are generally not a threat to
their sales;
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* specialty headwear retailers have recently become recognized as a
standard tenant group for malls;
* the relative uniqueness of our area of specialty retail makes the
concept less intrusive to the existing sales patterns in many malls;
* our store design and store size requirements are flexible which
facilitates our use of a variety of locations not often viewed as
desirable by potential tenants with more rigid store designs;
* we have a reputation for paying rent promptly and accurately; and
* our growth while maintaining profitability has also brought us the
attention of mall management firms looking to fill spaces with
reliable, professional tenants.
All existing store leases provide for the payment of fixed rent and
additional rent. Such rent is subject to increases. If gross sales in any
particular store exceed an annual base amount (or, in a few cases, a base
monthly amount) as provided in the lease for that store, we will be required to
pay additional rent equal to a fixed percentage rate ranging from 6% to 7% of
such annual amount (or monthly amount) of gross sales. In addition, we are
required under the leases to pay additional rent for each store's proportionate
share of real estate taxes and assessments, common area maintenance charges,
utility charges, advertising promotional and media fund charges associated with
the promotion of the malls where the stores are located.
In many cases, we are required to pay a proportionate share of the
landlord's insurance premium costs for insuring the malls in which stores are
located. Under some leases, we are required to pay a proportionate share of the
interior sprinkler system and heating, air conditioning and ventilation costs
for certain malls. Our operating expenses could increase significantly each
year, particularly after the first year of operations of the particular stores.
The effect on our financial operating expenses could be significantly impacted
by the cumulative effect of such increases as the bulk of our existing stores
which have opened in the last 12 months reach maturity.
In addition, several of our leases allow the landlords to increase our
fixed rent or terminate a lease for particular stores after the passage of a
number of years if our gross sales do not exceed the annual base rent at any
time prior to such date.
With few exceptions, our store leases contain a provision which restricts
within a prescribed area measured from the site of an existing store, the
opening of any additional stores by us. Under the terms of most leases, any
failure by us to comply with such restriction will result in the landlord of the
existing store location having the right to include the gross sales of such
additional store as part of the percentage rent calculation for the existing
store. Such provision could limit our ability to open stores in locations
included in such restrictive areas which we may subsequently determine are more
favorable locations in the future than a particular existing store.
Some of the store leases contain a cross default provision which provides
that a breach by us of any lease term or provision for a particular store
location may be treated by the landlord as a default of any other store lease we
may have with such landlord. The landlord as a consequence may terminate our
rights under all store leases to which the landlord is a party.
NATIONAL EXPOSURE. We presently have 96 stores in 25 states. We believe
that customer confidence and convenience is enhanced as we increase the number
of stores and our geographic presence. We believe that more stores and greater
geographical coverage give us greater exposure and recognition among consumers
in the regions where our stores are located and increase the benefits which
would otherwise be derived from advertising. We believe that for us there are
compelling benefits to growth. However, we prefer to grow in a well-managed
fashion, maintaining focus on key objectives such as profitability and enjoyment
of the workplace. We believe that we can continue to grow rapidly and well,
though this may not occur.
KIOSK. In addition to the traditional store format, we also have the
flexibility to use kiosks. It would generally be true that a kiosk would produce
lower sales and less profits than a traditional store in the same mall. However,
kiosks are less costly to open and can be used on a permanent or temporary
basis. A kiosk might be used when a traditional space is not available on
favorable terms. In such cases, operating a kiosk tends to give us priority for
a traditional store on favorable terms
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when space subsequently becomes available. A kiosk may also be used when we
estimate that sales would be insufficient to justify a traditional store space
but yet desirable enough to justify the cost of a kiosk. The inventory in a
kiosk is about half that of a traditional store, but the products offered
represent approximately 80% of those sold in a traditional store.
While the per-square-foot rents are higher with a kiosk, the space
requirement is lower, so rents can still be favorable as a percentage of sales
through a kiosk. Also, since the cost to construct and set up a kiosk is
considerably less than a traditional store, the return-on-investment can be
higher with a kiosk, though the actual dollar profits are less. We have two
kiosks in operation and plans for opening additional kiosk locations in 1999 and
thereafter. We expect the kiosk format will prove to be a suitable complement to
our traditional stores.
TEMPORARY STORES. We have opened stores with temporary leases, which are
generally those for less than one year. We may employ this strategy during the
Christmas season in order to capture incremental sales and profits while
avoiding the expense of constructing and placing fixtures in a permanent store.
We have also used temporary stores to test a mall or location.
INTERNET WEB SITE. Use of the Internet by the general public has
experienced considerable growth in recent years. We believe that our core
customer may be inclined to use the Internet on a regular basis to purchase
consumer items. We expect that an Internet web site may prove to further enhance
the growth of our sales. Due to the constant entertainment needs of our core
market, a web site, like our stores would need constant updating. Like our
stores, profits would have to be sufficient to justify the costs. We intend to
explore strategic alliances linking our Internet site with all sports leagues
that license the use of team names and logos to vendors who market and supply
our products, and with the vendors themselves. We plan to extract from our
passport club membership data base the buying preferences and purchase frequency
of our customers. With this information we will be able to send e-mail and other
advertisements to our customers about new products. We also plan to continue to
support our e-commerce activities with in store point of purchase displays that
advertise and reinforce our Internet presence.
MERCHANDISING STRATEGY
DISTINCTIVE, ITEM-FOCUSED MERCHANDISING. We fit the definition of a niche
or specialty retailer by offering a broad line of hats and hat accessories in a
single location. We are a desirable mall tenant because we are a single
classification store -- we sell hats, and that is relatively unique in specialty
retail. Our niche facilitates mall planning and balances the retail store mix
with a highly prized specialty venue. Furthermore, our niche gives us the
ability to generate more than the average mall sales per-square-foot, without
taking significant revenue away from current mall merchants. This has enabled us
to establish favorable relationships with companies that manage malls throughout
the country. We expect to leverage these contacts when securing mall space for
our expansion strategy.
Due to the marketing power of sports, we expect that our primary market
category will likely always be sports-licensed headwear. We expect other
categories to be important, though not primary, categories from time-to-time.
LOCALIZED PRODUCTS. While the majority of our stores carry similar
products, each store's product assortment is tailored to meet the demands of the
consumer in the local market. This strategy allows each store to capitalize on
marketing advantages unique to its particular location. The sales patterns of
each store are monitored on a daily basis to maximize inventory turns while
satisfying local demands.
MULTIPLE SIZES, STYLES. We offer over 1,200 different styles of hats, which
include fitted and adjustable for a total variety of approximately 4,000
different hats. Our stores offer mainly traditional, adjustable baseball-style
caps. We offer multiple styles, colors, textures and designs that most merchants
don't offer in one location. Some of our products are the authentic hats that
the professional players wear. We pride ourselves in staying current with styles
and fashion. In addition we have hat bill benders or curving devices and other
accessories. We believe product availability and convenience are greater factors
than price in our business.
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CHANGING MERCHANDISE MIX. The success of a team or player, particularly
professionals, has a considerable degree of influence on the demand for their
licensed products. Since we have no advance knowledge of their future successes,
our pre-season buying decisions for some teams are relatively conservative. As
players and teams distinguish themselves and win games, demand increases for
their licensed products, including hats. Our buyers then place additional orders
to supplement earlier buys.
PRODUCT PRESENTATION. We display our products in a visually appealing
manner. The variety of colors and styles of our product facilitates this effort.
We design our stores and product presentations to encourage customers to browse
and examine the products closely. Each manager has some flexibility to
creatively highlight those products that are expected to have the greatest
appeal to local shoppers. We agree with the viewpoint of the WWD/DNR Specialty
Stores Newsletter, April 1999 edition: "A specialty retailer that makes its
store inviting and visually exciting will always have a niche with its
customers."
WE ARE A CASH BUSINESS. We have no customer receivables since we do not
directly extend credit. We accept national credit cards and personal checks. We
special order products if a customer provides a deposit or pays in advance.
A TYPICAL HAT WORLD STORE
FORMAT. Our prototype store ranges between 500 and 800 square feet,
although we have stores ranging in size from 200 to 1,200 square feet. The sales
floor is generally about 85% of the total leasehold space. The remainder is
storage and inset entryways. Merchandise is displayed according to display
guidelines and directives given to each store by the operations team. This
procedure ensures uniform display standards and efficient allocation of products
throughout our stores. Our large product assortment is designed and displayed to
create buying interest. The checkout counter, or cash-wrap, is generally located
towards the center of the store, providing the store personnel with a broad view
of the entire store within a few steps.
STORE OPERATIONS. Hat World stores are open seven days a week during mall
hours. Malls are typically open 70 hours per week. A Senior Vice President of
Operations, Four District Managers, and 15 Area Market Leaders manage our store
operations. District Managers generally have responsibility for 25 stores within
a geographic district. Often, we designate our more experienced managers to
serve as Area Market Leaders. They become mentors to managers in their
geographic areas. The store manager is responsible for the day-to-day operation
of the store, including inventory receipt and merchandise display, personnel
functions, store security and sales. A typical store has one full or part-time
assistant manager and several part time sales associates, depending on the size
of the store, volume, and season. Additional part-time sales associates are
typically hired to assist with increased traffic and sales volume in the fourth
quarter. We compensate our district and store managers with a base salary plus a
performance bonus based on store sales. Sales associates are compensated on an
hourly basis.
We believe that our continued success is dependent on our ability to
attract, retain and motivate quality employees. In particular, the success of
our expansion program will be dependent on our ability to promote and/or recruit
qualified district and store managers and maintain quality sales associates. To
date, we have been able to hire district managers with prior supervisory
experience in the athletic apparel retail industry. Store managers, many of whom
were selected from among our sales associates, generally complete in-store
training before taking responsibility for a store. Store managers are
responsible for hiring and training new sales associates, assisted, where
appropriate, by our personnel administrator, district managers, or other
operations staff. We are continuing to develop enhanced training programs for
our store managers, assistant managers and sales associates. We constantly look
for motivated and talented people to promote from within Hat World, in addition
to recruiting from elsewhere.
The loss of key personnel and our failure to attract and retain additional
highly skilled personnel could harm our business and cause our stock price to
fall. We believe that our success will depend on the continued services of our
senior management team. The loss of the services of any of our senior
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management team or other key employees could adversely affect our business,
financial condition and operating results.
SITE SELECTION. We seek to locate our stores in malls that are destinations
for large numbers of shoppers, which reinforces our quality image. To assess
potential new mall locations, we review financial and demographic criteria and
analyze the type and quality of tenants and competitive factors, square footage
availability, frontage space and location and other relevant criteria to
determine the overall acceptability of a mall and the optimal locations within
it. We locate our stores in middle market and larger cities with a history of
high sales per-square-foot and multiple national department stores as anchors.
We prefer the presence of successful sporting goods stores or sports apparel
retailers that have modest hat inventories.
Our ability to generate more than the average mall sales per-square-foot,
without taking significant revenue away from current mall merchants, has enabled
us to establish favorable relationships with mall developers. Furthermore, we
believe we are a desirable tenant for mall developers because of our performance
track record. We pay our rent on time, provide audited financial statements,
deliver sales productivity and have a strong position in the sports related
headwear and accessory categories.
PURCHASING AND DISTRIBUTION
PURCHASING. We believe that our disciplined approach to purchasing, our
relationships with suppliers and our strong buying power contribute to our
successful purchasing strategy. We buy inventory on a centralized basis to take
advantage of volume purchase discounts and improve our ability to control
inventory product mix. Our four-person centralized buying group, located in
Indianapolis, Indiana, is responsible for all purchasing decisions and price
negotiations with vendors. We purchase merchandise on a product by product
basis, rather than based upon broad category classifications.
We manage our total purchases based upon annual budgets that are set at the
beginning of the year and updated throughout the year. We purchase our products
from approximately 30 vendors; however, five vendors supply approximately 65% of
our products. They are New Era Cap Company, Zephyr Grafx, Logo Athletic/ Puma
(which now controls Starter), The Game and Nike USA (formerly Sports
Specialties). Even though we do no direct importing, many of our vendors either
own production facilities in the Far East or contract their manufacturing with
firms in the Far East. We believe that by buying from importers and domestic
firms instead of directly from foreign manufacturers enables us to maximize
flexibility and minimize risks.
We believe that our executive management and buyers are more effective and
efficient by focusing on managing the retail business and allowing importers,
wholesalers and manufacturers to handle the procurement and shipment of
foreign-manufactured merchandise for our stores. The purchase of our products
from domestic manufacturers and wholesalers enables us to reduce the time
between ordering products and displaying them in our stores.
