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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended October 31, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File Number 0-24026
MAXWELL SHOE COMPANY INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2599205
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
101 Sprague Street
P.O. Box 37
Readville (Boston), MA 02137
(Address of principal executive offices) (Zip code)
(617) 364-5090
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on Which Registered:
- ------------------- --------------------
None None
Securities Registered Pursuant to Section 12(g) of the Act:
Class A Common Stock,
par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
The aggregate market value of the Class A Common Stock of the registrant
held by non-affiliates of the registrant on January 19, 2000 based on the
closing price of the Class A Common Stock on the NASDAQ National Market System
on such date was $74,215,398.
The number of shares of the registrant's Class A Common Stock outstanding
at January 19, 2000 was 8,795,899 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2000 Annual
Stockholders Meeting are incorporated by reference into Part III herein.
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MAXWELL SHOE COMPANY INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended October 31, 1999
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Caption Page
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PART I
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Item 1. Business.................................................................. 3
Item 2. Properties................................................................ 15
Item 3. Legal Proceedings......................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders....................... 15
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 16
Item 6. Selected Financial Data................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 18
Item 8. Consolidated Financial Statements and Supplementary Data.................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 40
PART III
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Item 10. Directors and Executive Officers of the Registrant........................ 40
Item 11. Executive Compensation.................................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 40
Item 13. Certain Relationships and Related Transactions............................ 40
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 41
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PART 1
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Item 1. Business
General
All references herein to the "Company" mean Maxwell Shoe Company Inc., a
Delaware corporation, and its predecessors and its consolidated subsidiaries,
unless the context otherwise requires. The Company's fiscal year ends on
October 31; all references herein to a fiscal year mean the twelve-month period
ended on the October 31 of the particular year.
The Company designs, develops and markets casual and dress footwear for
women and children under multiple brand names, each of which is targeted to a
distinct segment of the footwear market. The Company offers casual and dress
footwear for women in the moderately priced market segment under the Mootsies
Tootsies brand name, in the upper moderately priced market segment under the Sam
& Libby brand name and in the better market segment under the Anne Klein 2 and A
Line Anne Klein brand names. The Company also sells moderately priced and
upper moderately priced children's footwear under both the Mootsies Tootsies and
Sam & Libby brand names. The Company designs and develops private label
footwear for selected retailers under the retailers' own brand names. The
Company has licensed the J.G. Hook trademark to source and develop private label
products for retailers who require brand identification. The Company has also
licensed the Dockers/(R)/ Khakis brand name to increase its brand offerings in
the upper moderate and better industry segment. In addition, the Company sold
footwear closeouts that it had purchased at discounts from other manufacturers.
This footwear closeout business was terminated in fiscal 1999.
Since 1987, when the Company first focused on its branded footwear
strategy and, except for fiscal 1999 as noted below, the Company has increased
net sales every year and consistently maintained profitability. In fiscal 1999,
the Company's net sales decreased 9.4% as compared to fiscal 1998 while net
income increased 42.1%. This was largely a result of the sale of the Jones New
York license to the Jones Apparel Group, Inc. and Jones Investment Co.
(hereinafter collectively "Jones"). The Company's financial success has been
largely a result of its ability to design, develop and market footwear with
contemporary styles at affordable prices. Retail prices for the Company's
footwear generally range from $20 to $70 for the Mootsies Tootsies and Sam &
Libby brand offerings and from $45 to $95 for the A Line Anne Klein and Anne
Klein 2 product lines. Substantially all of the Company's products are
manufactured overseas by independent factories selected by the Company and its
overseas agents. The Company sells its footwear primarily to department stores
and specialty stores in the United States as well as through national catalog
retailers and cable television consumer shopping channels.
In July 1993, the Company entered into a license agreement (the "Jones
License Agreement") with Jones under which the Company had the exclusive right
to use the Jones New York and Jones New York Sport names in connection with the
development, manufacturing and marketing of women's footwear (other than
performance athletic shoes and bedroom slippers). The Jones License Agreement
covered the United States (including its territories) and Canada. The Company
had a number of options to extend the Jones License Agreement through December
2017, subject to the Company meeting certain minimum net sales amounts. On July
9, 1999 the Company sold and assigned its rights, title and interest as licensee
to manufacture and sell footwear and open sales orders and purchase orders
bearing Jones New York and Jones New York Sport trademarks under the Jones
License Agreement to Jones for $25 million cash.
The Company's strategy is to leverage its existing competitive strengths,
including but not limited to its strong manufacturing relationships and focused
brand management and to increase profitably its share of the women's and
children's footwear markets by further strengthening its existing footwear
brands and its private label business and expanding its brand portfolio through
a combination of acquisition, licensing and development of additional brands in
the future.
Through advertising, promotion and packaging, the Company has built
consumer and retail recognition for the Mootsies Tootsies and Mootsies Kids
brand names, and management believes that Mootsies Tootsies is currently one of
the largest selling brands in the moderately priced segment of the women's
casual and dress
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footwear industry. The Company continued its brand expansion through the
acquisition of the Sam & Libby worldwide trademarks and tradenames in 1996. The
Company has re-positioned the Sam & Libby brand from its prior focus on the
junior women's market segment to the updated, career-oriented women market
segment, and sales under the Sam & Libby lines have increased significantly
since this brand re-positioning and introduction of additional products under
such brand name. In late 1998, the Company licensed the Dockers/(R)/ Khakis
footwear brand name for women, in order to increase its brand offerings in the
upper moderate and better industry segments. In 1999, the Company sold its Jones
New York footwear license to Jones which had served the better footwear retail
segment. In 1999, in order to service the better women's footwear segment at
retail, the Company licensed the Anne Klein 2 and A Line Anne Klein footwear
brands. The A Line Anne Klein brand will begin shipping in Spring 2000. The Anne
Klein 2 will begin shipping for the Fall 2000 footwear season. The Company
believes that there is a growing demand among retailers for footwear to market
on a first cost basis with brand names. The Company licensed the J.G. Hook name
in 1997 to sell as a first cost product for retailers who require brand
identification.
The Company competes primarily in the women's casual and dress footwear
market, which emphasizes contemporary fashion, quality and value. The Company
believes that there has been a shift in the ''moderate'' segment of the women's
casual and dress footwear market toward value priced footwear. The Company has
positioned its Mootsies Tootsies line to take advantage of this shift by
offering value priced footwear that reflects current fashion trends. The Sam &
Libby brand is directed to appeal to the fashion forward customers in the upper
moderate price range that has been less affected by this shift. The Company's
Dockers/(R)/ Khakis footwear for women competes in the upper moderate and better
industry segments. The Company believes that the better segment of this market
has not been as affected by this shift due to a continuing interest in higher
quality and brand name products, such as the Company's Anne Klein 2 and A Line
Anne Klein brands.
The Company, originally a closeout footwear business founded in 1949, was
incorporated as Maxwell Shoe Company Inc. in Massachusetts in 1976. During the
late 1980s, the Company shifted its focus to designing, developing and marketing
full lines of branded women's footwear. In order to implement this new
strategy, the Company hired experienced senior management to strengthen its
organizational infrastructure, developed cost-efficient product sourcing,
implemented an advertising program and improved internal systems. In March
1994, Maxwell Shoe Company Inc. became a Delaware incorporated company.
Business Strategy
The Company's strategy is to leverage its existing competitive strengths,
to increase profitably its share of the women's and children's footwear markets
by further developing its existing footwear brands and its private label
business and expanding its brand portfolio through a combination of acquisition,
licensing and development of additional brands in the future.
Competitive Strengths. The Company has developed certain core operating
---------------------
strengths which have been significant sources of growth to date and which
management believes will help the Company achieve further growth in the future.
Such operating strengths include:
. Portfolio of Established Brands. Through advertising and promotion, the
Company has built consumer and retail recognition for its Mootsies
Tootsies and Mootsies Kids brand names and has established Mootsies
Tootsies as one of the largest selling brands in the moderately priced
segment of the women's casual and dress footwear industry. The Company
continued its brand expansion through the acquisition of the Sam &
Libby worldwide trademarks and tradenames in 1996. For several years,
the Company offered its Jones New York and Jones New York Sport
footwear lines in the better priced segments. This license was sold in
July 1999 to Jones. Effective July 1999, the Company licensed the Anne
Klein 2 and A Line Anne Klein brands for women's footwear to compete in
the better retail segment. The Company licensed the Dockers/(R)/ Khakis
footwear for women brand in order to increase its brand offering in the
upper moderate and better price segments. The Company has also licensed
the J. G. Hook name to sell as a first cost product for those first
cost
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retailers that require brand identification. The Company continues to
seek licensing or acquisition opportunities in order to expand its
current portfolio of brands.
. Strong Manufacturing Relationships. The Company believes that one of
the contributing elements of its growth has been its strong
relationships with overseas buying agents and manufacturers capable of
meeting the Company's requirements for quality and price in a timely
fashion. The Company's increased use of China-based manufacturing
facilities has resulted in lower manufacturing costs while continuing
to meet the Company's high quality standards. Universal Max Trading,
the Company's principal buying agent in The Peoples Republic of China
("China"), has agreed to exclusively source and monitor product
manufacturing for the Company in China. Universal Max Trading has a
dedicated manufacturing facility and a recently opened tanning facility
in China which will further improve the Company's product development
and sourcing capabilities. The Company continues to seek to develop
other exclusive relationships with buying agents whose access to
numerous manufacturing facilities will enable the Company to maximize
its sourcing flexibility.
. Emphasis on High Volume Moderate Through Better Segments of the
Footwear Market. The Company believes that its strategy of focusing on
the high volume moderate through better segments of the women's and
children's footwear markets and of providing value-priced products
reduces the risks associated with changing fashion trends. The Company
also attempts to reduce the risks of changing fashion trends and
product acceptance through market research and development and testing
of a broad range of styles prior to placing orders with its
manufacturers. The Company believes that this approach mitigates the
risks of carrying obsolete inventory and poor retail sell-through.