INTEREST IN NEW MERCHANDISE. Regardless of the quality of an inventory
management system, no system monitors hats not in the system. In other words, if
we do not carry a hat, our computer does not rate its potential in the
marketplace. For information on new hats, we rely on several sources. Vendors,
being eager to sell their merchandise, usually show us hats well in advance of
the hats being offered in stores. We will often buy a small order of new hats to
test sales before making larger commitments. At that point, the new hat enters
our system and sales can be monitored. We are not always correct in our buying
decisions; however, if our buyers reject a hat that subsequently proves to sell
well in other stores, vendors will generally re-introduce the hat to us with
sales information to entice us to buy.
We also rely on information feedback from our store managers regarding the
types of hats of interest to customers that we may not carry. This is
particularly important as we grow and expand geographically. Demand for
different styles varies geographically, especially with certain items such as
motorsports and brands of local interest.
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GOOD VENDOR RELATIONSHIPS. We believe we have excellent relationships with
our vendors. We enjoy reasonable prices and credit terms. As we have grown over
the years, our alliances with merchandise suppliers have strengthened.
We buy all our products from United States-based vendors and manufacturers,
many of whom have offshore production facilities or contract their production
with such facilities. Our five key vendors have the broadest licensing
agreements with teams and leagues and offer the greatest number of design
choices. While we are dependent on key suppliers, they have some dependency on
us as well. We believe that we are among the largest buyers of the complete, or
near complete, lines of some of our vendors. Other national retailers, such as
department stores, may buy more of one design or another, but we buy a broad
selection from these key vendors. Additionally, our vendors are eager for us to
test the marketplace with their new products. Also, the retail market is very
fragmented with many small retailers. We believe that our key vendors recognize
a considerable efficiency working with us in contrast to working with a large
number of smaller accounts where credit worthiness is often a concern. These
factors contribute to our good working relationship with our vendors.
PRODUCT DISTRIBUTION. Historically, we have both vendor-to-store direct
distribution and a centralized warehouse distribution center in order to
maintain a low cost operating structure. Most of our inventory is distributed
through our warehouse, which gives us more centralized quality control and
flexibility to make distribution decisions based on product deliveries from
vendors. Most of our merchandise is inspected and distributed through our
warehouse. Our vendors ticket approximately 80% of our merchandise.
Merchandise that is shipped directly to the stores is inspected and
ticketed at the stores, displayed in the store by store personnel and later
entered into the main computer system at our warehouse.
We believe our 17,600 square foot distribution/office facility will be
capable of handling 6,000,000 hats per year, which will be adequate to support
up to 300 stores. Our warehouse features a custom-designed, pallet-rack system
integrated with sloped plastic racks designed to expedite sorting and picking of
hats before shipment to stores. The warehouse design facilitates bundling of
palletizing goods, which helps contain freight costs. We believe that adequate
additional distribution center space will be available in the future on
acceptable terms as may be needed in order to accommodate our expansion plans.
MANAGEMENT INFORMATION SYSTEMS AND COMPUTERS
INVENTORY MANAGEMENT SYSTEM. We have historically placed considerable
emphasis on our management information and inventory control systems. We believe
that our systems are an important factor in enabling us to achieve our goals of
effective purchasing, merchandising and store management.
Our management information systems have always included automated
point-of-sale merchandising and financial applications. Our merchandise is
bar-coded, enabling us to manage and control inventory more efficiently and
effectively. Sales reports are updated daily in the merchandise reporting system
by polling sales information from each store's cash register. Our information
system consists of registers providing price look-up and scanning of bar-coded
labels on a per item basis. Through automated dial-up electronic communications
to each store, sales information is uploaded to the main system nightly.
Information obtained from such daily polling is used to implement merchandising
decisions and to identify the required merchandise reorders for each store.
Shipments are made at least weekly, and more often in some cases during the peak
selling seasons. Our buyers and merchandisers study the data to determine
whether to add inventory by buying, reduce inventory with price reductions or
adjust stock-out points. A complete physical count of inventory is made at least
annually, utilizing hand-held scanning equipment.
Our management information and control systems enable our operating team to
regularly identify sales trends, replenish depleted store inventories, change
prices, monitor merchandise mix and determine inventory shrinkage at individual
stores and throughout our store network. We believe
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these systems provide a number of benefits, including improved store inventory
management, better in-stock availability, higher operating efficiencies and
fewer markdowns.
INVENTORY MANAGEMENT SYSTEM UPGRADES. While our current system provides
useful data, we believe we may benefit by upgrading the sophistication of the
system. We have examined alternative systems that statistically interpret the
data, which should help improve the quality of our inventory management system
as we grow. When individual item sales show signs of slowing, they are
discounted. Our objective is to maintain fresh, new and clean inventory, as this
is what appeals most to our core market. It is important to us to maintain our
image of having the latest styles. Usually, moderate discounts are sufficient to
clear slow moving inventory if the discounts are taken promptly in response to
slowing customer demand for a product.
We believe a new inventory control system will identify slowing in sales of
individual items more quickly than our current system. One of our goals in
upgrading to a more refined system is to reduce discounting to clear slower
moving inventory. Conversely, the new system should identify increases in demand
more efficiently, which will help the buyers replenish hot items sooner.
Inventory management is recognized as an important aspect of our business. We
have not determined, yet, the extent of change and costs involved in upgrading
or switching to a different system. Estimates are between several hundred
thousand dollars to almost a million dollars. We recognize the importance of a
strong inventory management system and are continually examining ways to
cost-effectively improve our methods and systems.
We expect to have a new inventory management system in place in 2000. The
new system may integrate the existing information system with new back-office
software, or the entire system will be replaced. The new system will be Year
2000 compliant and will be compatible with most of our existing hardware
systems. We expect to select a system that will allow for future expansion to
accommodate our growth plans.
ADVERTISING AND PROMOTION
The marketing power of the sports industry drives our sales. We believe
that people like to identify themselves with heroes and role models, and that
sports teams and celebrities fill that need for some people. People also like
group activities. Sports fans enjoy the group activity of viewing, discussing,
and arguing about sports teams and games. The sports industries are
multi-billion dollar marketing networks that promote themselves and the
affinities with their teams. Therefore, in many respects, our products are
inherently sold by the sports industry. Our job is to offer their products in
desirable locations, at attractive prices and in a friendly manner. Therefore,
much of our advertising and promotion costs are built into the wholesale cost of
our products and our mall rents.
HISTORICAL ADVERTISING AND PROMOTION. Historically, we have not engaged in
extensive advertising because we believe that demand for our product is driven
by the sports industry. By paying mall rents for strategic locations in
high-traffic shopping malls, we make the products available in locations
frequented by our core market. In the past, we have relied on location and
word-of-mouth advertising by our customers to generate traffic in our stores.
Our advertising was largely limited to sponsoring events, though we have placed
local newspaper and radio ads on occasion to promote our stores or specific
items in our stores. We have also budgeted for store promotion by managers who
provide hats for community fundraisers and events.
ADVERTISING TESTS. We believe it is unlikely that advertising would
increase the demand for products of teams out of favor. Advertising also does
not make our stores more convenient. The only remaining promotional need would
seem to be advertising to inform our target market that we have in-demand
products at convenient locations. To this extent, we have recently begun to
experiment with certain advertising and promotion techniques geared towards our
core market. We have yet to determine the impact that such advertising might
have on store performance.
Key elements of our advertising experiment are to promote ten store grand
openings. We are running traditional television, radio and newspaper ads on a
sample basis. We also plan to increase the level of our co-op advertising with
certain manufacturers. We are working to evaluate the
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effectiveness of the various approaches and intend to define a promotion and
advertising plan to include the more successful strategies. The results of this
study have not been determined prior to this offering.
In addition, many shopping mall leases require some advertising, although
an industry shift to media funds has largely been implemented. Media funds are
contributions made by most mall retailers to the shopping mall's advertising
fund. The amount of the contribution is generally based on the square footage of
each store. Media funds are used to promote the shopping mall, which encourages
consumer visits. We believe that we benefit from such advertising, though we
consider it part of our rent payment.
SALE EVENTS. We do not have traditional sale events, as do many retailers.
We discount products as sales of products slow, and we generally do more
discounting in January and July than the remainder of the year. Shopping malls
also traditionally have sidewalk sales in these months, and in which all tenants
are encouraged to participate. Sidewalk sale events enable us to sell
merchandise that we buy at discounted prices for sale purposes at such events
and to clear previously marked-down inventory.
GIFT CERTIFICATES/LIBERAL RETURN POLICY. Recognizing the challenges
experienced by gift givers to our core customer group, we offer gift
certificates and have a liberal return policy. These are used more heavily
during holiday shopping seasons.
FREQUENT BUYER CARD. We promote customer loyalty through our Passport Club,
a frequent buyer card. To obtain membership to this program, our customers buy
their first hat at the regular price and pay an additional $3 for the club
membership. Thereafter, membership provides for a lifetime discount, from the
regular price, of 20% on hats and 10% on other items. We have over 186,000
members in our Passport Club program.
TRADEMARKS
We have received a Certificate of U.S. Registration for our mark consisting
of a triangle with a character and a bar logo. We have applied for U.S.
registration of our mark "Hat World." We are not aware of any claims of
infringement or other challenges to our right to use our marks in the United
States.
COMPETITION
The retail sports related headwear industry is competitive with respect to
product selection, quality, location, service, and price. Our industry is highly
fragmented, and we compete against a variety of retailers that sell hats,
including arena concessionaires, sporting goods stores, department stores,
discount stores, street vendors, catalog and Internet operations, and other
specialty stores. We believe our range of products offered on a timely basis,
our price and service quality, make us a strong competitor. Furthermore, our
local market merchandising focus and our ability to identify trends and respond
quickly to the changing consumer demands throughout our store network give us a
competitive advantage. In addition to sports related headwear products, we
compete against other specialty retailers for high traffic mall locations. We
believe that our current relationships with mall developers and our aggressive
expansion strategy will continue to give us an advantage in obtaining strategic
store locations.
We may experience difficulty in continuing to compete successfully against
existing or future competition. Our expansion into new markets or entry of new
competitors could have an adverse effect on our business. Many competitors are
larger than us and have access to significantly greater financial, marketing and
other resources.
We compete with all specialty retailers for mall space. We compete most
aggressively with specialty headwear retailers vying for the same spaces. Our
largest specialty headwear competitor has approximately 350 locations. There are
several smaller chains with less than 20 stores each, and an unknown number of
single store operations.
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CUSTOMERS
Our core customer is a young adult, 12 to 35 years old. We have found that
at $15 to $25 each, sports hats are a relatively affordable purchase for this
group. In particular, part of the Company's target market, teenagers, have
experienced a greater percentage increase of spending than any other consumer
group at 50% over the past 5 years. To effectively penetrate this market, many
of our stores are located in shopping malls frequented by this age group, such
as those near colleges and universities.
EMPLOYEES
We have 469 employees, 179 of them are full time, and 290 are part time.
Five of the employees are in executive management. Relations with our employees
are satisfactory, and none are subject to collective bargaining agreements.
There will be new employees added as new stores are opened.
FACILITIES
Our holding company occupies 1,400 square feet of leased office space in
Sioux Falls, South Dakota. The lease expires May 31, 2000.
Our operating unit occupies approximately 17,600 square feet of leased
office and warehouse space in Indianapolis, Indiana. Our lease on that facility
expires on January 31, 2002.
LEGAL PROCEEDINGS
From time to time, we have been involved in legal proceedings incidental to
the conduct of our business, none of which have been material. There are no
material legal proceedings pending or, to our knowledge, threatened against us
or management.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITIONS
- ---- --- -----------------------------------------
George N. Berger ............ 43 Chairman of the Board of Directors and
Secretary
James Harris ................ 42 Director and Chief Executive Officer; and
President of Hat World, Inc.
Kenneth J. Kocher ........... 33 Director, Chief Financial Officer and
Treasurer
J. Glenn Campbell ........... 34 Director; and Senior Vice President of
Operations of Hat World, Inc.
Scott A. Molander. .......... 34 Director; and Senior Vice President of
Logistics & Planning of Hat World, Inc.
Steve Kirby ................. 46 Director
Paul A. Schock .............. 40 Director
John Andretti ............... 36 Director
Mark E. Griffin ............. 48 Director
GEORGE N. BERGER has served as Chairman of the Board of Directors and
Secretary of Hat World Corporation since inception. He has served as Corporate
Secretary of Hat World, Inc. and as a Director and Chairman of the Board of
Directors since inception. He has served as Senior Vice President of Investor
Relations from September 1998 to June 1999, and as Senior Vice President,
Strategic Planning & Investor Relations from July 1998 to September 1998. From
1984 to present, he has been a business consultant and investor. Mr. Berger
received an MBA degree from the University of Minnesota, Minneapolis, in 1981;
and a BA degree in Economics from Concordia College, Moorhead, Minnesota in
1977.
JAMES HARRIS has served as Director and Chief Executive Officer of Hat
World Corporation since inception. He has served as President of Hat World,
Inc. since June 1997 and as a director since June 1998. From June 1981 until
June 1997, Mr. Harris was employed by the Foot Locker division of Kinney Shoe
Corp., a subsidiary of Woolworth Corp. (now "Venator Group Inc."). He began his
career at Foot Locker as a Store Manager/Manager Trainer and was promoted to
District Sales Manager and then Regional Vice President. As Regional Vice
President, he was responsible for the direct supervision of twelve District
Sales managers with 292 specialty retail stores including Foot Locker, World
Footlocker, Athletic Express and Foot Locker Outlets. Mr. Harris attended
Central Michigan University, Mt. Pleasant, Michigan.
KENNETH J. KOCHER, CPA has served as a Director and as Chief Financial
Officer and Treasurer of Hat World Corporation since inception. He has served as
Chief Financial Officer and Treasurer of Hat World, Inc. since July 1997. He
began with us as an accountant in January 1997. He also served as the Corporate
Secretary from July 1997 to January 1998. For four years prior to joining us he
was employed as a corporate controller with two medium size companies, one in
manufacturing and one in retail. Mr. Kocher worked in public accounting for five
years, three of which were with a large regional CPA firm, Charles Bailly & Co.
(now "Eide Bailly LLP"), as both an auditor and tax professional. Mr. Kocher
received a BA degree in Business Administration with a major in Accounting from
the University of North Dakota, Grand Forks, in December 1988.
J. GLENN CAMPBELL has served as a Director of Hat World Corporation since
inception. He has served Hat World, Inc. as a Director since inception and as
Senior Vice President of Operations since July 1998. He served as Corporate
Secretary from inception to July 1997, and as Chief Operating Officer from
inception to July 1998. From 1987 to September 1995, Mr. Campbell was employed
by the Foot Locker division of Kinney Shoe Corp., a subsidiary of Woolworth
Corp. (now "Venator Group Inc."). Mr. Campbell received a BS degree in Marketing
from Southeast Missouri State University in December 1987.
28
<PAGE>
SCOTT A. MOLANDER has served as a Director of Hat World Corporation since
inception. He has served Hat World, Inc. as a Director since inception and as
Senior Vice President of Logistics and Planning from July 1998 to present. He
has served as Chief Executive Officer from inception until July 1998, President
from inception until June 1997, and Chief Financial Officer from inception until
July 1997. He became a full-time, salaried employee starting in October 1996.
Mr. Molander was employed in warehouse management by Target Stores, a division
of Dayton-Hudson Corporation, from July 1994 to October 1996. From April 1994 to
June 1994, he was a Sales Representative for Preston Trucking Corp. From March
1989 to March 1994, Mr. Molander was employed by the Foot Locker division of
Kinney Shoe Corp., a subsidiary of Woolworth Corporation (now "Venator Group
Inc."). He received a BA degree in Business Administration from Dickinson State
University, Dickinson, North Dakota in May 1988.
STEVE KIRBY has served as a Director of Hat World Corporation since
inception and a Director of Hat World, Inc. since July 1997. Mr. Kirby is a
principal of Bluestem Capital Partners II, LP, an SBIC, and a member of the
Board of Managers of Bluestem Capital Partners I, LLC, each of which is an
investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Kirby Capital
Corp., a private equity firm. For the past five years, Mr. Kirby has worked in
partnership with Schock Financial Services, Inc., a company owned by Paul A.
Schock, in finding and structuring investments, as well as developing an
investor network for their joint private equity business, Bluestem Capital
Company and funds. Prior to forming Kirby Capital, Mr. Kirby was part owner,
secretary and senior claim counsel for Western Surety Company, a national surety
company, from 1972 to 1992. Mr. Kirby served as the 35th Lieutenant Governor of
South Dakota from May 1993 through January 1995. He is active in civic concerns,
serving on many boards and foundations. Mr. Kirby has a BS degree in Political
Science from Arizona State University and a JD degree from the University of
South Dakota Law School.
PAUL A. SCHOCK has served as a Director of Hat World Corporation since
inception and a Director of Hat World, Inc. since July 1997. Mr. Schock is a
principal of Bluestem Capital Partners II, LP, an SBIC, and a member of the
Board of Managers of Bluestem Capital Partners I, LLC, each of which is an
investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Schock
Financial Services, Inc. ("SFS"). He is a certified financial planner and
private equity specialist who focuses on finding, structuring and managing
equity investments for his clients. SFS is a general partner in several motel
properties and has initiated and managed a number of manufacturing/operating
projects. Mr. Schock was a commercial banker and manager for eight years with
First Bank Systems of Minneapolis. He left to become CFO of publicly-held
manufacturing company in Sioux Falls, South Dakota. Mr. Schock graduated from
Augustana College, Sioux Falls, SD, with a Business Degree.
JOHN ANDRETTI has served as a Director of Hat World Corporation since
August 1999. He has been a self-employed, professional race car driver for the
past eighteen years. He has amassed many career accomplishments, and presently
drives the #43 STP Pontiac for Petty Enterprises. For the past seven years he
has been a Partner and Vice President of Andretti-Helmling Automotive, an auto
parts retailer with two locations in Indiana. He is also Co-Owner of
Andretti-Laird Racing, a NASCAR Busch Team, and a Partner in Quality First
Products, which produces chemical cleaners and polishes for specialty markets.
Mr. Andretti graduated from Moravian College in 1985 with a Bachelors degree in
Business Management.
MARK E. GRIFFIN has served as a Director of Hat World Corporation since
August 1999. He has served as President and Chief Executive Officer of Lewis
Drugs, Inc., Sioux Falls, South Dakota since November 1986 where he previously
served as Executive Vice President. He is a Director of Raven Industries, Inc.
(Nasdaq: RAVN), President and CEO of Griffson Realty Company, Fredin Assoc. &
G.E.F. Assoc., Sioux Falls, South Dakota. He serves on the Board of Directors
of the National Association of Chain Drug Stores and as Chairman of the Sioux
Falls Regional Airport Authority. He has served in the following capacities:
Director, Norwest Bank of South Dakota; Chairman, Junior Achievement of South
Dakota; Member of the American Greetings Research Council; Chairman, Sioux
Falls Development Foundation; Chairman, Sioux Falls Chamber of Commerce;
Chairman, Forward Sioux Falls; Director, South Dakota Chamber of Commerce and
on the Executive
29
<PAGE>
Committee Board of Directors for the Chain Drug Industry/Dominant Trade
Association. Mr. Griffin attended the University of South Dakota and Arizona
State University.
Scott Molander and John Andretti are brothers-in-law.
BOARD OF DIRECTORS
We currently have nine directors. The directors are elected annually by the
shareholders for a term of one year or until their successors are elected and
qualified. The officers serve at the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Mark Griffin, James Harris, Ken
Kocher and Steve Kirby. The compensation committee reviews and recommends
compensation and benefits for the executive officers.
The audit committee consists of John Andretti, Mark Griffin, and Paul
Schock. The functions of the audit committee are:
* to review the scope of the audit procedures used by the independent
auditors;
* to review with the independent auditors the accounting practices and
policies;
* to consult with the independent auditors during the year;
* to approve the audit fee charged by the independent auditors; and
* to report to the Board of Directors on such matters and to recommend
the selection of the independent auditors.
DIRECTOR COMPENSATION
Each director has been issued a three year option to purchase 4,000 shares
of common stock, exercisable at $8.75 per share. Additionally, each director
will be paid $400 for each board meeting attended in person and $200 for
attendance by teleconference. We will also reimburse directors for travel
expenses to attend meetings. Grant of future options will be at the discretion
of the board of directors and will be reviewed annually; however, the grant is
expected to be for approximately 2,000 shares per director per year.
STOCK PLANS
1999 STOCK OPTION PLAN. Our stock option plan was adopted and approved by
shareholders on June 15, 1999. It replaced a similar plan that was adopted by
Hat World, Inc. on June 8, 1995. No options are to be granted under the 1999
Stock Option Plan after December 31, 2005. The plan is administered by the board
or a committee appointed by the board.
Grants may be made to employees, including officers and employee directors,
consultants and non-employee directors of Hat World Corporation or any of its
subsidiaries. Grants under the plan may consist of options intended to qualify
as incentive stock options within the meaning of Section 422A of the Internal
Revenue Code, as amended, and nonqualified stock options that are not intended
to so qualify.
Under the plan, 880,000 shares of common stock have been reserved for
issuance. Shares issued and not expired, voided or forfeited under the prior
plan were "grandfathered" into this plan. Therefore, as of June 15, 1999, there
were outstanding options to purchase 433,500 shares of common stock at a
weighted-average exercise price of approximately $5.61 per share. There are
446,500 additional shares available for which stock options can be granted under
the plan.
The board determines the exercise price of options granted under the plan
in accordance with the guidelines set forth in the plan. The exercise price of
incentive stock options granted pursuant to the plan cannot be less than 100% of
the fair market value of the common stock on the date of the grant. The exercise
price of options granted to any person who at the time of grant owns stock
representing more than 10% of the total combined voting power of all classes of
our capital stock or any of its affiliates must be at least 110% of the fair
market value of our common stock on the date
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<PAGE>
of grant. The term of such options cannot exceed six years. Options granted
under the plan are subject to more restrictive terms and conditions and vest at
the rate specified in the option agreement.
Upon certain changes in control all outstanding options under the plan must
either be assumed or substituted by the surviving entity. In the event the
surviving entity determines not to assume or substitute such options, then the
exercise of such non-assumed options and awards held by persons will be
accelerated. Such options and awards will terminate if not exercised prior to
such change in control event.
401-K PLAN
We started a 401-K plan in February 1998 for all eligible employees
including executive officers. We contribute to this plan 50% of up to 5% of the
salary of each participating employee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by our executive
officers during the year ended December 31, 1998. There were no executive
officers that earned as much as $100,000 during the same year.
1998 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER LONG TERM COMPENSATION
NAME AND PRINCIPAL POSITION SALARY COMPENSATION SHARES UNDERLYING OPTIONS
- --------------------------- -------- ------------ -------------------------
<S> <C> <C> <C>
George Berger, Chairman .................... $37,244 $ 0 40,000
James Harris, President .................... $83,923 $2,769 172,000
Kenneth Kocher, Chief Financial Officer .... $52,994 $ 0 92,000
J. Glenn Campbell, Vice President. ......... $61,901 $2,769 40,000
Scott Molander, Vice President ............. $61,901 $3,000 40,000
</TABLE>
The amounts set forth in "All Other Compensation" represents payments for
automobile allowances. We have since replaced the automobile allowance program
with the use of company-owned cars.
Effective July 1, 1998, we entered into 3-year employment agreements with
each of Messrs. Berger, Harris, Kocher, Campbell and Molander. The base salary,
incentive adjustments, performance bonuses and stock options were set for the
three year period for Messrs. Harris, Kocher, Campbell and Molander and for one
year for Mr. Berger. The base pay rates were set to begin at $50,000 for Mr.
Berger, $80,000 for Mr. Harris, $60,000 for Mr. Kocher, and $70,000 each for
Messrs. Campbell and Molander.
We increased the base pay of each of the executives listed above by 10% at
the time that we had 50 stores in operation, $55,000 for Mr. Berger, $88,000
for Mr. Harris, $66,000 for Mr. Kocher, and $77,000 each for Mr. Campbell and
Mr. Molander. Effective July 1, 1999 Mr. Berger's salary was set at $77,000. We
also agreed to increase the salaries of the executive officers by 10% at the
time that we have opened 100 stores. We pay health insurance for all of the
executive officers and their families. We provide an automobile for each of the
following: James Harris, Scott Molander and J. Glenn Campbell. Please see the
information below regarding employment agreements, compensation and options
granted to the executive officers.
The employment agreements were structured to provide three different types
of incentives for the executives, as follows:
* to encourage growth, we provide for salary adjustments based on the
number of stores operated;
* to promote profits and financial well-being we provide performance
bonuses based on certain levels of EBITDA or earnings before interest,
taxes, depreciation and amortization; and
* to promote increased appreciation of the value of our company, we
provide stock options.
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<PAGE>
The base salary adjustments provide for increases or decreases in annual
base salary for each of these executives as the number of stores which we
operate increases or decreases, as follows:
50 to 99 stores ........................ 10% increase or decrease
100 to 149 stores ...................... 10% increase or decrease
150 to 199 stores ...................... 15% increase or decrease
200 to 249 stores ...................... 15% increase or decrease
The increases or decreases are based initially on the base pay rate in the
first year of employment and, after each adjustment, the adjusted base pay rate
is the rate for each period preceding the event triggering such increase or
decrease. For example, Mr. Harris's base salary increased from the initial base
pay rate of $80,000 per year to $88,000 per year when we had 50 to 99 stores in
operation. His adjusted base salary will increase to $96,800 when we operate 100
to 149 stores. In other words, the increases or decreases apply to the
immediately prior adjusted annual base salary amount.