. Comprehensive Customer Relationships. The Company supports its
customers by maintaining an in-stock inventory position for selected
styles in order to minimize the time necessary to fill customers'
orders. In addition, the Company provides its customers with electronic
data interchange (EDI) capability (see "--Distribution"), co-op
advertising, point of sale displays and assistance in evaluating which
products are likely to appeal to their retail customers. Management
believes that the Company has earned a strong reputation among its
customers by consistently providing quality products at attractive
prices. In return, the Company's customers provide certain information
to the Company on current retail selling trends which helps the Company
identify and interpret fashion trends.
Growth Strategy. By leveraging the above competitive strengths, the Company
---------------
has pursued and will continue to pursue growth through various initiatives,
including, but not limited to, the following:
. Growing the Company's Existing Brands. Management seeks to increase
sales of the Company's products under each of the Company's existing
brands by: (i) offering a broader assortment of products and styles
under such brand names, (ii) further penetrating the Company's existing
retail channels through increased display area and additional stores,
(iii) developing new retail channel relationships appropriate to the
Company's product offerings and (iv) increasing the use of advertising
to strengthen brand awareness among retailers and consumers.
. Increasing the Company's Private Label Business. The Company entered
the private label footwear market in order to leverage its offshore
manufacturing experience and existing infrastructure by providing
selected retailers with private label products for sale under their own
house brands. This business enables the Company to sell products to new
customers as well as strengthen the Company's relationship with certain
of its existing customers. The Company believes that there is a growing
demand among retailers for footwear to market under their own brand
names, and the Company licensed the J. G. Hook name to sell as a first
cost product for retailers who require brand identification.
. Adding Brands to the Company's Portfolio. Management believes that the
footwear industry segments in which the Company operates remain highly
fragmented, although consolidation has been
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accelerating recently as fewer companies control more brands and
retailers generally purchase footwear merchandise from a reduced number
of manufacturers. The Company intends to continue capitalizing on this
ongoing consolidation by expanding its existing brand portfolio which
will appeal to different market segments of the footwear industry.
Management believes that creating, acquiring or licensing additional
brands will enable the Company to increase its sales by satisfying the
needs of a broader range of customers. The Company intends to sell
these new brands through the Company's existing customers as well as
new customers which the Company seeks to develop. The acquisition of
the Sam & Libby brand and the licensing of the Anne Klein 2 and A Line
Anne Klein and Dockers/(R)/ Khakis brands represent the Company's most
recent efforts to expand into new market segments. The Company intends
to continue to explore entering other market segments through
acquisition or licensing of additional brands, as evidenced by the
recent introduction of the A Line Anne Klein brand. The Company
believes that it is well positioned to continue pursuing this strategy
due to its relatively strong and unencumbered balance sheet.
Product Lines
The Company's products consist of eight lines of brand name footwear as
well as private label footwear for selected retailers for sale under their own
house brands. Each of the branded product lines is targeted to appeal to a
different market segment of the footwear industry. The characteristics of the
product lines sold by the Company are summarized in the following table:
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General Retail
Price Range
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Style Industry Segment Shoes Boots
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Mootsies Tootsies........................ Contemporary Moderate $25-$40 $35-$55
Mootsies Kids............................ Contemporary Moderate $20-$25 $30-$40
Sam & Libby and Just Libby............... Updated Upper Moderate $35-$50 $45-$70
Sam & Libby Kids......................... Updated Upper Moderate $25-$45 $35-$55
Dockers/(R)/ Khaki....................... Casual Upper Moderate-Better $40-$65 -
A Line Anne Klein........................ Contemporary Better $45-$79 $79-$95
Anne Klein 2............................. Contemporary Better $45-$79 $79-$95
Jones New York*.......................... Contemporary Better $65-$90 -
Jones New York Sport*.................... Classic Casual Better $40-$75 $60-$85
J.G. Hook Private Label.................. All Budget-Moderate $12-$20 $25-$30
</TABLE>
*The Jones New York license for footwear was sold to Jones in July 1999.
Mootsies Tootsies
The Mootsies Tootsies brand line provides consumers with a wide selection
of footwear with contemporary styles and quality at affordable prices primarily
targeted at women ages 18 to 34. The line includes approximately 30 new styles
each spring and fall season, as well as a number of core styles that are updated
periodically based on fashion trends. The line principally consists of casual
shoes, dress shoes, boots and sandals. Styles are available in a wide variety of
colors and materials, including leather, sueded leather and fabric. All footwear
in the line is designed to have soft construction for comfort.
Mootsies Kids
The Mootsies Kids brand line is targeted at girls in the misses market
(ages 8 to 12) who desire contemporary footwear. The line consists of
approximately 20 new styles each spring and fall that, in many cases, represent
a miniature version of the Mootsies Tootsies line. The children's line is
focused on casual shoes, party shoes, boots and sandals.
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Sam & Libby and Just Libby
The Sam & Libby line is updated casual and dress footwear targeted at
female fashion customers, ages 21 to 35, and contains approximately 30 styles
per season, consisting of casual shoes, dress shoes, boots and sandals. The
acquisition of the Sam & Libby brand with its trademarks registered in over 20
countries will bolster the Company's efforts to develop and grow
internationally, although the Company's expansion to overseas markets will be a
long-term effort. A wholly owned subsidiary of the Company has granted to SLJ
Retail LLC ("SLJ Retail") a license to sell Sam & Libby and Just Libby women's
footwear products. See "--License Agreements--SLJ Retail."
Sam & Libby Kids
The Sam & Libby Kids line is geared toward girls ages 8 to 14 and is
targeted towards the updated and more fashion-conscious girl. The line will have
approximately 20 styles each season often similar to the Sam & Libby women's
styles. The children's line is focused on dress shoes, casual shoes, casual
athletic shoes, boots and sandals.
Dockers/(R)/ Khaki
The Dockers/(R)/ Khakis footwear for women line targets women between the
ages of 25-34 and has been designed to provide women with a new choice in
stylish, comfortable casual footwear. The footwear line will compliment the
Dockers/(R)/ Khakis for women apparel products and are specifically designed to
be worn with Khakis, complimenting a wide variety of versatile looks.
Anne Klein 2 and A Line Anne Klein
The Anne Klein 2 and A Line Anne Klein footwear lines focus on
contemporary, quality footwear targeted at career oriented women 30 years and
older. The lines capitalize on the name recognition and reputation enjoyed by
the Anne Klein apparel line produced by the Company's licensor and the footwear
is designed to complement the Anne Klein apparel. The Company's Anne Klein 2 and
A Line Anne Klein footwear lines consist of approximately 25 styles per season
with all leather uppers and soles.
Jones New York
The Jones New York footwear line focused on contemporary, quality footwear
targeted at career oriented women 30 years and older. The line capitalized on
the name recognition and reputation enjoyed by the Jones New York apparel line
produced by the Company's former licensor and was designed to complement Jones
New York apparel. The Company's Jones New York footwear line consisted of
approximately 25 styles per season with all leather uppers and soles.
Jones New York Sport
The Jones New York Sport line appealed to the Jones New York casual
sportswear customer by providing leisure footwear to career oriented women. The
line contained approximately 20 styles per season.
J. G. Hook and Private Label Products
In response to the growing demand among retailers for footwear to market
under their own brand names, the Company designs and sources private label
women's and children's footwear for selected retailers. The
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Company's private label business has minimal overhead and capital requirements
primarily because the Company utilizes its existing branded product styles
(thereby incurring no additional product development costs) and because the
Company does not incur any costs related to purchasing, importing, shipping or
warehousing of inventory, all of which costs are borne by the retailer. The
Company has licensed the J. G. Hook name to sell as a first cost product for
retailers who require brand identification.
The following table sets forth the percentage of the Company's net sales
generated by each of its major product categories for the periods indicated:
Year Ended October 31
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Category 1997 1998 1999
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Women's................................. 84.9% 86.5% 87.6%
Children's.............................. 14.8 13.3 12.3
Other................................... 0.3 0.2 0.1
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Total................................... 100.0% 100.0% 100.0%
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Closeout Business
The Company sold certain product styles that it purchased at volume
discounts from other footwear manufacturers. These products, which were
typically either slow moving or factory seconds, were sold to discount
retailers. At times, the Company held closeout products in inventory until the
next fashion season. The Company terminated this business in fiscal 1999.
Retail Joint Venture
In April 1997, the Company completed a transaction to operate Sam & Libby
women's footwear stores through SLJ Retail. Initially, the Company and the
Butler Group LLC, a wholly-owned subsidiary of General Electric Capital
Corporation, owned initially 49% and 51% of SLJ Retail, respectively. However,
currently, the Company and the Butler Group LLC own less than 2% and more than
98% of SLJ Retail, respectively. Under certain circumstances, the Company may
be obligated to acquire the ownership interest of the Butler Group at a value
based upon the operating results of SLJ Retail. Effective January 19, 1999,
the Company was no longer the managing member of SLJ Retail.
Design and Product Development
The Company seeks to identify fashion trends and to translate such trends
into contemporary footwear that appeal to its target market segments'
requirements for style, quality, fit and price. Management believes that its
philosophy of marketing contemporary styles to a broad audience rather than
"fashion forward" styles reduces the risks associated with changing fashion
trends.
Each branded product line has its own design team, including design staff,
sales staff and a brand manager in an effort to design footwear that appeals to
the characteristics of that line's market segment. The designers research and
confirm market trends by: (i) traveling extensively to fashion markets in the
United States and Europe, (ii) attending trade shows, (iii) subscribing to
fashion and color information services and (iv) commissioning market studies. In
addition, product development efforts benefit from interaction with retailers,
who provide information on current retail selling trends, and the Company's
buying agents, who provide information on industry trends. The designers for the
Anne Klein 2 and A Line Anne Klein footwear lines also meet regularly with The
Anne Klein Company to exchange product and fashion concepts. See "--License
Agreements - Anne Klein 2 and A Line Anne Klein." Each line initially consists
of between 100 and 200
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prototypes each season from which the design team selects the styles that it
believes will satisfy the target market segment's requirements for style,
quality, fit and price. Each line is further refined following presentations at
industry shows.