The performance bonus is based on a reasonable projected ratio of EBITDA
for the year, as determined by March 31 of that year by the Board of Directors.
In 1999, even though the EBITDA targets were not obtained for the 1998 fiscal
year, the board of directors unanimously approved a discretionary bonus to these
executives of 5% of their then annual base salary amounts.
The stock options granted to our executives are as follows:
* George Berger was granted an option to purchase 40,000 shares at an
exercise price of $6.50 per share. His options vest over a period of
three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Berger's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate.
* James Harris was granted an option to purchase 100,000 shares at an
exercise price of $6.50 per share. His options vest over a period of
three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Harris's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate. We also granted Mr. Harris an
option to purchase 72,000 shares at an exercise price of $1.5625 per
share. Of the total, 52,000 shares were vested as of January 1, 1999
and 20,000 shares will vest on January 1, 2000. These options expire
on May 31, 2000, and are exercisable only during Mr. Harris's
employment by us.
* Kenneth J. Kocher was granted an option to purchase 80,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Kocher's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate. We also granted Mr. Kocher an
option to purchase 12,000 shares at an exercise price of $1.5625 per
share. These options expire on May 31, 2000, and are exercisable only
during Mr. Kocher's employment by us.
* J. Glenn Campbell was granted an option to purchase 40,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Campbell's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate.
* Scott A. Molander was granted an option to purchase 40,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998.
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<PAGE>
These options expire on December 31, 2001, and are exercisable only
during Mr. Molander's employment by us. In the event of an acquisition
of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate.
The following table sets forth the Option/SAR grants to our executive
officers during the year ended December 31, 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ----------------------------------------------------------------------------------------
PERCENT OF TOTAL
OPTIONS/SARS GRANTED
OPTIONS/SARs TO EMPLOYEES IN EXERCISE OF EXPIRATION
NAME GRANTED FISCAL YEAR BASE PRICE DATE
- ---- ------------ -------------------- ----------- ----------
<S> <C> <C> <C> <C>
James Harris ............ 100,000 30% $ 6.50 12/31/2001
George Berger ........... 40,000 12% $ 6.50 12/31/2001
Kenneth J. Kocher ....... 80,000 24% $ 6.50 12/31/2001
J. Glenn Campbell ....... 40,000 12% $ 6.50 12/31/2001
Scott A. Molander ....... 40,000 12% $ 6.50 12/31/2001
</TABLE>
INDEMNIFICATION
Minnesota Statutes, Section 302A.521, contain an extensive indemnification
provision which requires mandatory indemnification by a corporation of any
officer, director and affiliated person who was or is a party, or who is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a member, director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a member, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, and against judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted, or failed to act, in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In some instances a court
must approve such indemnification.
Indemnification does not eliminate the duty of care and does not affect an
officer's or a director's responsibilities under any laws, such as the federal
securities laws.
We have entered into indemnity agreements with each of our directors and
executive officers to indemnify them against expenses and losses incurred for
claims brought against them in their capacities as directors or executive
officers. The indemnification agreements provide that the maximum
indemnification by us of each director or officer would be the maximum extent
permissible under Minnesota law as amended from time to time. Indemnification is
available if the director or officer seeking indemnification:
* has not been indemnified by another corporation or employee benefit
plan with respect to the same matters complained of in the proceeding;
* has acted in good faith;
* had no reason, in the case of a criminal proceeding, to believe his
conduct was unlawful;
* received no improper personal benefits and complied with the conflict
of interest provisions of the Minnesota Statutes; and
* reasonably believed the conduct was in our best interests.
There is no pending litigation or proceeding involving any director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
As to indemnification for liabilities arising under the Securities Act of
1933 for directors, officers or controlling persons, we are aware that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy and unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
We have agreed to issue a warrant to Bluestem Capital Partners I to
purchase 40,000 shares of our common stock at an exercise price of 125% of the
initial public offering price. The warrant will expire two years from the
effective date of this initial public offering. The warrants are in partial
consideration for the guarantee of a $2,000,000 bridge loan from a bank, which
has funded new stores and working capital prior to this offering. We have also
agreed to pay Bluestem Capital Partners I an interest rate of 4% as additional
compensation for the guaranty.
We believe the transaction summarized above was made on terms no less
favorable than terms we could have obtained from unaffiliated third parties. The
board of directors has determined that any future transactions between us and
our officers, directors or principal stockholders will be approved by a majority
of the disinterested directors and will be on terms no less favorable than we
could obtain from an unaffiliated third party. The board of directors may obtain
independent counsel or other independent advice to assist in that determination.
As part of its purchase of shares of our common stock in 1998, Bluestem
Capital Partners II, LP granted us a "put" option to sell to such entity
additional shares of our common stock at $8.44 per share for up to $2,000,000
for two years in increments as we may desire to sell to it. Such put option is
subject to our having achieved certain projected financial goals at the time of
exercise which were determined at the date of the granting of the option. We do
not intend to exercise this put if the capital is available from another source
on more favorable terms.
In June 1995, Hat World, Inc. issued 100,000 shares of Class M common stock
to each of Messrs. Berger, Campbell and Molander for $1,000 per person, and we
issued 50,000 shares of Class M common stock to CR Ventures, Inc., a corporation
which was controlled by Mr. Berger, for $50,000 cash. The Class M common stock
had the same voting rights as the Class A common stock which was authorized at
the time under our articles of incorporation. The Class A common stock was
entitled to receive a 12.5% per year priority return on a noncumulative basis
based on the amount of the purchase price of such stock. The Class M common
stock was automatically convertible into Class A common stock upon the
occurrence of certain events, including the offer by Hat World, Inc. to
repurchase the Class A common stock for the full amount of the purchase price
paid by the owners of such stock plus the priority return.
Such an offer was made in July 1997, and both classes of common stock were
converted into an equal number of shares of common stock of a single class. As a
result, Messrs. Berger, Campbell and Molander became owners of our common stock.
Mr. Berger acquired additional shares of stock as a result of the distribution
of his pro rata shares of CR Ventures, Inc.'s assets when that company was
subsequently dissolved. Since the inception of Hat World, Inc. the number of
shares has increased due to the declaration of one 10% stock dividend and two
100% stock dividends.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table details certain information with respect to the
beneficial ownership of our common stock as of July 31, 1999 by:
* each stockholder known by us to beneficially own more than 5% of our
common stock;
* each named executive officer;
* each director; and
* all directors and executive officers as a group.
The table also presents information as adjusted to reflect the sale by us
of the shares offered hereby (assuming no exercise of the representatives'
over-allotment option).
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
---------------------
SHARES BENEFICIALLY
OWNED PRIOR EXERCISABLE NUMBER PRIOR TO AFTER
TO OFFERING OF OPTIONS OFFERING OFFERING
------------------- ------------------ -------- --------
<S> <C> <C> <C> <C>
George Berger (1) .............. 576,524 24,000 18.96% 14.69%
Bluestem Capital
Partners I, LLC (2)(3)(6) ..... 878,576 48,000 29.03 22.54
Bluestem Capital
Partners II, LP (2)(3) ........ 597,630 19.01 14.71
J. Glenn Campbell (4) .......... 390,000 24,000 13.07 10.13
James Harris (4) ............... 4,000 126,000 3.98 3.10
Ken Kocher (1) ................. 30,500 56,000 2.70 2.10
Scott Molander (4) ............. 390,000 24,000 13.07 10.13
John Andretti (4) .............. -- 4,000 .13 .10
Mark E. Griffin (5) ............ -- 4,000 .13 .10
All directors and officers
as a Group (9 persons) ........ 2,867,230 310,000 92.00% 72.65%
</TABLE>
- ------------------
(1) The address is Hat World Corporation, 4912 S. Minnesota Avenue, Sioux
Falls, South Dakota 57108.
(2) The address is 122 S. Phillips Avenue, Sioux Falls, South Dakota 55104.
(3) Steve Kirby and Paul A. Schock, directors, are control persons and
principals of Bluestem Capital Partners I, LLC and Bluestem Capital
Partners II, LP.
(4) The address is Hat World, Inc., 8142 Woodland Drive, Indianapolis, Indiana
46278.
(5) The address is 2701 S. Minnesota Avenue, Sioux Falls, South Dakota 57105.
(6) The directors' options for Messrs. Kirby and Schock have been assigned to
Bluestem Capital Partners I, LLC.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to warrants or options held by that person that
are currently exercisable or will become exercisable within 60 days after July
31, 1999 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Applicable
percentages are based on 3,143,446 shares of common stock outstanding as of July
31, 1999 and 4,063,446 shares of common stock outstanding after completion of
this offering. Unless otherwise indicated in the following paragraphs, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description summarizes certain terms of our capital stock and
certain provisions of our restated certificate of incorporation and bylaws.
Please refer to our restated certificate of incorporation and bylaws, which have
been filed as exhibits to this registration statement.
COMMON STOCK
We have authorized 10,000,000 shares of common stock, with a par value of
$.01 per share. Each holder of common stock has one vote per share on all
matters voted upon by the shareholders. Such voting rights are not cumulative
and as such shareholders holding more than 50% of the outstanding shares of
common stock are able to and will be able to elect all members of the Board of
Directors. There are no preemptive rights or other rights of subscription.
Each share of common stock is entitled to participate equally in dividends
as and when declared by the Board of Directors of Hat World out of funds legally
available, and is entitled to participate equally in the distribution of assets
in the event of liquidation. All shares, when issued and fully paid, are not
assessable and are not subject to redemption or conversion and have no
conversion rights.
MINNESOTA ANTI-TAKEOVER LAW
We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act. In general, Section 302A.671 restricts the
voting of certain percentages of voting control to be acquired in a control
share acquisition of our voting stock (in excess of 20%, 33.3% or 50%) until
after shareholder approval of the acquisition is obtained. A "control share
acquisition" is an acquisition, directly or indirectly, of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. In general, Section 203A.673 prohibits a
public Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved by a majority of disinterested directors prior
to the date the shareholder becomes an interested shareholder.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
In the event of certain tender offers for capital stock Section 302A.675
precludes the tender offeror from acquiring additional shares of capital stock
(including acquisitions pursuant to mergers, consolidations or statutory share
exchanges) within two years following the completion of such an offer unless the
selling shareholders are given the opportunity to sell the shares of capital
stock on terms that are substantially equivalent to those contained in the
earlier tender offer. Section 302A.675 does not apply if a committee of the
Board of Directors consisting of all of its disinterested directors (excluding
present and former officers) approves the subsequent acquisition before shares
are acquired pursuant to the earlier tender offer.
These provisions of the Minnesota law could delay and make more difficult a
business combination, particularly one opposed by the board of directors, even
if the business combination could be beneficial, in the short term, to the
interests of shareholders. These statutory provisions could also depress the
price certain investors might be willing to pay in the future for shares of our
common stock (because it may make hostile takeovers more difficult and costly,
and therefore, less attractive to the potential pursuer).
LISTING
We have applied for listing of our common stock on the Nasdaq National
Market under the trading symbol "HATS."
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<PAGE>
TRANSFER AGENT AND REGISTRAR
American Securities Transfer and Trust, Incorporated has been appointed as
the transfer agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 4,063,446 shares of common
stock outstanding, or 4,201,446 shares if the over allotment option is exercised
in full. Of these shares, the 920,000 sold in this offering (1,058,000 with the
over allotment) will not be deemed to be restricted shares under the Securities
Act of 1933. The remaining 3,143,446 shares were issued and sold in transactions
and in reliance on the exemptions under the Securities Act.
The 3,143,446 restricted shares will be eligible for sale pursuant to Rule
144 of the Securities Act at the expiration of a one-year holding period from
their date of acquisition and after ninety days from the effective date of this
offering. The one-year holding period for these shares has ended.
Hat World's executive officers, directors, and 5% stockholders, who
collectively hold an aggregate of approximately 2,867,230 restricted shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any such shares for a period of one year, with a few
isolated exceptions, from the date of this prospectus. Our stockholders owning
less than 5% of our common stock have agreed not to offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of their shares for a
period of six months, for a total of 226,216 shares. The representatives of the
underwriters may, in their sole discretion and at any time without prior notice,
release all or any portion of the common stock subject to these lock-up
agreements.
The 226,216 shares of stock subject to the six month lock agreement will
automatically be released if our stock is traded on the public market at a
closing price in excess of 150% of the initial public offering price for a
period of 15 consecutive trading days before the end of the six month period.