Marketing and Customer Support
Each branded product line has its own sales organization, including a
divisional executive who oversees all aspects of selling the line and works with
a network of independent sales representatives located throughout the United
States. Certain of the independent sales representatives sell only the Company's
brands, and the rest of the independent sales representatives sell brands that
do not compete directly with the Company's brands. The Company develops spring
and fall product lines for each of its brands. Each line is first introduced at
industry trade shows prior to on-site sales visits by the independent sales
representatives and the Company's divisional head responsible for the line. In
addition, the Company maintains showrooms in New York and Boston where buyers
view products and place orders. While the Company's products are distributed
primarily in the United States, the Company also sells to independent wholesale
distributors in Canada.
In fiscal 1999, the Company sold products to approximately 1,500 accounts
with over 7,000 retail locations. The Mootsies Tootsies retailers, which market
moderately priced apparel merchandise, include Shoe Carnival, Kohl's and Belks.
The A Line Anne Klein footwear line will be distributed starting in Spring 2000
to those retailers who typically market merchandise at higher retail price
points, including Federated (Macy's), May Co., (Lord & Taylor) and Saks' Stores
(Parisian). The Sam & Libby footwear lines are distributed to retailers such as
Federated, May Co., Bon Ton and Nordstrom. Dockers Footwear for Women
distributes footwear to Sears and department stores such as Kohl's. The retail
industry has periodically experienced consolidation, and any future
consolidation may result in loss of customers of the Company and lower profit
margins on the Company's footwear. The Company also markets its branded
products through national catalog retailers such as Spiegel, Nordstrom and
Chadwicks of Boston and through home shopping clubs such as QVC and Home
Shopping Network.
The Company's largest customer, The TJX Companies ("TJX"), the successor
entity from the combination of Marshall's and T. J. Maxx, accounted for 18% and
13% of the Company's net sales in fiscal 1998 and fiscal 1999, respectively,
including revenues from closeouts. The Company's top three customers (TJX,
Federated and May Co.) accounted for 31% and 25% of net sales for fiscal 1998
and fiscal 1999, respectively. While the Company seeks to build long-term
customer relationships, revenues from any particular customer can fluctuate from
period to period due to such customer's purchasing patterns. In addition, the
Company believes that although purchasing decisions have generally been made
independently by each department store customer, there is a trend among
department store customers toward more centralized purchasing decisions. The
retail industry has also periodically experienced consolidation, and any future
consolidation may result in loss of customers of the Company and lower profit
margins on the Company's footwear. In the future, the Company's wholesale
customers may consolidate, undergo restructuring or reorganizations, or realign
their affiliations, any of which could decrease the number of stores that carry
the Company's products or increase the ownership concentration within the retail
industry. Any termination or significant disruption of the Company's
relationships with one or more of the Company's major customers could have a
material adverse effect on the Company's financial condition or results of
operations. See Note 1 of "Notes to Consolidated Financial Statements."
The Company believes that its reputation for quality products and
relationships with retailers will also be useful during the introduction of new
brands that it may develop or acquire to fill other niches in the women's
footwear market.
The Company supports its customers through a variety of programs, including
its in-stock inventory position for selected styles, the availability of EDI,
co-op advertising and point of sale displays. In addition, the Company assists
its customers in evaluating which products are more likely to appeal to their
retail customers. Customers may return defective products in quantities of more
than six pairs for full credit. Customer allowances are based on the Company's
ability to meet the particular customer's objectives and specifications.
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Advertising and Promotion
The Company works closely with its retailers in promoting its brands
through its own and cooperative national consumer print advertising, in-store
merchandising, point of sale promotions, in-store events, distinctive packaging
and active solicitation of fashion editorial space.
Print advertisements for Mootsies Tootsies are designed to build brand
awareness, rather than market a particular footwear product, by linking the
brand to a consumer's lifestyle. The advertisements run in fashion/lifestyle
publications like Glamour and Cosmopolitan as well as in general interest
publications like People. Utilizing the print media, the Company seeks to reach
a large percentage of its target audience, women ages 18 to 34, with a number of
advertisements each selling season. Advertising for Anne Klein 2 and A Line
Anne Klein is largely executed through department store co-op programs.
Additionally, the Company participates in Image advertising through The Anne
Klein Company. Major campaigns by The Anne Klein Company are planned via direct
consumer media such as Vogue, Elle and W magazines to support the Anne Klein
brands.
Print advertisements for Sam & Libby are designed to build brand awareness
by creating a lifestyle viewpoint that appeals to the modern consumer. The
advertisements will appear in fashion publications such as Glamour, Cosmopolitan
and InStyle.
The Company participated in the Dockers' Khakis for women Fall 1999
collection of products launch campaign. The campaign included full page
advertisements in national magazines and national television spots.
The Company also participates with its retail customers in cooperative
advertising programs intended to take the brand awareness created by the
national print advertising and channel it to local retailers where consumers can
buy the Company's brands. This includes local advertising on radio, television,
and newspaper as well as Company participation in major catalogs for retailers
such as Spiegel. The Company's co-op efforts are intended to maximize
advertising resources by having its retailers share in the cost of promoting the
Company's brands. Also the Company believes that co-op advertising encourages
the retailer to merchandise the brands properly and sell them aggressively on
the sales floor.
The Company uses point-of-sale advertising to further promote its products
in the store. Point-of-sale techniques used by the Company includes packaging,
point-of-sale displays, counter cards, banners and other visual merchandising
displays. These materials mirror the look and feel of the national print
advertising in order to reinforce brand image at the point-of-sale. Management
believes these efforts stimulate impulse sales and repeat purchases.
Manufacturing
Mootsies Tootsies, Mootsies Kids, Sam & Libby and Dockers/(R)/ Khakis
footwear for women are manufactured primarily in China and Brazil because of the
ability of the suppliers in these countries to manufacture quality products at
affordable prices. The A Line Anne Klein footwear brand will be primarily
manufactured in China and also manufactured in Spain and Italy because Spanish
and Italian suppliers can meet the Company's quality requirements for this
product line and the Spanish and Italian reputation for quality footwear is
consistent with the A Line Anne Klein image.
The Company does not have long-term contracts with any of the factories
that produce its footwear. The Company relies on its relationships with buying
agents who are responsible for securing raw materials, selecting manufacturers,
monitoring the manufacturing process, inspecting finished goods and coordinating
shipments to the Company. These agents work regularly with numerous factories
with the capacity to meet the Company's product specifications for quality, fit,
volume and price. By using buying agents rather than manufacturing products
itself, the Company is able to maximize production flexibility while avoiding
significant capital expenditures, work-in-process inventory and costs of
managing a production work force. To date, the Company has not encountered
significant delivery or quality problems. The Company works with buying agents
with access to numerous
10
<PAGE>
manufacturing facilities in order to maximize the Company's sourcing
flexibility. The Company believes it has built strong relationships with its
agents and manufacturing facilities over time and through volume of business.
Management believes that its buying agents do not represent other direct
competitor branded footwear lines, and Universal Max Trading, the Company's
principal buying agent in China, has agreed to act exclusively for the Company
in China. The Company pays its buying agents a percentage of the order price of
products shipped to the Company. The Company manufactures none of its products
and does not own any manufacturing facilities or equipment.
Prior to the start of production, the Company submits specifications for
products to the buying agent, who then provides a confirmation sample of each
style for inspection by the Company. During production, the Company makes
periodic reviews of products at the factory in addition to inspections conducted
by the buying agent. The Company also inspects products upon receipt at its
warehouse.
The Company maintains an in-stock position for selected styles of its
footwear in order to minimize purchasing costs and the time necessary to fill
customer orders. In order to maintain an in-stock position, the Company places
orders for selected footwear with its manufacturers prior to the time the
Company has received customers' orders for such footwear. In order to reduce the
risk of overstocking, the Company seeks to assess demand for its products by
soliciting input from its customers and monitoring retail sell-through
throughout the selling season.
The Company believes that its ability to satisfy customer order demands is
enhanced by designing its products to use common elements in raw materials,
lasts and dyes. Whenever possible, the Company seeks to use factories that have
previously produced the Company's footwear because the Company believes that
this enhances continuity and quality while holding down production costs.
The Company protects itself against currency fluctuations by purchasing
products in U.S. dollars from China and Brazil. In order to minimize volatility
in the price of products from Spain, the Company generally buys forward exchange
contracts for Spanish pesetas in connection with the placement of orders for
products.
Distribution
Following manufacture, the Company's products are packaged in retail boxes
bearing bar codes and shipped to the Company's warehouse facility in Brockton,
Massachusetts. When an order is received, it is filled in the warehouse and
shipped to the customer by whatever means the customer requests, which is
usually by common carrier.
The Company has an electronic data interchange system to which some of the
Company's larger customers are linked. This system allows these customers to
automatically place orders with the Company, thereby eliminating the time
involved in transmitting and inputting orders. The Company is working to add
more of its customers to the system and to expand system capability to include
direct billing, payment and shipping information.
Restrictions on Imports
The Company's operations are subject to compliance with relevant laws and
regulations enforced by the United States Customs Service and to the customary
risks of doing business abroad, including fluctuation in the value of
currencies, increases in customs duties and related fees resulting from position
changes by the United States Customs Service, import controls and trade barriers
(including the unilateral imposition of import quotas), restrictions on the
transfer of funds, work stoppages and, in certain parts of the world, political
instability causing disruption of trade. These factors have not had a material
adverse impact upon the Company's operations to date. Imports into the United
States are also affected by the cost of transportation, the imposition of import
duties and increased competition from greater production demands abroad. The
United States or the countries in which the Company's products are manufactured
may, from time to time, impose new quotas, duties, tariffs or other
11
<PAGE>
restrictions, or adjust presently prevailing quotas, duty or tariff levels,
which could affect the Company's operations and its ability to import products
at current or increased levels. The Company cannot predict the likelihood or
frequency of any such events occurring.
The Company's use of common elements in raw materials, lasts and dyes give
the Company the flexibility to duplicate sourcing in various countries in order
to reduce the risk that the Company may not be able to obtain products from a
particular country.
The Company's imported products are subject to United States customs duties
and, in the ordinary course of its business, the Company may, from time to time,
be subject to claims for duties and other charges. United States customs duties
currently range from 6% to 37.5% on the principal products currently imported
by the Company. Because the Company has had no disputes with the United States
Customs Service in the past, the Company is allowed to and does submit its
footwear products to United States customs officials for pre-classification and
customs duties rates determination prior to importation of such footwear
products from abroad.
For fiscal 1999, approximately 92% of the Company's footwear was imported
from China. After a serious dispute with the United States Trade Representative
("USTR") over the protection of intellectual property rights in China,
including the threat by USTR to impose trade sanctions, the Chinese government
agreed to meet its enforcement obligations. That agreement is now being
monitored by USTR and the failure of China to comply with its obligations could
result in trade sanctions in the future, including the imposition of retaliatory
tariffs that might affect the Company's imports of footwear from China. From
time to time there have been other trade disputes with China, involving such
things as market access, textile quotes, automotive industry policies and
agricultural products. These and other such matters could also present problems
in the future that might lead to trade sanctions affecting the Company's imports
of footwear.
Imports from China continue to enter the United States on a conditional
normal-trade-relations ("NTR") basis. Pursuant to NTR status, products imported
by the Company from China currently receive the lower tariff rates made
available to most of the United States' major trading partners. In the case of
China, however, this NTR treatment is made possible under the Trade Act of 1974
by virtue of certain Presidential findings that waive restrictions that would
otherwise render China ineligible for NTR treatment. The President has waived
these restrictions each year since 1979. This year the President has announced
that he intends to seek the passage of legislation that would grant permanent
NTR status to China. The proposal is controversial and there can be no
assurance that it will be passed. Moreover, there can be no assurance that
China will continue to enjoy NTR status in the future. If goods manufactured in
China enter the United States without the benefit of NTR treatment, such goods
will be subject to significantly higher duty rates, ranging between 20% and 66%
of customs value. Any such increased duties or tariffs could significantly
increase the cost or reduce the supply of goods from China.
Backlog
At October 31, 1997, 1998 and 1999, the Company had unfilled customer
orders of $61.6 million, $68.0 million and $60.1 million, respectively. If the
Company were to adjust the backlog for each fiscal year by the amount of
unfilled customer orders relating to Jones New York footwear, unfilled customer
orders would have been $44.8 million, $46.7 million and $59.0 million at October
31, 1997, 1998 and 1999, respectively. This is an increase of 26.3% for fiscal
year end 1999 over fiscal year end 1998. The backlog at a particular time is
affected by a number of factors, including seasonality and the scheduling of
manufacturing and shipment of products. Orders generally may be canceled by
customers without financial penalty. Accordingly, a comparison of backlog from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments to customers. To date, the Company has not experienced
material returns of its products or material cancellations of orders, except
directly related to the sale of the Jones New York license, which reduced the
Company's Jones New York footwear net sales in fiscal 1999. The Company expects
that substantially all of its backlog as of October 31, 1999 will be filled
during the first six months of fiscal 2000.
12
<PAGE>
License Agreements
Anne Klein 2 and A Line Anne Klein
Effectively in July 1999, the Company entered into a license agreement (the
"Anne Klein Agreement") with Kasper A.S.L., Ltd., B.D.S., Inc. and Lion
Licensing, Ltd. under which the Company has the exclusive right to use the Anne
Klein 2 and A Line Anne Klein names in connection with the manufacture,
advertising, promotion, distribution and sale of footwear for women. The Anne
Klein License Agreement covers the United States, Canada and Puerto Rico and
expires on December 31, 2002. The Company may extend the term of the license
for two (2) additional five (5) year terms ending December 31, 2007 and 2012,
upon meeting certain terms and conditions. The Company will pay Kasper A.S.L.,
Ltd. a royalty on all net sales and is responsible for a guaranteed minimum
royalty payment during each year of the agreement. The licensor can terminate
the agreement for a variety of reasons, including but not limited to default in
performing any of the terms of the agreement and bankruptcy of the licensee.
Dockers(R) Khakis
In November 1998, the Company entered into a license agreement (the
"Dockers(R) Khakis Agreement") with Levi Strauss Co. under which the Company
has the exclusive right to use the Dockers(R) Khakis name in connection the
development, manufacturing and marketing of footwear for women. The
Dockers(R) Khakis License Agreement covers the United States (including its
territories and possessions) and expires on December 31, 2001. The Company may
renew the license for one (1) additional four (4) year term ending December 31,
2005, upon meeting certain terms and conditions. The Company will pay Levi
Strauss Co. a royalty on all net sales and is responsible for a guaranteed
minimum royalty payment during each year of the agreement. The licensor can
terminate the agreement for a variety of reasons, including but not limited to
default in performing any of the terms of the agreement and bankruptcy of the
licensee.
Jones New York
In July 1993, the Company entered into the Jones License Agreement with
Jones under which the Company had the exclusive right to use the Jones New York
and Jones New York Sport names in connection with the development, manufacturing
and marketing of women's footwear (other than performance athletic shoes and
bedroom slippers). The Jones License Agreement covered the United States
(including its territories) and Canada. The Company had three, five-year
options to extend the Jones License Agreement options through December 2017,
subject to the Company meeting certain minimum net sales amounts. On July 9,
1999 the Company sold and assigned its rights, title and interest as licensee to
manufacture and sell women's footwear bearing Jones New York and Jones New York
Sport trademarks under the Jones License Agreement to Jones for $25 million
cash.
J.G. Hook
In April 1997, the Company entered into a license agreement (the "J.G.
Hook License Agreement") with J.G. Hook, Inc. pursuant to which the Company
received the right to design, develop and market women's and children's shoes
under the J.G. Hook and Hook Sport brand names in exchange for payment of
royalties based on net sales of products marketed under such brand names. The
J.G. Hook License Agreement was for an initial 18-month period ending September
30, 1998, with two one-year extension options. In September 1998, the Company
exercised its first one-year option and renewed the agreement through September
1999. The Company later exercised its second one year option and renewed the
agreement through September 2000. The J.G. Hook License Agreement is subject to
early termination for various specified reasons, including any failure by the
Company to meet its royalty obligations thereunder. The Company plans to use the
J.G. Hook label to sell footwear on a first cost basis.
13
<PAGE>
SLJ Retail
In April 1997, the Company entered into a retail license agreement (the
"SLJ Retail Sam & Libby License Agreement") with SLJ Retail pursuant to which
the Company granted to SLJ Retail a license, throughout the United States and
such other locations outside the United States in which the Company or its
affiliates may from time to time sell Sam & Libby and Just Libby women's
footwear products, to use the Sam & Libby and Just Libby trademarks in
connection with the manufacturing, advertising, merchandising, promotion and
retail sale of women's footwear merchandise bearing such trademarks in enclosed
regional mall store locations; provided however, that such license does not
extend to products to which Inter-Pacific Corporation ("IPC") has the
exclusive rights. Under the SLJ Retail Sam & Libby License Agreement, SLJ
Retail does not have to pay any royalty to the Company in consideration of the
license granted and the services to be performed by the Company under such
agreement. The initial term of the SLJ Retail Sam & Libby License Agreement
expires on January 31, 2047, subject to earlier termination upon the occurrence
of certain specified events.
Inter-Pacific Corporation
In January 1997, the Company entered into a license agreement with IPC.
IPC is a 40 year old California-based seller and distributor of men's, women's
and children's footwear. IPC has the exclusive rights to design, manufacture
and distribute Sam & Libby beachwear type footwear (E.V.A. sandals, jellies,
aqua socks and injected molded slides) for men, women and children for an
initial period from January 1997 to May 2000. IPC may also design and
manufacture women's slippers bearing the Sam & Libby trademark. For the use of
the Sam & Libby trademark, IPC will pay the Company royalties at a rate based on
sales volume, subject to payment of minimum royalties of $396,000 over the
initial term of the agreement. IPC has exercised its option to extend the
license agreement until May 2003. Minimum royalties for this period, June 2000
until May 2003, are $651,000.
Trademarks
Mootsies Tootsies and Mootsies Kids are registered trademarks of the
Company in the United States. In addition, these trademarks have been registered
in Canada, Japan and Taiwan and trademark registration applications are pending
in several other countries. The Company's United States trademark registration
for Mootsies Tootsies expires in 2000 and the registration for Mootsies Kids
expires in 2003, although both are renewable.
Sam & Libby, Just Libby, New Nineties and Jeff & Kristi are registered
trademarks of Sprague Company, a 100% owned subsidiary of the Company. These
trademarks were acquired by the Company in August 1996 from Sam & Libby, Inc.
and are registered trademarks in the United States (see Note 1 of "Notes to
Consolidated Financial Statements"). In addition, the Sam & Libby and Just
Libby trademarks are registered in over 20 countries worldwide. Sprague's United
States trademark registration of Sam & Libby expires in 2001 and the
registration of Just Libby expires in 2005, although both are renewable. In
January 1997, the Company entered into a license agreement with IPC, a 40 year
old California-based seller and distributor of men's, women's and children's
footwear to license the Sam & Libby trademarks for slippers and E.V.A. sandals,
pursuant to which the Company will receive certain royalties and other revenues.
Jones New York and Jones New York Sport are registered trademarks of Jones
in the United States. Under the Jones License Agreement, Jones had the sole
right to defend against any infringement of those trademarks.
Dockers(R) Khakis is a registered trademark of the Levi Strauss Co. in
the United States. Under the Dockers(R) Khakis Agreement, Levi Strauss Co.
has the sole right to defend against any infringement of this trademark.
Anne Klein 2 and A Line Anne Klein are registered trademarks of Kasper
A.S.L., Ltd., or its wholly owned affiliates, in the United States. Under the
Anne Klein License Agreement, Kasper A.S.L., Ltd. has the sole right to defend
against any infringement of these trademarks.
14
<PAGE>
Competition
The women's and kids' fashion footwear markets are highly competitive.