The representatives currently have no plans to release any portion of the
securities subject to these lock-up agreements. When determining whether or not
to release shares from the lock-up agreements, the representatives will
consider, among other factors, earnings history, market conditions and other
factors deemed relevant by the representatives.
In general, under Rule 144 a person who has beneficially owned his
restricted shares for at least one year, and persons who are affiliates are
entitled to sell within any three month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of our common stock
(approximately 42,936 shares immediately after this offering) or the average
weekly trading volume in our common stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about us. However, a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale and who has
beneficially owned his registered stock for at least two years would be entitled
to sell his shares under Rule 144 without regard to the volume limitations,
manner of sale provisions or notice requirements.
Prior to this offering there has been a limited market for the common stock
and no predictions can be made of the effect, if any, that market sales of
restricted shares or the availability of restricted shares for sale will have on
the market price of the shares if a market for the shares develops.
Nevertheless, sales of substantial amounts of the restricted shares in the
public market could adversely affect such market prices.
Taking into account the lock-up agreements the number of restricted shares
that will be available for sale under the provisions of Rules 144, 144(k) and
701, as of the date of this prospectus, approximately 50,000 shares will be
eligible for sale, approximately 222,216 after 6 months, and 2,867,230 shares
will be eligible for sale 12 months after the date of this prospectus upon the
expiration of the lock-up agreements. This does not take into account any early
release from the lock-up agreements or for sales in reliance on Rule 701 with
the consent of the representatives.
The market price of our common stock could fall if our stockholders sell
substantial amounts of stock, including shares issued on the exercise of options
and warrants, in the public market following
37
<PAGE>
this offering. Such sales might also make it more difficult for us to sell
equity securities in the future on terms we deem appropriate.
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which Neidiger, Tucker, Bruner,
Inc., EBI Securities Corporation, American Fronteer Financial Corporation, and
Joseph Stevens & Company, Inc. are acting as representatives, have severally
agreed to purchase from us the respective number of shares of common stock set
forth opposite each underwriter's name.
UNDERWRITER NUMBER OF SHARES
Neidiger, Tucker, Bruner, Inc. 230,000
EBI Securities Corporation 230,000
Capital West Securities, Inc. 230,000
Joseph Stevens & Company, Inc. 230,000
---------
Total 920,000
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates opinions and letters from us, our counsel and independent auditors.
The underwriters will be obligated to purchase all the shares of common stock
offered, if any shares are purchased.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $.28 per share. The underwriters may allow and such dealers may allow
a concession not in excess of $.14 per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the representatives. The representatives have advised us
that the underwriters do not expect any sales to accounts for which any of the
underwriters or dealers will exercise discretion as to such sale.
We have granted to the representatives an option, expiring at the close of
business on the 45th day after the date of this prospectus, to purchase up to
138,000 additional shares at $7.00, less the underwriting discounts, all as set
forth on the cover page of this prospectus. The representatives may exercise
such option only to cover over-allotments made in connection with the sale of
common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering we will sell warrants to purchase 92,000
shares of common stock, to the representatives for $92 in the aggregate. The
representatives' warrants will become exercisable immediately after the
completion of this offering at a per share exercise price of $8.75, and will
expire five years from the date of this prospectus. The representatives'
warrants and underlying shares of common stock will be restricted from sale,
transfer, assignment or hypothecation for a period of one year from the date of
this prospectus, except to the representatives, underwriters, selling group
members and their officers and partners. During the exercise period, holders of
the representatives' warrants are entitled to certain demand and incidental
rights with respect to the shares of common stock issuable upon exercise of the
representatives' warrants. The common stock issuable on exercise of the
representatives' warrants is subject to adjustment in certain events to prevent
dilution.
We will pay the representatives a nonaccountable expense allowance of 2.5%
of the gross proceeds of the offering, which will include proceeds from the
over-allotment option, if exercised. The
38
<PAGE>
representatives expenses in excess of the nonaccountable expense allowance,
including its legal expenses, will be borne by the representatives. We have paid
$40,000 to the representatives as an advance for expenses.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, and to contribute to
payments which the underwriters may be required to make regarding these
liabilities.
We have agreed to give notice to the representatives of meetings of the
board of directors and to grant access to such meetings to advisors designated
by the representatives to attend the meetings as observers.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Neither Hat World nor the underwriters can predict the effect that the
transactions described may have on the price of the common stock. In addition,
neither Hat World nor the underwriters represent that the underwriters will
engage in such transactions. If begun, the transactions may be discontinued at
any time without notice. It is anticipated that certain of the underwriters will
make a market in the common stock on completion of this offering, as permitted
by law. The underwriters are not obligated to make a market in the common stock,
and if they do so may discontinue making a market at any time. An active trading
market may never develop for the common stock.
Before this offering there has been no market for the common stock.
Negotiations between the representatives and us will determine the initial
public offering price. The main factors to be considered in determining the
initial public offering price include:
* the information set forth in this prospectus and otherwise available;
* the history and the prospects for the industry in which we compete;
* the ability of our management;
* the prospects for our future earnings;
* the present state of our development and our financial condition;
* the general condition of the securities markets at the time of this
offering; and
* the recent market prices of, and the demand for, publicly traded stock
of generally comparable companies
39
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Hat World
by Charles Clayton, Minneapolis, Minnesota. Clanahan, Tanner, Downing and
Knowlton, P.C., Denver, Colorado will pass upon certain legal matters for the
representatives of the underwriters.
EXPERTS
The audited financial statements of Hat World, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by Eide
Bailly LLP, independent public accountants, as indicated in their reports, and
are included in reliance on the authority of the firm as experts in giving
reports.
In June 1999, Hat World, Inc. stockholders approved a plan wherein Hat
World, Inc. would become the sole operating subsidiary of Hat World
Corporation, a holding company, incorporated in April 1999. This became
effective in July 1999.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report ........................................................... F-2
Balance Sheets, December 31, 1998 (Audited) and June 30, 1999 (Unaudited) .............. F-3
Statements of Operations, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1998 and 1999 (Unaudited) ................................... F-4
Statements of Stockholders' Equity, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1999 (Unaudited) ............................................ F-5
Statements of Cash Flows, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1998 and 1999 (Unaudited) ................................... F-6
Notes to Financial Statements .......................................................... F-8
</TABLE>
F-1
<PAGE>
EIDE BAILLY LLP
------------------------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Hat World, Inc.
Sioux Falls, South Dakota
We have audited the accompanying balance sheet of Hat World, Inc. as of December
31, 1998, and the related statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hat World, Inc. as of December
31, 1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ Eide Bailly LLP
Sioux Falls, South Dakota
January 15, 1999
F-2
<PAGE>
HAT WORLD, INC.
BALANCE SHEETS
DECEMBER 31, 1998 (AUDITED) AND JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................. $ 433,354 $ 13,405
Receivables ............................................... 120,794 129,065
Income taxes refundable ................................... -- 314,272
Inventories ............................................... 2,682,854 3,898,320
Prepaid expenses .......................................... 67,192 272,533
------------ ------------
Total current assets .................................... 3,304,194 4,627,595
------------ ------------
DEFERRED INCOME TAXES ...................................... 114,770 114,770
------------ ------------
INTANGIBLE ASSETS, net of accumulated amortization ......... 2,566 21,896
------------ ------------
PROPERTY AND EQUIPMENT
Leasehold improvements .................................... 3,368,917 5,269,689
Furniture and fixtures .................................... 513,192 863,119
Equipment, office and computer ............................ 329,990 738,037
Vehicles .................................................. 110,243 146,329
------------ ------------
4,322,342 7,017,174
Less accumulated depreciation & amortization ............ (628,780) (1,056,974)
------------ ------------
3,693,562 5,960,200
------------ ------------
Total Assets ............................................ $ 7,115,092 $ 10,724,461
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable -- bank ..................................... $ -- $ 3,600,000
Current maturities of long-term debt ...................... 15,511 72,661
Accounts payable, trade ................................... 836,317 1,553,271
Accrued expenses .......................................... 456,858 443,344
Income taxes payable ...................................... 373,221 --
------------ ------------
Total current liabilities ............................... 1,681,907 5,669,276
------------ ------------
LONG-TERM DEBT, less current maturities .................... 57,689 138,727
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 10,000,000 shares
Issued, 3,143,446 shares ................................ 31,436 31,436
Additional paid-in capital ................................ 4,383,230 4,383,230
Retained earnings ......................................... 960,830 501,792
------------ ------------
Total Stockholders' Equity ................................ 5,375,496 4,916,458
------------ ------------
Total Liabilities and Stockholders' Equity ................ $ 7,115,092 $ 10,724,461
============ ============
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
HAT WORLD, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
1997 1998 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ............................. $ 3,761,107 $ 10,975,102 $ 3,159,810 $ 7,518,135
COST OF SALES ......................... 1,707,026 4,897,930 1,439,134 3,346,289
------------ ------------ ------------ ------------
GROSS PROFIT .......................... 2,054,081 6,077,172 1,720,676 4,171,846
OPERATING EXPENSES .................... 1,573,407 5,062,679 1,791,998 4,810,199
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ......... 480,674 1,014,493 (71,322) (638,353)
OTHER INCOME (EXPENSE)
Interest income ...................... 3,126 15,151 3,114 448
Interest expense ..................... (18,620) (41,404) (18,046) (72,718)
Other ................................ 5,678 20,029 5,726 (54,440)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES ......................... 470,858 1,008,269 (80,528) (765,063)
INCOME TAXES (BENEFIT) ................ 195,300 365,700 (36,238) (306,025)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ..................... $ 275,558 $ 642,569 $ (44,290) $ (459,038)
============ ============ ============ ============
EARNINGS (LOSS) PER
COMMON SHARE, basic .................. $ 0.13 $ 0.23 $ (0.02) $ (0.15)
============ ============ ============ ============
EARNINGS (LOSS) PER
COMMON SHARE, diluted ................ $ 0.13 $ 0.22 $ (0.02) $ (0.15)
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
HAT WORLD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND SIX MONTHS ENDED JUNE 30,
1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK CLASS A COMMON STOCK CLASS M COMMON STOCK
---------------------- ----------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ............... -- $ -- 35,540 $ 355 385,000 $ 3,850
Issuance of 216,474 shares of Class A
common stock, net of offering costs
of $3,117 .............................. -- -- 216,474 2,166 -- --
Purchase and retirement of 560 shares
of Class A common stock ................ -- -- (560) (6) -- --
Conversion of all shares of Class M
common stock to shares of common
stock .................................. 636,454 6,365 (251,454) (2,515) (385,000) (3,850)
Issuance of 636,454 shares of common
stock pursuant to a stock split in the
form of a stock dividend ............... 636,454 6,365 -- -- -- --
Net income .............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 ............... 1,272,908 12,730 -- -- -- --
Issuance of 248,815 shares of common
stock, net of offering costs of $928 ... 248,815 2,488 -- -- -- --
Issuance of 50,000 shares of common
stock upon the exercise of options ..... 50,000 500 -- -- -- --
Issuance of 1,571,723 shares of common
stock pursuant to a stock split in the
form of a stock dividend ............... 1,571,723 15,718 -- -- -- --
Net income .............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 ............... 3,143,446 31,436 -- -- -- --
Net (loss) .............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) ............................. 3,143,446 $ 31,436 -- $ -- -- $ --
========== ========== ========== ========== ========== ==========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
CAPITAL EARNINGS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ............... $ 205,848 $ 64,786 $ 274,839
Issuance of 216,474 shares of Class A
common stock, net of offering costs
of $3,117 .............................. 1,034,468 -- 1,036,634
Purchase and retirement of 560 shares
of Class A common stock ................ (3,170) -- (3,176)
Conversion of all shares of Class M
common stock to shares of common
stock .................................. -- -- --
Issuance of 636,454 shares of common
stock pursuant to a stock split in the
form of a stock dividend ............... -- (6,365) --
Net income .............................. -- 275,558 275,558
---------- ---------- ----------
BALANCE, DECEMBER 31, 1997 ............... 1,237,146 333,979 1,583,855
Issuance of 248,815 shares of common
stock, net of offering costs of $928 ... 2,996,584 -- 2,999,072
Issuance of 50,000 shares of common
stock upon the exercise of options ..... 149,500 -- 150,000
Issuance of 1,571,723 shares of common
stock pursuant to a stock split in the
form of a stock dividend ............... -- (15,718) --
Net income .............................. -- 642,569 642,569
---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 ............... 4,383,230 960,830 5,375,496
Net (loss) .............................. -- (459,038) (459,038)
---------- ---------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) ............................. $4,383,230 $ 501,792 $4,916,458
========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
HAT WORLD, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................... $ 275,558 $ 642,569 $ (44,290) $ (459,038)
Charges and credits to net income
(loss) not affecting cash
Depreciation .............................. 33,250 116,435 27,555 118,908
Amortization of leasehold improvements
and intangibles .......................... 104,767 344,798 127,518 309,286
Deferred income taxes ..................... (20,585) (98,585) -- --
Changes in assets and liabilities
Receivables ............................... 10,954 (116,748) 1,423 19,554
Inventories ............................... (587,591) (1,907,153) (653,772) (1,215,466)
Prepaid expenses .......................... 146 (61,324) (38,973) (205,341)
Accounts payable, trade ................... 389,664 332,647 211,925 563,572
Accounts payable, stockholders ............ (3,733) -- -- --
Accrued expenses .......................... 168,394 230,636 (56,372) (13,514)
Unearned membership dues .................. (4,225) -- -- --
Income taxes payable ...................... 189,731 168,153 (328,123) (687,493)
----------- ----------- ----------- -----------
NET CASH FROM (USED FOR)
OPERATING ACTIVITIES ........................ 556,330 (348,572) (753,109) (1,569,532)
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Property and equipment purchases ............ (969,805) (3,072,226) (1,468,632) (2,420,380)
Reimbursement received on property and
equipment purchases ........................ -- -- -- 34,175
Payment of start-up costs and loan fees ..... -- -- -- (19,438)
----------- ----------- ----------- -----------
NET CASH USED FOR INVESTING
ACTIVITIES .................................. (969,805) (3,072,226) (1,468,632) (2,405,643)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) on notes
payable .................................... (198,584) -- 1,650,000 3,600,000
Proceeds from long-term debt borrowings ..... -- 78,194 -- 15,586
Principle payments on long-term debt ........ -- (4,994) -- (32,649)
Proceeds from stock issuance, net of
offering costs ............................. 1,036,634 2,999,072 -- --
Proceeds from stock issuance upon the
exercise of options ........................ -- 150,000 -- --
Payment of offering costs ................... -- -- (928) --
</TABLE>
(continued on next page)
F-6
<PAGE>
STATEMENTS OF CASH FLOWS -- PAGE 2
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES (Con't.)
Purchase and retirement of stock ............ $ (3,176) $ -- $ -- $ --
Payment of short-term payable used to
finance equipment purchases ................ -- -- -- (27,711)
----------- ----------- ----------- -----------
NET CASH FROM FINANCING
ACTIVITIES .................................. 834,874 3,222,272 1,649,072 3,555,226
----------- ----------- ----------- -----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ................................. 421,399 (198,526) (572,669) (419,949)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ......................... 210,481 631,880 631,880 433,354
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ............................... $ 631,880 $ 433,354 $ 59,211 $ 13,405
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period
Interest .................................. $ 22,561 $ 41,404 $ 18,046 $ 17,225
Income taxes .............................. 26,175 296,132 248,965 373,270
=========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment
through accounts and notes payable ......... $ -- $ 137,954 $ 145,059 $ 181,093
Reimbursement due for property and
equipment purchases included in
receivables ................................ -- 118,700 -- 62,000
Common stock subscription ................... -- -- 3,150,000 --
Stock split in the form of a stock dividend . 6,365 15,718 -- --
Capital lease obligations incurred for use
of equipment ............................... -- -- -- 155,251
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 -- PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Hat World, Inc. (the "Company") was incorporated June 1, 1995 for the
purpose of operating specialty retail stores, primarily to sell baseball-style
caps. The first store was opened November 3, 1995 and at December 31, 1998
fifty-three stores were operating in fourteen states.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999, are unaudited but, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
which are necessary for a fair presentation of financial condition, results of
operations, and cash flows. The operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers money market funds to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost, (first-in, first-out method)
or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Furniture and fixtures 5 - 7 years
Equipment, office and computer 3 - 5 years
Amortization of the leasehold improvements is computed over the lives of
the respective leases which are one to nine years.
INTANGIBLE ASSET
Amortization of the cost of developing Company trademarks for registration
is computed using the straight-line method over an estimated life of fifteen
years.
CONCENTRATION OF CREDIT RISK
At December 31, 1998, one bank account had $437,119 in excess of the
Federal Deposit Insurance Corporation insurance limits.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between
F-8
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-- PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property and equipment for financial and income tax reporting. The deferred tax
assets represent the future tax return consequences of those differences, which
will be deductible when the assets are recovered.
ADVERTISING
Advertising costs are expensed as incurred. The Company incurred $28,584
and $13,932 for advertising costs in 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain amounts in 1997 have been reclassified to conform with 1998
presentation.
NOTE 2 -- LINE OF CREDIT AND LONG-TERM DEBT
The Company has a variable rate line of credit of $650,000 at
December 31, 1998, due on demand and secured by substantially all
assets of the Company. Interest is .5% above the bank's prime rate,
and was 9.25% at December 31, 1998 .................................. $ --
=========
Long-term debt at December 31, 1998 consists of:
3.9% note payable to finance corporation, due in monthly
installments of $357, including interest, to July 2002;
secured by a vehicle ....................................... $ 18,623
9.77% note payable to bank, due in monthly installments
of $449, including interest, to August 2003; secured by
two vehicles ............................................... 40,255
8.0% note payable to finance corporation, due in monthly
installments of $490, including interest, to August 2002;
secured by a vehicle ....................................... 14,322
---------
73,200
Less current maturities ................................... (15,511)
---------
$ 57,689
=========
Long-term debt maturities are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
------------ -------
1999 .................................. $15,511
2000 .................................. 16,772
2001 .................................. 18,145
2002 .................................. 15,863
2003 .................................. 6,909
-------
$73,200
=======
F-9
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 -- ACCRUED EXPENSES
Accrued expenses at December 31, 1998 include:
Compensation, related withholdings & benefits ......... $234,675
Sales taxes ........................................... 182,170
Rent .................................................. 11,703
Other ................................................. 28,310
--------
$456,858
========
NOTE 4 -- EMPLOYEE BENEFIT PLAN
The Company established a 401(K) retirement plan in 1998, which covers all
employees who meet eligibility requirements. Employees may defer a maximum of
15% of their salary. The Company will match 50% of the first 5% of the
employee's elective deferral. The Company may also make additional contributions
to the plan at the discretion of the Board of Directors. The Company's
contribution for 1998 was $15,681.
NOTE 5 -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1997 and
1998 follows:
1997 1998
------------------------------ ------------------------------
TOTAL CURRENT PREPAID TOTAL CURRENT PREPAID
-------- -------- -------- -------- -------- --------
Federal ..... $146,600 $164,185 $(17,585) $283,700 $366,285 $(82,585)
State ....... 48,700 51,700 (3,000) 82,000 98,000 (16,000)
-------- -------- -------- -------- -------- --------
Total ....... $195,300 $215,885 $(20,585) $365,700 $464,285 $(98,585)
======== ======== ======== ======== ======== ========
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate of 34% to pretax income for the
years ended December 31, 1997 and 1998 due to the following:
1997 1998
-------- ---------
Computed "expected" tax expense ........................ $160,092 $ 342,799
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit ........ 32,149 54,180
Other ................................................. 3,059 (31,279)
-------- ---------
$195,300 $ 365,700
======== =========
Deferred income taxes represent the accumulated depreciation differences
between financial statement and income tax reporting of property and equipment.
There is no valuation allowance account.
F-10
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 6 -- LEASE COMMITMENTS
The Company leases all fifty-three of its store locations and a warehouse
under noncancelable lease agreements with terms ranging from less than one year
to nine years. In most cases, management expects that in the normal course of
business, leases will be renewed or replaced by other leases. Generally, under
these leases, the Company is obligated for certain minimum rentals, real estate
taxes, utilities, insurance and contingent rentals based upon sales volume. Rent
expense under these leases was $1,230,657 and $390,531 for the years ended
December 31, 1998 and 1997, respectively. Included in the total rent expense for
the years ended December 31, 1998 and 1997 was $18,667 and $28,264,
respectively, representing contingent rent based upon sales volume. At December
31, 1998, the Company had also entered into lease agreements for nine new stores
and a new warehouse, with plans to begin operation at these locations during
1999. Minimum lease payments in future years are as follows:
YEARS ENDING
DECEMBER 31, AMOUNT
------------ -----------
1999 .................................. $ 1,759,868
2000 .................................. 1,786,361
2001 .................................. 1,801,257
2002 .................................. 1,644,264
2003 .................................. 1,533,408
Remaining Years ....................... 2,380,944
-----------
Total minimum lease payments ......... $10,906,102
===========
Subsequent to year end, the Company entered into a lease agreement for a
new store. The lease will commence on March 1, 1999, with a term of 107 months.
The annual minimum lease payment on the store will be $35,280.
NOTE 7 -- EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
During 1997, all Class M and Class A shares were converted to shares of
common stock, and basic earnings per share was computed for a single class of
common stock. Diluted earnings per share assume the execution of all stock
options at the shareholders' most advantageous price. Earnings per share has
been computed using the weighted average of the number of shares outstanding
during each of the periods presented.
In both 1998 and 1997 the Company declared two for one stock splits in the
form of a stock dividend of two shares of common stock for each share
outstanding. All stock option per share information in these financial
statements has been adjusted retroactively for the effect of these splits.
F-11
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 7-- EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY (CONTINUED)
Following is a reconciliation of the numerators and the denominators for
the earnings per share computations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders ...................... $275,558 2,074,902 $ 0.13
Effect of Dilutive Securities Options -- 40,936 --
-------- --------- ------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions ....................... $275,558 2,115,838 $ 0.13
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
-------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders ...................... $642,569 2,820,890 $ 0.23
Effect of Dilutive Securities Options -- 62,122 --
-------- --------- ------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions ....................... $642,569 2,883,012 $ 0.22
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1998 (UNAUDITED)
--------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share
Loss available to common
stockholders ...................... $ (44,290) 2,545,816 $ (0.02)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 (UNAUDITED)
--------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share
Loss available to common
stockholders ...................... $ (459,038) 3,143,446 $ (0.15)
========== ========= =========
</TABLE>
F-12
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 -- COMMON STOCK
Two classes of common stock were created to facilitate selling shares in an
initial offering of Class A shares to the public utilizing a Small Corporate
Offering Registration Exemption Form (Form U-7). The Class M shares were created
to demonstrate a commitment by the founders of the Company that they would not
participate in the direct financial rewards of owning shares in the Company
until such time as Class A shareholders had an opportunity to receive a priority
return on their investment. Class M shares were to be automatically converted
into Class A shares, on a one for one basis, at such time as the 24,400 Class A
shares sold in the initial U-7 offering achieved a 12.5% Annual, Cumulative,
Priority Return.
Such a priority return was achieved during 1997, in accordance with the
terms of the Company's articles of incorporation, by tendering an offer to
buy-back all outstanding shares issued pursuant to the U-7 offering at a cash
purchase price determined in the prescribed manner. The Company purchased and
retired 560 Class A shares as a result of the buy-back offer. Acceptance of the
buy-back offer by shareholders was not a condition of conversion of the Class M
shares to Class A shares. Subsequent to tendering the buy-back offer, all
outstanding Class M and Class A shares were converted to shares of common stock,
and the Company's articles of incorporation were amended to reflect only one
class of common stock.
NOTE 9 -- STOCK OPTIONS
The Company has reserved 880,000 shares of common stock in its 1995 Stock
Option Plan, as amended, and intends to grant such options to officers, store
managers and other employees as performance incentives. The incentive stock
options will vest over a three to five year period. The Plan expires on December
31, 2005.
During 1998 and 1997, the Company granted options to certain officers and
employees to purchase 329,000 and 114,000 shares, respectively, of common stock
under the Plan. The fair value of each option was estimated using a model
similar to the Black-Scholes option pricing model, with the following weighted
average assumptions: dividend yield of 0%; risk-free interest rate of 5% and 6%
in 1998 and 1997, respectively; and expected life of 3.4 years and 3 years in
1998 and 1997, respectively. Because the exercise price exceeded the market
value at grant date, it was determined that the fair value of the options was
insignificant and no compensation expense would be recorded. Vesting of certain
options granted to an officer was contingent upon the Company meeting net sales
and before tax profit goals during 1997 and 1998. The 1997 goals were met and
the related options vested in 1998. The 1998 goals were not met and the related
options expired.
The Company also reserved 100,000 shares of common stock under an option
agreement with a significant shareholder of the Company. These options were
granted by the Company in 1997 and were exercised by the shareholder in 1998.
The fair value of these options at grant date, determined using the same
assumptions as those stated above, was insignificant, and no value would be
recognized in the financial statements.