In fact, due to the consolidation of the industry as a result of the recent
Jones New York acquisition of Nine West, the Company is in an industry with a
dominant competitor in Jones New York. The Company's products compete against
other branded footwear and, in the case of Mootsies Tootsies, against private
label footwear sold by many large retailers, including some of the Company's
customers. Many of the Company's competitors have substantially greater
financial, distribution and marketing resources, as well as greater brand
awareness than the Company. In addition, the general availability of offshore
manufacturing capacity allows easy access by new market entrants. The Company
believes its ability to compete successfully is based on its ability to design,
develop and market value priced footwear that reflects current fashion trends.
Employees
At October 31, 1999, the Company employed 132 people, including
officers, administrative, selling and warehouse personnel. None of the Company's
employees are represented by a union. The Company considers its relationship
with its employees to be good.
Item 2. Properties
The Company's headquarters, which includes approximately 20,000 square
feet of office space and 120,000 square feet of warehouse space, is located in
Boston, Massachusetts, approximately 49,000 square feet of which is leased to an
unaffiliated third party. This facility is leased by the Company under a lease
that expires in 2001. The Company also leases a 215,000 square feet warehouse in
Brockton, Massachusetts. This lease expires in 2007, subject to two five-year
options. The Company also holds an option exercisable in the year 2001 to lease
for six years, with two additional five-year options, an additional 240,000
square feet of space in the same warehouse facility. The Company also leases a
4,000 square feet showroom in New York City under a lease that expires in 2001.
The Company believes that these facilities are adequate for its current needs
and that it will be able to obtain additional space at a reasonable cost if
required in the future.
Item 3. Legal Proceedings
The Company is, from time to time, a party to litigation that arises
in the normal course of its business operations. The Company does not believe it
is presently a party to litigation that will have a material adverse effect on
its business operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Class A Common Stock is traded on the Nasdaq National Market System
("Nasdaq") under the symbol MAXS. The following table sets forth for the fiscal
periods indicated the range of high and low sale prices of the Class A Common
Stock as reported by Nasdaq:
<TABLE>
<CAPTION>
1998 January 31, April 30, July 31, October 31,
---- ----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Low......................... 10 1/2 13 7/8 17 1/2 9 13/16
High........................ 14 5/8 19 1/2 23 3/8 20 1/2
1999 January 31, April 30, July 31, October 31,
---- ----------- --------- -------- -----------
Low......................... 9 1/2 6 1/2 7 7 13/16
High........................ 13 5/8 14 1/8 9 3/8 8 15/16
</TABLE>
The number of stockholders of record of the Class A Common Stock on
October 31, 1999 was 33. However, based on available information, the Company
believes that the total number of Class A Common stockholders, including
beneficial stockholders, is approximately 1,600.
Dividend Policy
The Company has not paid cash dividends on the Common Stock to date
since the payment of certain distributions in connection with the termination of
the S Corporation status of the Company prior to the consummation of the
Company's initial public offering. In addition, because the Company currently
intends to retain any earnings for development of its business, the Company does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
Any determination to pay cash dividends on the Common Stock in the future will
be at the sole discretion of the Company's Board of Directors and will depend
upon, among other things, future earnings, operations, capital requirements, the
general financial condition of the Company and general business conditions.
16
<PAGE>
Item 6. Selected Financial Data
The following selected financial data are derived from audited
financial statements of the Company. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations."
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------------ ------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales............................................ $101,870 $104,337 $134,211 $165,921 $150,320
Cost of sales........................................ 77,912 79,915 98,230 121,032 113,820
-------- -------- -------- -------- --------
Gross profit......................................... 23,958 24,422 35,981 44,889 36,500
Selling, general and administrative
expenses........................................ 13,581 15,413 20,982 25,122 25,745
-------- -------- -------- -------- --------
Operating income..................................... 10,377 9,009 14,999 19,767 10,755
Amortization of trademark............................ 0 0 367 367 367
Interest expense..................................... 255 38 110 34 26
Other expense (income), net(1)....................... 399 (579) (42) (523) (21,061)
-------- -------- -------- -------- --------
Income before income taxes........................... 9,723 9,550 14,564 19,889 31,423
Income taxes......................................... 3,889 3,629 5,534 6,624 12,569
-------- -------- -------- -------- --------
Net income........................................... $ 5,834 $ 5,921 $ 9,030 $ 13,265 $ 18,854
======== ======== ======== ======== ========
Earnings per share
Basic............................................... $ 0.77 $ 0.78 $ 1.19 $ 1.61 $ 2.14
======== ======== ======== ======== ========
Diluted............................................. $ 0.70 $ 0.72 $ 1.06 $ 1.44 $ 1.99
======== ======== ======== ======== ========
Shares used to compute earnings per share
Basic............................................... 7,588 7,588 7,588 8,222 8,796
======== ======== ======== ======== ========
Diluted............................................. 8,311 8,261 8,537 9,226 9,466
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
October 31,
------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $ 35,097 $ 35,523 $ 44,441 $ 69,802 $ 87,220
Total assets......................................... 39,979 46,920 60,179 91,005 108,764
Total debt (including current maturities)............ 787 611 469 1,628 1,410
Total stockholders' equity........................... $ 35,684 $ 41,605 $ 50,635 $ 79,309 $ 98,326
</TABLE>
(1) Fiscal 1999 includes a gain of $19,500 from the sale of the Jones New York
license in July 1999.
17
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements contained in this Form 10-K regard matters that are
not historical facts and are forward looking statements (as such term is defined
in the rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act"). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed in or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to: changing consumer
preferences, competition from other footwear manufacturers, loss of key
employees, general economic conditions and adverse factors impacting the retail
footwear industry, and the inability by the Company to source its products due
to political or economic factors or the imposition of trade or duty
restrictions. The Company undertakes no obligation to release publicly the
results of any revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Results of Operations
The following table sets forth net sales by product line or category
of business:
<TABLE>
<CAPTION>
Year Ended October 31,
------------------------------------------------------------------------------
1997 1998 1999
---------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
(In millions--except percentages)
Mootsies Tootsies.......................... $ 71.0 52.9% $ 79.7 48.0% $ 68.8 45.8%
Jones New York Footwear.................... 32.2 24.0 42.2 25.5 33.5 22.2
Sam & Libby................................ 14.6 10.9 17.2 10.3 21.0 14.0
Dockers.................................... - - - - 2.4 1.6
Private Label Footwear..................... 13.6 10.1 22.2 13.4 21.9 14.6
Closeout................................... 2.8 2.1 4.6 2.8 2.7 1.8
------ ----- ------ ----- ------ -----
$134.2 100.0% $165.9 100.0% $150.3 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net sales were $150.3 million in fiscal 1999 compared to $165.9
million in fiscal 1998, a decrease of 9.4%. This decrease was due primarily to
the sale of the Jones New York footwear license in July 1999 and reduction of
Mootsies Tootsies net sales in fiscal 1999. Subsequent sales of Jones New York
footwear by the Company were comprised of either liquidating inventory on hand
at the date of the sale or the sale, at cost, of previously ordered inventory to
the Jones Apparel Group, Inc. This resulted in a decrease in the Company's Jones
New York footwear net sales in fiscal 1999 by $8.7 million or 20.6%, as compared
to fiscal year 1998 net sales. The decrease in net sales was also due to a
reduction in Mootsies Tootsies net sales in fiscal 1999. Mootsies Tootsies net
sales decreased $10.9 million or 13.7% in fiscal 1999 as compared to fiscal
1998. This was due to the continued consolidation of retailers and bankruptcy of
significant retail customers. Offsetting the decreases of Mootsies Tootsies and
the loss of the Jones New York footwear brand, was an increase of $3.8 million
or 22.1% in net sales of Sam & Libby footwear in fiscal 1999 as compared to 1998
and the incremental net sales of Dockers footwear for women in fiscal 1999 of
$2.4 million. Dockers footwear for women was introduced by the Company in fiscal
1999.
Gross profit was $36.5 million in fiscal 1999 compared to $44.9
million in fiscal 1998, a decrease of 18.7%. The decrease in gross margins in
fiscal 1999 was directly attributable to the decrease in net sales of Jones New
York footwear and the significant portion of Jones New York net sales shipped at
liquidation prices which generally approximated cost. Selling, general and
administrative expenses were relatively flat during fiscal 1999. As a percentage
of net sales selling, general and administrative expenses increased to 17.1% in
fiscal 1999 as compared to 15.1% in fiscal 1998. This increase was due to bad
debt expense relating to the bankruptcy of two significant retail customers,
higher depreciation expense, computer infrastructure improvements, as well as
expenses attributable to the introduction of the new Anne Klein 2 and A Line
Anne Klein footwear lines.
18
<PAGE>
Other income was $20.7 million for fiscal 1999 compared to other income of
$122,000 for fiscal 1998. In fiscal 1999, other income included $19.5 million
from the sale of the Jones New York license ($25.0 million less expenses of $5.5
million), interest income from cash equivalents of $1.5 million and royalty
income of $.3 million was offset by amortization expense relating to the
acquisition of the Sam & Libby trademark of $.4 million and donations of
footwear of $.2 million. In fiscal 1998, management fees from the SLJ Retail
LLC joint venture ($500,000), interest income from cash equivalents ($447,000),
and royalty income ($176,000) were offset by expenses related to a public stock
offering ($503,000), and amortization of expenses relating to the acquisition of
the Sam & Libby trademark ($367,000). Interest expense in fiscal 1999 was
incurred for capital leases. The Company had no short term borrowings in fiscal
1999.
The provision for income taxes increased from 33% of pre-tax income in
fiscal 1998 to 40% in fiscal 1999, principally as a result of deductions for
stock option compensation in fiscal 1998 which did not occur in fiscal 1999.
Fiscal 1998 Compared to Fiscal 1997
Net sales were $165.9 million in fiscal 1998 compared to $134.2 million in
fiscal 1997, an increase of 23.6%. This increase was due to a 31.1%, 12.3% and
17.8% rise in net sales of Jones New York, Mootsies Tootsies, and Sam & Libby
footwear, respectively, over the prior year. Private label unit sales increased
63.1% over the prior fiscal year.
Gross profit was $44.9 million in fiscal 1998 compared to $36.0 million in
fiscal 1997, an increase of 24.8%. Gross margins were substantially unchanged in
fiscal 1998 as compared to fiscal 1997. Selling, general and administrative
expenses increased $4.1 million during fiscal 1998 from fiscal 1997 due to an
increase in administrative charges relating to increased net sales.
Other income was $122,000 for fiscal 1998 compared to other expenses of
$435,000 for fiscal 1997. In fiscal 1998, management fees from the SLJ Retail
LLC joint venture ($500,000), interest income from cash equivalents ($447,000),
and royalty income ($176,000) were offset by expenses related to a public stock
offering ($503,000), and amortization of expenses relating to the acquisition of
the Sam & Libby trademark ($367,000). During fiscal 1997, amortization expense
relating to the acquisition of the Sam & Libby trademark was $367,000 and losses
of $76,000 were realized from foreign exchange contracts, offset by $132,000 in
interest income from cash equivalents. Interest expense in fiscal 1998 was
incurred for capital leases and short term borrowings. The Company had no short
term borrowings in fiscal 1998.
Liquidity and Capital Resources
The Company has relied primarily upon internally generated cash flows from
operations and borrowings under its credit facility to finance its operations
and expansion. Cash provided (used) by operating activities totaled
approximately ($6.5) million in fiscal 1997, $6.9 million in fiscal 1998 and
$13.6 million in fiscal 1999. At October 31, 1999, working capital was $87.2
million as compared to $69.8 million at October 31, 1998. Working capital may
vary from time to time as a result of seasonal requirements, the timing of early
factory shipments and the Company's in-stock position, which requires increased
inventories, and the timing of accounts receivable collections. Capital
expenditures were $3.3 million for the year ended October 31, 1999.
In fiscal 1999, cash provided by operations was $13.6 million as compared
to cash provided by operations in fiscal 1998 of $6.9 million. The increase in
cash provided in fiscal 1999 was due to the reduction of accounts receivable and
inventory. As of October 31, 1999, the proceeds of $25 million from the sale of
the Jones New York license were held for the account of the Company by an
independent intermediary pending future utilization for acquisitions and were
classified as restricted cash. On January 5, 2000, the funds became
unrestricted to the Company.
19
<PAGE>
The Company currently has a $35.0 million discretionary demand credit
facility bearing interest at either the Bank of Boston's base rate or Adjusted
Eurodollar Rate plus one percent (1.0%), renewable annually under certain
conditions. This demand line of credit will cover the aggregate amount of demand
loans outstanding plus the letter of credit exposure amount. As of October 31,
1999, there were no outstanding borrowings, $9.8 million was outstanding under
letters of credit and $25.2 million was available for future borrowings.
The Company anticipates that it will be able to satisfy its cash
requirements for fiscal 2000 primarily with cash flow from operations,
supplemented by borrowings under its demand credit facility.
Year 2000 Readiness
As of the date of this filing, January 19, 2000, the Company has not
incurred any significant business disruptions as a result of year 2000 issues
(as defined below). However, while no such occurrence has developed as of the
date of this filing, year 2000 issues that may arise related to material third
parties (as defined below) may not become apparent immediately and therefore,
there is no assurance that the Company will not be affected by third party
noncompliance in the future. The Company will continue to monitor the issue
vigilantly and work to remediate any issues that may arise.
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Such software and
devices with embedded technology may recognize a date using "00" as the year
1900 rather than the year 2000. The Company is dependent upon complex computer
systems for certain phases of its operations, including sales, distribution and
delivery. Since many of the Company's older computer software programs
recognize only the last two digits of the year in any date (e.g., "97" for
"1997"), some software may recognize a date using "00" as the year 1900 rather
than the year 2000 and fail to operate properly in 2000 if the software is not
reprogrammed or replaced (the "Year 2000 Problem"). This could result in system
failures or miscalculations leading to disruptions in the Company's operations,
including, among other things, a temporary inability to process transactions,
receive inventory from suppliers, ship inventory to customers, or engage in
similar business activities.
The Company believes that many of its customers and suppliers also could
have Year 2000 Problems which could adversely affect the Company. One area in
which customers' Year 2000 Problems could adversely impact the Company and its
operations relates to electronically received orders for the Company's products
through Electronic Data Interchange (EDI). Significant customers and suppliers
have been identified and although there have been no reported problems to date,
the Company maintains an open line of communication with them in regards to the
Year 2000 Problem and its effects going forward. Prior to January 1, 2000,
correspondence was sent to all significant customers and suppliers and the
Company was told by a large majority that they expected to be Year 2000
compliant prior to the development of material Year 2000 Problems. Although
there have been no disruptions to date, the Company is following up with
inquiries with these significant customers and suppliers. In the event some
customers and suppliers experience problems or disruptions that could have an
adverse impact on the Company, the Company will implement its contingency plan.
The Company's contingency plan includes the utilization of existing manual order
receiving capabilities and increasing inventory. The Company currently receives
approximately 15-20% of orders for its products through EDI.
Although the Company has not experienced any Year 2000 Problems to date,
there is still uncertainty as Year 2000 Problems may still occur in the future.
In the event of a Year 2000 Problem, it is not possible at present to quantify
the financial effect of the Year 2000 Problem if it is not timely resolved.
Although, the cost of fixing the Year 2000 Problem did not have a material
effect on the Company's financial condition or results of operations,
expectations about future year 2000-related costs are subject to various
uncertainties that could cause the actual results to differ materially from the
Company's expectations, including the success of the Company in identifying
systems and programs that are not Year 2000 ready, the nature and amount of
programming required to upgrade or replace each of the affected programs, the
availability, rate and magnitude of related labor and consulting costs and the
success of the Company's business partners, vendors and clients in addressing
the Year 2000 issue.
20
<PAGE>
Although the Company anticipates that no material business disruption will
occur as a result of the Year 2000 issue, the Year 2000 issue is unique and the
failure to correct a material Year 2000 issue could result in an interruption,
or a failure of, certain normal business activities or operations, such as loss
of communications with store locations, inability to process transactions,
inability for malls to operate, and the disruption of the supply of product and
distribution channel. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to
general uncertainty inherent in the Year 2000 Problem, resulting from the
uncertainty of the Year 2000 readiness of third parties, the Company is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition. The Company's Year 2000 Plan is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 issue and the
readiness of its material third parties. The Company believes that the
completion of its Plan helps reduce the possibility of significant interruptions
of normal operations.
Effects Of Inflation
The Company believes that the relatively moderate rate of inflation over
the past few years has not had a significant impact on the Company's revenues or
profitability.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not believe that there is any material market risk
exposure with respect to derivative or other financial instruments that would
require disclosure under this item.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements required in response to this
section are submitted as part of Item 14(a) of this Report.
21
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Maxwell Shoe Company Inc.
We have audited the accompanying consolidated balance sheets of Maxwell Shoe
Company Inc. as of October 31, 1998 and 1999, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended October 31, 1999. 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 auditing standards generally accepted
in the United States. 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 consolidated financial position of Maxwell Shoe
Company Inc. at October 31, 1998 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
October 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
December 20, 1999
except for Note 11, as to which
the date is January 5, 2000
22
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands -- except per share amounts)
<TABLE>
<CAPTION>
October 31,
-----------------------------------
ASSETS 1998 1999
--------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 18,731 $ 28,901
Restricted cash............................................................ - 25,000
Accounts receivable, trade (net of allowance for doubtful accounts and
discounts of $581 in 1998, $785 in 1999)................................. 35,655 29,753
Inventory, net............................................................. 22,928 11,327
Prepaid expenses........................................................... 430 735
Prepaid income taxes....................................................... 1,177 0
Deferred income taxes...................................................... 1,074 739
--------- ---------
Total current assets.......................................................... 79,995 96,455
Property and equipment, net................................................... 6,231 7,897
Trademarks, net............................................................... 4,767 4,400
Other assets.................................................................. 12 12
--------- ----------
$ 91,005 $ 108,764
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................... $ 3,824 $ 3,179
Accrued expenses........................................................... 5,938 5,346
Deferred income taxes...................................................... 306 593
Current portion of capital lease obligations............................... 125 117
--------- ----------
Total current liabilities..................................................... 10,193 9,235
Long-term deferred income taxes............................................... 1,283 1,191
Capital lease obligations..................................................... 220 102
Stockholders' equity:
Preferred stock, par value $.01, 1,000 shares
authorized, none outstanding........................................... -- --
Class A common stock, par value $.01, 20,000 shares authorized,
8,794 shares outstanding in 1998, 8,796 shares outstanding in 1999..... 88 88
Class B common stock, par value $.01, no shares authorized,
none outstanding in 1998 and 1999...................................... -- --
Additional paid-in capital................................................. 43,015 43,026
Deferred compensation...................................................... (306) (244)
Retained earnings.......................................................... 36,512 55,366
--------- ----------
Total stockholders' equity.................................................... 79,309 98,236
--------- ----------
$ 91,005 $ 108,764
========= ==========
</TABLE>
See accompanying notes.
23
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- except per share amounts)
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Net sales....................................................... $ 134,211 $ 165,921 $ 150,320
Cost of sales................................................... 98,230 121,032 113,820
--------- ---------- ----------
Gross profit................................................... 35,981 44,889 36,500
Operating expenses:
Selling....................................................... 7,903 10,241 9,905
General and administrative.................................... 13,079 14,881 15,840
--------- ---------- ----------
20,982 25,122 25,745
--------- ---------- ----------
Operating income................................................ 14,999 19,767 10,755
Other expenses (income)
Interest...................................................... 110 34 26
Amortization of trademarks.................................... 367 367 367
Other, net.................................................... (42) (523) (21,061)
--------- ---------- ----------
435 (122) (20,668)
--------- ---------- ----------
Income before income taxes...................................... 14,564 19,889 31,423
Income taxes.................................................... 5,534 6,624 12,569
--------- ---------- ----------
Net income...................................................... $ 9,030 $ 13,265 $ 18,854
========= ========== ==========
Earnings per share
Basic......................................................... $ 1.19 $ 1.61 $ 2.14
Diluted....................................................... $ 1.06 $ 1.44 $ 1.99
Shares used to compute earnings per share:
Basic......................................................... 7,588 8,222 8,796
Diluted....................................................... 8,537 9,226 9,466
</TABLE>
See accompanying notes.