F-13
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9-- STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1997 and 1998, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1998
---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 214,000 $ 1.53
Granted ................................ 214,000 1.53 329,000 6.46
Exercised .............................. -- -- (100,000) 1.50
Forfeited .............................. -- -- (28,000) 2.08
------- --------
Outstanding at end of year .............. 214,000 1.53 415,000 5.41
======= ========
Options exercisable at year-end ......... 122,000 1.53 142,500 4.53
======= ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Fixed Options:
$ 1.5625 .................... 76,000 1.5 years $ 1.5625 36,000 $ 1.5625
$ 4.00 ...................... 13,000 2.0 years 4.0000 13,000 4.0000
$ 6.50 ...................... 300,000 3.0 years 6.5000 75,000 6.5000
$10.00 ...................... 10,000 3.0 years 10.0000 2,500 10.0000
Performance Based:
$1.5625 ..................... 16,000 1.5 years 1.5625 16,000 1.5625
------- -------
415,000 2.6 years 5.4100 142,500 4.5300
======= =======
</TABLE>
On January 6, 1999, stock options were granted to an employee of the
Company to purchase 2,500 shares of common stock for $10 per share. The options
expire on May 31, 2002.
F-14
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 10 -- NOTES PAYABLE -- BANK (UNAUDITED)
JUNE 30, 1999
-------------
(UNAUDITED)
The Company has a $3,500,000 variable rate line of credit with a
bank at June 30, 1999, due September 30, 1999, and secured by
substantially all assets of the Company. Interest is .25% above
the Wall Street Journal prime rate, and was 8.00% at June 30,
1999. The line is renewable for an additional six months, and is
subject to certain financial performance covenants. .............. $2,000,000
The Company has a $2,000,000 variable rate line of credit with a
bank at June 30, 1999, due September 30, 1999; secured by
substantially all assets of the Company and guaranteed by
Bluestem Capital Partners I, LLC (BCPI), a stockholder of the
Company. Interest is .25% above the Wall Street Journal prime
rate, and was 8.00% at June 30, 1999. ............................ 1,600,000
----------
$3,600,000
==========
In connection with the guarantee of the $2,000,000 line of credit, the
Company has agreed to pay interest of 4% to BCPI on the amounts borrowed, and
has agreed to issue to BCPI a warrant to purchase up to 40,000 shares of Company
stock at 25% over the offering price of the anticipated public offering
exercisable for a period of two years following the offering.
F-15
<PAGE>
[LOGO]
HATWORLD
STORE LOCATIONS
[MAP]
NUMBER OF STORES BY STATE
Alabama 2 Iowa 3 Missouri 3 Tennessee 9
Arkansas 3 Kentucky 5 North Carolina 1 Virginia 8
Colorado 1 Louisiana 1 Ohio 11 West Virginia 4
Delaware 1 Maryland 1 Oklahoma 1 Wisconsin 3
Florida 2 Michigan 6 Pennsylvania 4 TOTAL STORES 96
Illinois 9 Minnesota 1 South Carolina 2
Indiana 12 Mississippi 2 South Dakota 1
<PAGE>
[LOGO]
HATWORLD
HAT WORLD CORPORATION
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The statutes of the State of Minnesota provide for indemnification of any
officer, director or affiliated person for acts or omissions if he acted in good
faith and in what he believed to be the best interests of the corporation. The
registrant has indemnification agreements with its officers and directors. The
registrant understands that the Securities and Exchange Commission feels that
this indemnification is against public policy as to liability arising out of the
Securities Act of 1933.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fees ................................................ $ 3,125
NASD filing fee .................................................. $ 1,690
Nasdaq National Market application fee ........................... $ 5,000
Accounting Fees. ................................................. $ 30,000
Legal Fees ....................................................... $ 20,000
Printing Expenses ................................................ $ 40,000
Blue Sky Fees .................................................... $ 10,000
Transfer Agent and Registrar Fees ................................ $ 10,000
Miscellaneous .................................................... $ 40,000
TOTAL ........................................................... $159,815
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following are all sales of unregistered securities for the past three
years.
NAME NUMBER OF SHARES DATE AMOUNT PAID
- ---- ---------------- ------ -----------
Bernadette A. Berger .......... 10,200 8/95 $ 14,000
George N. Berger .............. 495,440 6/95 $ 64,000
Ida Berger .................... 4,400 9/95 $ 5,000
Ramona A. Berger .............. 24,760 8/95 $ 33,260
Bluestem Capital I ............ 838,576 7/97 $1,000,000
Bluestem Capital II ........... 597,630 7/98 $3,150,000
J. Glenn Campbell ............. 440,000 6/95 $ 1,000
CR Ventures, Inc. ............. 220,000 6/95 $ 50,000
James I. Davis ................ 340 4/97 $ 510
Neil C. Davis ................. 340 4/97 $ 510
Gerard Hanson ................. 4,800 2/95 $ 5,550
James Harris .................. 4,000 10/97 $ 0
William Heupel ................ 4,400 9/95 $ 5,000
Thomas D. Houle ............... 1,760 8/95 $ 2,000
John M. Kavali ................ 4,000 3/97 $ 6,000
Becky Knudson ................. 4,000 12/96 $ 5,500
Les Knudson ................... 4,000 12/96 $ 5,500
Kenneth Kocher ................ 10,000 10/97 $ 15,000
Donna Molander ................ 2,640 12/95 $ 3,000
Scott A. Molander ............. 440,000 6/95 $ 1,000
Shane Molander ................ 800 12/96 $ 1,100
Harry Overholtzer ............. 400 8/95 $ (175)
Jack G. Rentschler ............ 7,200 10/96 $ 9,900
David W. Stewart .............. 22,000 8/95 $ 25,000
Grant Washnok ................. 1,760 9/95 $ 2,000
II-1
<PAGE>
The registrant believes that all transactions were transactions not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, since (a) each of the transactions involved the offering
of such securities to a substantially limited number of persons; (b) each person
took the securities as an investment for his own account and not with a view to
distribution; (c) each person had access to information equivalent to that which
would be included in a registration statement on the applicable form under the
Act; (d) each person had knowledge and experience in business and financial
matters to understand the merits and risk of the investment; therefore no
registration statement need be in effect prior to such issuances.
ITEM 27. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------
1.1 Underwriting Agreement
1.2 Representative's Warrant Agreement
1.3 Lockup Agreement*
10.8 1999 Stock Option Plan
10.9 401-k Plan
24.0 Consent of Accountant*
- ------------------
*Filed with this Amendment.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to reflect in
the prospectus any facts or events arising after the effective date of
the registration statement (or the most recent post-effective
amendment thereof) which, individually, or in the aggregate,
represents a fundamental change in the information set forth in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(4) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933; (ii) to reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement; (iii) to include any material
information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the
II-2
<PAGE>
registration statement; (iv) that for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof; and (v) to remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on September 28, 1999.
HAT WORLD CORPORATION
By: /S/ JAMES HARRIS
--------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on September 28, 1999.
SIGNATURE TITLE
--------- -----
/S/ GEORGE N. BERGER Director, Secretary
- --------------------------------------
George N. Berger
/S/ KENNETH J. KOCHER Director, Chief Financial Officer
- --------------------------------------
Kenneth J. Kocher
/S/ J. GLENN CAMPBELL Director
- --------------------------------------
J. Glenn Campbell
/S/ JAMES HARRIS Director, Chief Executive Officer
- --------------------------------------
James Harris
/S/ SCOTT A. MOLANDER Director
- --------------------------------------
Scott A. Molander
/S/ STEVE KIRBY Director
- --------------------------------------
Steve Kirby
/S/ PAUL A. SCHOCK Director
- --------------------------------------
Paul A. Schock
/S/ JOHN ANDRETTI Director
- --------------------------------------
John Andretti
/S/ MARK E. GRIFFIN Director
- --------------------------------------
Mark E. Griffin
II-4
<PAGE>
INDEX TO EXHIBITS
ITEM 27. EXHIBITS.
EXHIBIT
NO. DESCRIPTION
- ---------- -----------------------------------------------------------------
1.1 Underwriting Agreement
1.2 Representative's Warrant Agreement
1.3 Lockup Agreement*
10.8 1999 Stock Option Plan
10.9 401-k Plan
24.0 Consent of Accountant*
- ------------------
*Filed with this Amendment.
EXHIBIT 1.3
LOCK UP AGREEMENT
THIS AGREEMENT is made and entered into this _____ day of September,
1999, by and between the undersigned, as an officer, director and/or shareholder
of HAT WORLD CORPORATION ("Company"), a Minnesota corporation, and NEIDIGER,
TUCKER, BRUNER, INC. ("NTBI"), as lead manager of the Representatives of the
Underwriters. The undersigned owns a total of _______________ shares ("Shares")
of the Company's $.01 par value common stock ("Common Stock"), of which
_________ shares shall be subject to the terms of this Agreement.
1. PURPOSE. The Company has filed a registration statement on Form SB-2
(Commission File No. 333-80761) and all amendments thereto ("Registration
Statement") with the United States Securities and Exchange Commission relating
to the public offering of the Company's securities, consisting of 920,000 shares
of its Common Stock plus an overallotment option of 138,000 shares of its Common
Stock. NTBI has required the Company to agree that, prior to the execution of
the Underwriting Agreement to be entered into between the Company and the
Representatives of the Underwriters ("Underwriting Agreement"), the undersigned
will sign and deliver to NTBI this Agreement accompanied by the Stock
Certificates representing the Shares owned by the undersigned as set forth
above. The Shares will be held by NTBI for a period of twelve (12) months after
the date that the Company's Registration Statement is declared effective
("Effective Date") by the United States Securities and Exchange Commission.
During such twelve (12) month period ("Lock Up Period") the undersigned will not
directly or indirectly offer, sell or grant any option to purchase or otherwise
dispose of or transfer, publicly or privately, any portion of the Shares owned
by the undersigned, whether beneficially or of record, as of the Effective Date
of the Company's Registration Statement, or any portion of the shares of Common
Stock acquired by such persons directly from the Company after such Effective
Date without NTBI's prior written consent. The purpose of this Agreement is to
set forth the agreement of the undersigned relating to such stock transfer
restriction.
2. AGREEMENT OF SHAREHOLDERS. The undersigned hereby acknowledges that
the undersigned will benefit greatly from the Company's proposed public offering
of the shares of Common Stock; and, as further inducement to the Representatives
of the Underwriters to agree to act as the Representatives of the Underwriters
in connection with the proposed public offering of the Company's shares of
Common Stock, the terms and conditions of which underwriting will be more
particularly described in the Underwriting Agreement to be entered into by the
Company and the Representatives of the Underwriters, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned hereby agrees and represents that during the Lock
Up Period, except to the extent permitted under Section 4 hereof, the
undersigned shall not directly or indirectly offer, sell, pledge, margin,
hypothecate, or grant any option to purchase or otherwise dispose of or
transfer, publicly or privately, any portion of the Shares held, whether
beneficially or of record, by the undersigned as of the Effective Date of the
Company's Registration Statement, or any portion of the shares of Common Stock
acquired by the undersigned directly from the Company, including shares of
Common Stock acquired as the result of the exercise of any options, warrants or
other rights (including a right of conversion), after such Effective Date and
prior to the expiration of the Lock Up Period, without NTBI's prior written
consent. While the granting of written consent shall be made in NTBI's sole
discretion, NTBI will
<PAGE>
be reasonable in granting its consent for a limited amount of sales after the
Effective Date by taking into account such factors as the Company's earnings
history, market conditions for the Company's shares of Common Stock, and other
factors deemed relevant by NTBI. The undersigned shall not enter into any swap
or other arrangement that transfers all or any portion of the economic
consequences associated with the ownership of the shares or any shares of Common
Stock owned or which may be acquired by the undersigned during the Lock Up
Period.
3. AFTER ACQUIRED SHARES OF COMMON STOCK. If the undersigned, who is
either an officer or director of the Company does not own any shares of Common
Stock as of the Effective Date but subsequent to the Effective Date and prior to
the expiration of the Lock Up Period acquires shares of Common Stock as a result
of exercising any options, warrants or other rights (including the right of
conversion), the undersigned agrees that the shares of Common Stock so acquired
will be subject to the terms of this Agreement for the remaining portion of the
Lock Up Period and as otherwise provided in this Agreement. In addition, the
undersigned agrees not to sell, pledge, margin or hypothecate or otherwise
dispose of any shares of Common Stock acquired by exercise of any option,
warrants or other rights pursuant to the exemption afforded by Rule 701 under
the Securities Act of 1933, as amended, during the Lock Up Period without NTBI's
prior written amount.