24
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------------------------
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Operating activities:
Net income.......................................................... $ 9,030 $ 13,265 $ 18,854
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization..................................... 672 1,214 2,017
Deferred income taxes............................................. (685) 1,930 530
Doubtful accounts provision....................................... 125 125 1,496
Gain on sale of Jones license..................................... - - (19,500)
Deferred compensation............................................. - - 62
Changes in operating assets and liabilities:
Accounts receivable............................................ (11,866) (7,186) 2,906
Inventory...................................................... (7,966) (2,787) 10,101
Prepaid expenses............................................... (124) (487) (305)
Prepaid income taxes........................................... - - 1,177
Accounts payable............................................... 1,317 1,627 (645)
Income taxes payable........................................... (433) - -
Accrued expenses............................................... 3,467 (829) (3,092)
--------- --------- --------
Net cash provided (used) by operating activities.................... (6,463) 6,872 13,601
Investing activities:
Purchases of property and equipment................................. (659) (5,686) (3,316)
--------- --------- --------
Net cash used by investing activities............................... (659) (5,686) (3,316)
Financing activities:
Proceeds from sale of common stock.................................. - 13,246 -
Proceeds from exercise of stock option.............................. - 1,294 11
Payments on capital lease obligation................................ (142) (124) (126)
--------- --------- --------
Net cash (used) provided by financing activities.................... (142) 14,416 (115)
--------- --------- --------
Net increase (decrease) in cash and cash equivalents................ (7,264) 15,602 10,170
Cash and cash equivalents at beginning of year...................... 10,393 3,129 18,731
--------- --------- --------
Cash and cash equivalents at end of year............................ $ 3,129 $ 18,731 $ 28,901
========= ========= ========
Supplemental Disclosure of Cash Flow Information:
Proceeds from sale of Jones license
(classified as restricted cash).................................... $ - $ - $ 25,000
========= ========= ========
Interest paid....................................................... $ 110 $ 34 $ 26
========= ========= ========
Income taxes paid................................................... $ 6,807 $ 4,847 $ 10,697
========= ========= ========
</TABLE>
See accompanying notes.
25
<PAGE>
MAXWELL SHOE COMPANY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
------------------- ------------------
Number Number Additional Deferred
of of Paid-In Compen- Retained
Shares Amount Shares Amount Capital sation Earnings Total
------ ------ ------- ------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996...... 2,525 $25 5,063 $ 51 $27,312 - $14,217 $41,605
Net income for 1997............. 9,030 9,030
----- --- ------ ------ ------- ----- ------- -------
Balance at October 31, 1997...... 2,525 25 5,063 51 27,312 23,247 50,635
Net income for 1998............. 13,265 13,265
Shares converted................ 5,063 51 (5,063) (51) -
Sale of common stock............ 802 8 13,238 13,246
Options exercised............... 404 4 1,290 1,294
Tax benefit from options
exercised........................ 869 869
Options granted................. 306 $(306) -
----- --- ------ ------ ------- ----- ------- -------
Balance at October 31, 1998...... 8,794 88 - - 43,015 (306) 36,512 79,309
Options exercised............... 2 - 11 11
Net -income for 1999............ 18,854 18,854
Amortization of deferred
compensation................... 62 62
Balance at October 31, 1999 8,796 $88 - $ - $43,026 $(244) $55,366 $98,236
===== === ====== ====== ======= ===== ======= =======
</TABLE>
See accompanying notes.
26
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands--except per share amounts)
October 31, 1999
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
Concentration of Credit Risk
The Company sells footwear for women and children to retailers located
throughout the United States, Canada and Japan. The company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Credit losses in previous years have been within or below
management's expectations, although during fiscal 1999 credit losses exceeded
management expectations as a large and several medium sized retailers declared
bankruptcy. In fiscal 1997, 1998 and 1999 one customer accounted for
approximately 19%, 18% and 13%, respectively, of net sales. At October 31, 1999
one customer accounted for 19% of trade receivables outstanding.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Recognition of Revenue
Sales are recognized upon shipment of products.
Cash and Cash Equivalents
Cash, checking accounts and all highly-liquid debt instruments with
original maturities of three months or less are deemed to be cash and cash
equivalents.
Inventory
Inventory is valued at the lower of cost or market, using the first-in,
first-out method.
27
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
Long Term Assets
Property and equipment are stated at cost. Depreciation is provided using
both straight line and accelerated methods over the estimated useful lives of
these assets or the lease term, if shorter. The estimated useful lives of these
assets are as follows:
Asset Useful Life
----- -----------
Furniture and fixtures................ 5 Years
Warehouse equipment................... 7 Years
Leasehold improvements................ 7 Years
Computer equipment.................... 5 Years
In August 1996, the Company acquired the rights to the Sam & Libby and
certain related trademarks and tradenames for $5.5 million cash. The trademarks
and tradenames are being amortized on a straight line basis over 15 years, their
estimated useful lives. Amortization began in 1997 when sale of product with the
trademark names commenced. Accumulated amortization at October 31, 1997, 1998
and 1999 was $367, $733 and $1,100, respectively.
Operating Expenses
General and administrative expenses include the cost of warehousing and
shipping operations.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense (including
cooperative advertising with retailers) amounted to $2,502, $3,852 and $3,095
for the years ended October 31, 1997, 1998 and 1999, respectively.
Income Taxes
The Company utilizes the liability method for accounting for income taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Deferred tax assets may be reduced by a
valuation allowance to reflect the uncertainty associated with their ultimate
realization.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed based on basic shares outstanding increased by incremental shares
assumed issued for dilutive common stock equivalents in the form of stock
options.
28
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
Forward Exchange Contracts
The Company uses forward exchange contracts to manage its foreign currency
exposure. Realized and unrealized gains and losses on contracts that hedge
anticipated cash flows are determined by comparison of contract values to
current market values upon execution of a contract (realized) and at each
balance sheet date for open contracts (unrealized). Resulting gains and losses
are recognized in other income and expense ($76 loss in 1997, $13 gain in 1998
and no loss or gain in 1999).
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees,
generally with an exercise price equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and, accordingly, recognizes no compensation expense for
the stock option grants when the exercise price equals the fair value of the
shares at the date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." These provisions require the Company to disclose pro forma net
income and earnings per share amounts as if compensation related to grants of
stock options were recognized based on the fair value of such options (see Note
5).
Comprehensive Income
Effective November 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes rules for the reporting and
display of comprehensive income and its components. The adoption of SFAS No.
130 had no material effect on the Company's financial statements.
Segment Reporting
Effective November 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an enterprise and Related Information." SFAS No. 131
establishes standards for public companies to report information about operating
segments in financial statements and requires that those companies report
selected information about operating segments in interim financial reports.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers.
All of the Company's efforts are devoted to selling footwear that are
managed and reported in one segment. The Company is located in the U.S. and
derives substantially all of its revenues from sales in the U.S.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (FAS 133) which
29
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
provides for the recognition and measurement of derivatives and hedging
activities. In May 1999, the FASB delayed the required implementation date by
one year, making it effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management of the Company does not expect the adoption of
this Statement to have a material impact on the Company's financial statements.
30
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
2. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Warehouse equipment............................ $4,298 $ 4,382
Furniture and fixtures......................... 756 845
Leasehold improvements......................... 863 985
Computer equipment............................. 2,807 5,828
Other.......................................... 4 4
------ -------
8,728 12,044
Less accumulated depreciation.................. 2,497 4,147
------ -------
Property and equipment, net.................... $6,231 $ 7,897
====== =======
</TABLE>
At October 31, 1998 and 1999, property and equipment included assets
recorded under capital leases of $1,047. Accumulated amortization of such assets
was $765 and $887 at October 31, 1998 and 1999, respectively. Depreciation
expense, including amortization of assets recorded under capital leases, for the
years ended October 31, 1997, 1998 and 1999 amounted to $305, $847 and $1,650,
respectively.
3. Bank Borrowings
The Company currently has a $35.0 million discretionary demand credit
facility bearing interest at either the Bank of Boston's base rate or Adjusted
Eurodollar Rate plus one percent (1.0%), renewable annually under certain
conditions. The credit agreement provides that the bank will both advance funds
directly to the Company and issue letters of credit on behalf of the Company. As
of October 31, 1999, there were no outstanding borrowings, $9.8 million was
outstanding under letters of credit and $25.2 million was available for future
borrowings.
4. Accrued Expenses
Accrued expenses consist of the following at October 31:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Inventory purchases.............................. $3,076 $1,941
Compensation..................................... 1,687 1,417
Income taxes payable............................. - 695
Employee benefit plan contribution............... 283 402
Other............................................ 892 891
------ ------
$5,938 $5,346
====== ======
</TABLE>
31
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
5. Stockholders' Equity
Preferred Stock
The Company's Charter authorizes the issuance of 1,000,000 shares of
preferred stock. The Company's Charter provides that the Board of Directors of
the Company may authorize the issuance of one or more series of preferred stock
having such rights, including voting, conversion and redemption rights, and such
preferences, including dividend and liquidation preferences, as the Board may
determine without any further action by the stockholders of the Company. There
are no shares of preferred stock currently outstanding.
Common Stock
On April 27, 1998, the Company completed a public stock offering of an
aggregate of 6,145,792 shares of Class A Common Stock at $17.50 per share. Of
the shares sold, 5,044,167 Class A shares were sold by members of the founder's
family and a trust for their benefit upon conversion of a like number of Class B
shares and exercise of stock options, and 300,000 Class A shares were sold by
the Company Chairman and CEO pursuant to the exercise of stock options. The
Company did not receive any proceeds from the sale of shares by the selling
stockholders. In addition, the Company sold 801,625 shares of Class A Common
Stock pursuant to the full exercise of an over-allotment option granted by the
Company to the underwriters. The Company received $13.2 million from the
exercise of the over-allotment option and $1.3 million from the exercise of
stock options. The Company no longer has any Class B shares outstanding. The
Company expensed $.5 million of costs related to the sale of shares by the
selling stockholders pursuant to prior contractual obligations of the Company.