4. PERMISSIBLE TRANSFERS. Notwithstanding the provisions of Section 2
to the contrary, following the Effective Date, the undersigned may transfer
Shares, including shares of Common Stock acquired by the undersigned after the
Effective Date, held by the undersigned to members of the undersigned's
immediate family. However, such Shares so transferred shall continue to be held
by such transferee subject to the terms and restrictions set forth in this
Agreement. Members of an undersigned's "immediate family" shall consist only of
such undersigned's spouse and lineal descendants or a trust or other entity
created for such persons in order to facilitate estate planning for the
undersigned.
5. AGREEMENTS AND COVENANTS OF THE UNDERSIGNED. The undersigned hereby
agree(s) and consent(s) and authorize(s) the Company and the Company's stock
transfer agent as follows:
a. To maintain a copy of this Agreement in the Company's
principal place of business and to provide a copy to the Company's
stock transfer agent, and to make a copy available (or cause the
Company's stock transfer agent to make a copy available) to any person
upon request and without charge;
b. To file a manually signed copy of this Agreement with each
state where such filing is requested or required in order to maintain
registration of the Company's shares of Common Stock;
c. To permit and authorize the Company and the Company's stock
transfer agent to place a notice on the front of each stock certificate
covered by the terms of this Agreement stating that the transfer of the
stock evidenced by the certificate is restricted in accordance with the
conditions set forth on the reverse side of the certificate; and
2
<PAGE>
d. To place the following legend placed on the reverse side of
each certificate covered by the terms of this Agreement:
The sale or transfer of the shares evidenced by this
certificate is subject to certain restrictions until
September ______, 2000 (12 months following the
effective date of the registration statement
relating to the Shares) pursuant to an agreement
between the holder hereof, the Company and Neidiger,
Tucker, Bruner, Inc., which agreement is on file
with the Company and the Company's stock transfer
agent, from which a copy is available upon request
and without charge.
e. To file a manually signed copy of this Agreement as part of
the registration documents with the Securities and Exchange Commission
and with the securities commission or division of those states, if any,
where the filing of this Agreement is required as a condition of the
registration of the Company's shares of Common Stock in such state; and
f. To enter stop transfer instructions with the Company's
stock transfer agent and registrar against transfer of the Shares or
any shares of Common Stock acquired by the undersigned during the Lock
Up Period except in compliance with the restrictions set forth in this
Agreement.
6. REPRESENTATIVE'S RIGHT TO TRANSFER The undersigned further agrees
that all of the rights, authority and preemptive provisions granted to NTBI
pursuant to this Lock Up Agreement may be transferred to any other NASD member
firm that participates in the proposed public offering of the shares of the
Company's Common Stock.
7. FAILURE TO COMPLETE OFFERING. If the Company's registration
Statement does not become effective, if the Underwriting Agreement is not
executed or if the Company's shares of Common Stock are not purchased by the
Representatives of the Underwriters pursuant to the Underwriting Agreement, this
Agreement shall be come null and void.
8. BENEFIT. This Agreement is made solely for the benefit of the
Representatives of the Underwriters and their respective successors and assigns.
9. AMENDMENTS. This Agreement may not be modified or amended in any
manner (including premature termination hereof) except in writing signed by all
of the parties hereto, and then only with the approval of the securities
commissions or divisions of those states, if any, where such approval is
required as a condition of the registration of the Company's shares of Common
Stock.
3
<PAGE>
10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
NEIDIGER, TUCKER, BRUNER, INC. UNDERSIGNED
If Individual(s):
By:
------------------------------------ --------------------------------------
Anthony B. Petrelli
Senior Vice President
Corporate Finance, as lead manager on --------------------------------------
behalf of the Underwriters as set (Print Name)
forth in the Underwriting Agreement
--------------------------------------
--------------------------------------
(Print Name)
If Entity:
--------------------------------------
By:
-----------------------------------
Name
----------------------------------
Title
---------------------------------
4
<PAGE>
LOCK UP AGREEMENT
THIS AGREEMENT is made and entered into this _____ day of September,
1999, by and between the undersigned, as an officer, director and/or shareholder
of HAT WORLD CORPORATION ("Company"), a Minnesota corporation, and NEIDIGER,
TUCKER, BRUNER, INC. ("NTBI"), as lead manager of the Representatives of the
Underwriters. The undersigned owns a total of __________ shares ("Shares") of
the Company's $.01 par value common stock ("Common Stock"), of which _________
shares shall be subject to the terms of this Agreement.
1. PURPOSE. The Company has filed a registration statement on Form SB-2
(Commission File No. 333-80761) and all amendments thereto ("Registration
Statement") with the United States Securities and Exchange Commission relating
to the public offering of the Company's securities, consisting of 920,000 shares
of its Common Stock plus an overallotment option of 138,000 shares of its Common
Stock. NTBI has required the Company to agree that, prior to the execution of
the Underwriting Agreement to be entered into between the Company and the
Representatives of the Underwriters ("Underwriting Agreement"), the undersigned
will sign and deliver to NTBI this Agreement accompanied by the Stock
Certificates representing the Shares owned by the undersigned as set forth
above. The Shares will be held by NTBI for a period of six (6) months after the
date that the Company's Registration Statement is declared effective ("Effective
Date") by the United States Securities and Exchange Commission. During such six
(6) month period ("Lock Up Period") except as provided in this Agreement, the
undersigned will not directly or indirectly offer, sell or grant any option to
purchase or otherwise dispose of or transfer, publicly or privately, any portion
of the Shares owned by the undersigned, whether beneficially or of record, as of
the Effective Date of the Company's Registration Statement, or any portion of
the shares of Common Stock acquired by such persons directly from the Company
after such Effective Date without NTBI's prior written consent. The purpose of
this Agreement is to set forth the agreement of the undersigned relating to such
stock transfer restriction.
2. AGREEMENT OF SHAREHOLDER. The undersigned hereby acknowledges that
the undersigned will benefit greatly from the Company's proposed public offering
of the shares of Common Stock; and, as further inducement to the Representatives
of the Underwriters to agree to act as the Representatives of the Underwriters
in connection with the proposed public offering of the Company's shares of
Common Stock, the terms and conditions of which underwriting will be more
particularly described in the Underwriting Agreement to be entered into by the
Company and the Representatives of the Underwriters, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned hereby agrees and represents that during the Lock
Up Period, except to the extent permitted under Section 4 of this Agreement, the
undersigned shall not directly or indirectly offer, sell, pledge, margin,
hypothecate, or grant any option to purchase or otherwise dispose of or
transfer, publicly or privately, any portion of the Shares held, whether
beneficially or of record, by the undersigned as of the Effective Date of the
Company's Registration Statement, or any portion of the shares of Common Stock
acquired by the undersigned directly from the Company, including shares of
Common Stock acquired as the result of the exercise of any options, warrants or
other rights (including a right of conversion), after such Effective Date and
prior to the expiration of the Lock Up Period, without NTBI's prior written
consent or except as otherwise specifically provided in this Section 2. While
the granting of written
<PAGE>
consent shall be made in NTBI's sole discretion, NTBI will be reasonable in
granting its consent for a limited amount of sales after the Effective Date by
taking into account such factors as the Company's earnings history, market
conditions for the Company's shares of Common Stock, and other factors deemed
relevant by NTBI.
Notwithstanding anything contained in this Section 2 to the contrary,
the stock certificate(s) representing the Shares held by NTBI in the
undersigned's names(s) shall be released, prior to the expiration of the Lock Up
Period, by NTBI if the shares of Common Stock have traded on the National Market
System at a closing price equal to one hundred and fifty percent (150%) of the
initial offering price of the shares of Common Stock (as priced in the
definitive Prospectus included as part of the Registration Statement as of the
Effective Date thereof) for a period of fifteen (15) consecutive trading days.
The undersigned shall not enter into any swap or other arrangement that
transfers all or any portion of the economic consequences associated with the
ownership of the shares or any shares of Common Stock owned or which may be
acquired by the undersigned during the Lock Up Period.
3. AFTER ACQUIRED SHARES OF COMMON STOCK. If the undersigned, who is
either an officer or director of the Company does not own any shares of Common
Stock as of the Effective Date but subsequent to the Effective Date and prior to
the expiration of the Lock Up Period acquires shares of Common Stock as a result
of exercising any options, warrants or other rights (including the right of
conversion), the undersigned agrees that the shares of Common Stock so acquired
will be subject to the terms of this Agreement for the remaining portion of the
Lock Up Period and as otherwise provided in this Agreement. In addition, the
undersigned agrees not to sell, pledge, margin or hypothecate or otherwise
dispose of any shares of Common Stock acquired by exercise of any option,
warrants or other rights pursuant to the exemption afforded by Rule 701 under
the Securities Act of 1933, as amended, during the Lock Up Period without NTBI's
prior written amount.
4. PERMISSIBLE TRANSFERS. Notwithstanding the provisions of Section 2
to the contrary, following the Effective Date, the undersigned may transfer
Shares, including shares of Common Stock acquired by the undersigned after the
Effective Date, held by the undersigned to members of the undersigned's
immediate family. However, such Shares so transferred shall continue to be held
by such transferee subject to the terms and restrictions set forth in this
Agreement. Members of an undersigned's "immediate family" shall consist only of
such undersigned's spouse and lineal descendants or a trust or other entity
created for such persons in order to facilitate estate planning for the
undersigned.
5. AGREEMENTS AND COVENANTS OF THE UNDERSIGNED. The undersigned hereby
agree(s) and consent(s) and authorize(s) the Company and the Company's stock
transfer agent as follows:
2
<PAGE>
a. To maintain a copy of this Agreement in the Company's
principal place of business and to provide a copy to the Company's
stock transfer agent, and to make a copy available (or cause the
Company's stock transfer agent to make a copy available) to any person
upon request and without charge;
b. To file a manually signed copy of this Agreement with each
state where such filing is requested or required in order to maintain
registration of the Company's shares of Common Stock;
c. To permit and authorize the Company and the Company's stock
transfer agent to place a notice on the front of each stock certificate
covered by the terms of this Agreement stating that the transfer of the
stock evidenced by the certificate is restricted in accordance with the
conditions set forth on the reverse side of the certificate; and
d. To place the following legend placed on the reverse side of
each certificate covered by the terms of this Agreement:
The sale or transfer of the shares evidenced by this
certificate is subject to certain restrictions until
September ______, 2000 (6 months following the
effective date of the registration statement
relating to the shares) pursuant to an agreement
between the holder hereof, the Company and Neidiger,
Tucker, Bruner, Inc., which agreement is on file
with the Company and the Company's stock transfer
agent, from which a copy is available upon request
and without charge.
e. To file a manually signed copy of this Agreement as part of
the registration documents with the Securities and Exchange Commission
and with the securities commission or division of those states, if any,
where the filing of this Agreement is required as a condition of the
registration of the Company's shares of Common Stock in such state; and
f. To enter stop transfer instructions with the Company's
stock transfer agent and registrar against transfer of the Shares or
any shares of Common Stock acquired by the undersigned during the Lock
Up Period except in compliance with the restrictions set forth in this
Agreement.
6. REPRESENTATIVE'S RIGHT TO TRANSFER The undersigned further agrees
that all of the rights, authority and preemptive provisions granted to NTBI
pursuant to this Lock Up Agreement may be transferred to any other NASD member
firm that participates in the proposed public offering of the shares of the
Company's Common Stock.
3
<PAGE>
7. FAILURE TO COMPLETE OFFERING. If the Company's registration
Statement does not become effective, if the Underwriting Agreement is not
executed or if the Company's shares of Common Stock are not purchased by the
Representatives of the Underwriters pursuant to the Underwriting Agreement, this
Agreement shall be come null and void.
8. BENEFIT. This Agreement is made solely for the benefit of the
Representatives of the Underwriters and their respective successors and assigns.
9. AMENDMENTS. This Agreement may not be modified or amended in any
manner (including premature termination hereof) except in writing signed by all
of the parties hereto, and then only with the approval of the securities
commissions or divisions of those states, if any, where such approval is
required as a condition of the registration of the Company's shares of Common
Stock.
10. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
NEIDIGER, TUCKER, BRUNER, INC. UNDERSIGNED
If Individual(s):
By:
------------------------------------ --------------------------------------
Anthony B. Petrelli
Senior Vice President
Corporate Finance, as lead manager on --------------------------------------
behalf of the Underwriters as set (Print Name)
forth in the Underwriting Agreement
--------------------------------------
--------------------------------------
(Print Name)
If Entity:
--------------------------------------
By:
-----------------------------------
Name
----------------------------------
Title
---------------------------------
4
EXHIBIT 24.0
[EIDE BAILLY LLP LETTERHEAD]
--------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 15, 1999, in the Registration Statement (Form
SB-2 No. 333-80761) and related Prospectus of Hat World Corporation dated June
16, 1999 for the registration of 1,150,000 shares of its common stock.
Eide Bailly LLP
Eden Prairie, Minnesota
September 16, 1999