At the April 8, 1999 Annual Meeting, the shareholders approved an amendment to
the company's Certificate of Incorporation to eliminate the authorization for
the issuance of Class B Common Stock.
Stock Options
Under the 1994 Stock Incentive Plan (the Plan), the Board of Directors has
reserved 750,000 shares of Class A Common Stock for issuance upon exercise of
options or grants of other awards under the Plan. On June 1, 1998, the Plan was
amended to increase the number of shares by 300,000 of Class A Common Stock for
issuance upon exercise of options or grants of other awards under the Plan.
Except for options granted to non-employee directors, which vest immediately,
options generally vest annually over a four-year period.
In September 1998, the Company granted 30,000 options to certain employees
to purchase stock at $1.00 per share. Based on the market price of the
Company's stock on the date of grant, the Company recorded deferred compensation
expense of $306, which will be recognized ratably over the vesting period of
five years.
32
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
Presented below is a summary of the status of the stock option plan and
related transactions:
<TABLE>
<CAPTION>
Year ended October 31,
-----------------------------------------------------------
1997 1998 1999
------------------ ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year..... 670,850 $7.46 735,850 $ 7.15 682,300 $8.46
Granted...................................... 129,500 $6.45 145,000 $14.03 200,000 $8.80
Exercised.................................... 0 $0.00 (104,257) $ 8.17 (1,700) $6.50
Canceled..................................... (64,500) $9.00 (94,293) $ 7.13 (14,200) $6.08
------- -------- -------
Options outstanding at end of year........... 735,850 $7.15 682,300 $ 8.46 866,400 $8.58
------- -------- -------
Options exercisable at end of year........... 214,405 437,696 516,531
======= ======== =======
</TABLE>
The following table summarizes information about stock options outstanding
under the stock option plan at October 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (Years) Price Shares Price
----------------------- ------- ------------ --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$1.00.................................... 30,000 9.0 $ 1.00 0 --
$5.00 - $ 6.50.......................... 379,000 6.7 $ 6.00 308,215 $ 5.98
$7.75 - $10.38.......................... 342,400 7.8 $ 9.12 162,400 $ 9.39
$17.00 - $17.50.......................... 115,000 8.5 $17.43 45,916 $17.34
------- -------
866,400 7.4 $ 8.58 516,531 $ 8.06
======= =======
</TABLE>
At October 31, 1998 and 1999, there were 263,443 and 77,643 shares
available, respectively, for future grants under stock option plans.
In 1994, in consideration for the termination of a deferred compensation
agreement, the Board of Directors approved a non-transferable stock option grant
to the CEO for the purchase of 888,412 shares of Class A Common Stock at an
exercise price of $1.50 per share. The grant was outside of the Company's stock
option plan, and the stock options were immediately exercisable. In connection
with the April 1998 public stock offering, the CEO exercised a portion of these
options to purchase 300,000 shares of common stock. At October 31, 1999, 588,412
share remained outstanding.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123) utilizes the fair value method of accounting for
employee stock options. Under this method, compensation expense for stock-based
compensation plans is measured at the grant date based on the fair value of the
award and is recognized over the service period. In accordance with FAS 123, the
Company has elected to continue to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25, no
compensation expense is recognized as long as the exercise price equals the
market price of the underlying stock on the date of grant.
33
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options and other stock-
based compensation granted subsequent to October 31, 1995 under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk-free interest rates ranging from 5.26% to
6.89%; dividend yield of 0%; volatility factor of the expected market price of
the Company's common stock of 63.4%, 61.2% and 55.8% for 1997, 1998 and 1999;
and a weighted average expected life of 5.1 years for options granted for 1997
and 5.0 years for options granted in 1998 and 1999. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
<TABLE>
<CAPTION>
Year ended
October 31,
-----------------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Pro forma:
Net income.................................................... $8,731 $12,662 $18,268
Earnings per share:
Basic........................................................ $ 1.15 $ 1.54 $ 2.08
Diluted...................................................... $ 1.02 $ 1.37 $ 1.93
Options granted whose exercise price equals
market price on grant date
Weighted average fair value of options granted............... $ 4.07 $ 9.99 $ 4.81
Weighted average exercise price.............................. $ 6.74 $ 17.44 $ 8.80
Options granted whose exercise price is less than
market price on grant date
Weighted average fair value of options granted............... $ 4.74 $ 10.52 -
Weighted average exercise price.............................. $ 6.00 $ 1.00 -
</TABLE>
During the initial phase-in period, the effects of applying FAS 123 for
recognizing compensation expense may not be representative of the effects on
reported net income or loss for future years because the options granted by the
Company vest over several years and additional awards may be made in future
years.
Stockholder Rights Plan
In November 1998 the Company adopted a Stockholder Rights Plan, under which
each outstanding share of the Company's Class A common stock carries one Common
Stock Purchase Right. The rights may only become exercisable under certain
circumstances involving acquisition of the Company's common stock by a person or
group of persons without the prior written consent of the Company's board.
Depending on the circumstances, if the rights become exercisable, the holder of
rights may be entitled to purchase shares of the Company's Class A common stock
or shares of common stock of the acquiring person at discounted prices. The
rights will expire on November 2, 2008 unless they are earlier exercised,
redeemed or exchanged.
34
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
6. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of October 31 were as
follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets
Stock option compensation....................................... $ 1,854 $ 1,854
Inventory reserve............................................... 482 217
Allowance for doubtful accounts................................. 232 314
Inventory capitalization........................................ 360 208
------- -------
2,928 2,593
Valuation allowances for deferred tax assets...................... (1,854) (1,854)
------- -------
Total deferred tax assets......................................... 1,074 739
Deferred tax liabilities:
Trademark....................................................... 1,283 1,191
Property and equipment.......................................... 306 593
------- -------
Total deferred tax liabilities.................................... 1,589 1,784
------- -------
Net deferred tax liabilities...................................... $ (515) $(1,045)
======= =======
</TABLE>
FAS 109 requires a Company to recognize a valuation allowance if it is more
likely than not that some portion or all of the deferred tax asset will not be
realized. In connection with the stock option compensation discussed in Note 5,
the Company recorded a valuation allowance in 1994 for the related deferred tax
asset. The stock option compensation is deductible for tax purposes upon
exercise of the option. During 1998, a portion of the options were exercised and
a proportionate share of the valuation allowance was reduced resulting in a tax
benefit of $946, which is included in the income tax provision. Furthermore, for
tax purposes, the Company recognized additional compensation expense for the
difference between the market price at the date of grant and the market price at
the date of exercise. This additional tax benefit of $869 for 1998 has been
recorded as a reduction of current taxes payable and an increase in additional
paid-in-capital. In 1999 no such options were exercised.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ 5,023 $ 3,844 $ 9,720
State........................................... 1,196 850 2,319
-------- -------- --------
Total current................................... 6,219 4,694 12,039
Deferred:
Federal......................................... (582) 1,559 418
State........................................... (103) 371 112
-------- -------- --------
Total deferred.................................. (685) 1,930 530
-------- -------- --------
$ 5,534 $ 6,624 $ 12,569
======== ======== ========
</TABLE>
35
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate.................................. 34% 35% 35%
State income taxes, net of federal tax benefit..... 5 5 5
Stock option compensation.......................... - (5) -
Other.............................................. (1) (2) -
---- ---- ----
Effective tax rate................................... 38% 33% 40%
==== ==== ====
</TABLE>
7. Profit-Sharing Plan
The Company has a contributory 401(k) profit-sharing plan covering
substantially all employees. Employees may contribute up to 15% of their pre-
tax salary subject to statutory limitations. The plan requires the Company to
match 100% of employee contributions up to 2% of total employee compensation.
The plan also allows for additional discretionary Company contributions. Total
plan expense amounted to $300, $350 and $504 for fiscal years 1997, 1998 and
1999, respectively.
8. Commitments
The Company leases equipment and office and warehouse space under long-term
non-cancelable operating leases which expire at various dates through January
31, 2007. These leases require the Company to pay the real estate taxes on the
real property. The Company also leases equipment under capital leases.
At October 31, 1999, future minimum payments under such leases were as
follows:
<TABLE>
<CAPTION>
Capital Operating
------- ---------
<S> <C> <C>
2000.................................................... $142 $1,216
2001.................................................... 123 1,233
2002.................................................... - 706
2003.................................................... - 613
Later years............................................. - 1,950
---- ------
Total minimum lease payments............................ 265 $5,718
======
Amounts representing interest........................... (46)
----
Capital lease obligation (including current portion).... $219
====
</TABLE>
Rent expense for the years ended October 31, 1997, 1998 and 1999 was $831,
$981 and $859, respectively.
The Company is a licensee under three agreements which allow for the
manufacture and sale of various items of footwear. The agreements require the
payment of royalties on qualified product sales and generally guarantee minimum
royalty payments regardless of sales volume. In April 1997, the Company entered
into a license agreement with J. G. Hook, Inc. (the Hook agreement) for an
initial 18 month period ending September 30, 1998, with two one-year option
periods. The Company exercised its second one year option and renewed the
agreement through September 2000. On November 13, 1998, the Company entered
into a license agreement with Levi Strauss Co. which allows for the manufacture
and sale of a full range of women's casual footwear under the
36
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
Dockers(R) brand name. The agreement requires the payment of royalties on
qualified sales and guarantees minimum royalty payments. The minimum royalty
ranges from $144 to $864 through the initial term ending December 31, 2001.
There is one four-year option to renew through December 31, 2005, subject to
satisfying certain conditions.
Effective July 1999 the Company entered into a license agreement with
Kasper A.S.L., Ltd. which allows for the manufacture and sale of women's
footwear under the Anne Klein 2 and A Line Anne Klein brands. The agreement
requires the payment of royalties and minimum advertising obligations. The
initial term of the license agreement expires December 31, 2002. The Company
has two five year options, subject to satisfying certain conditions.
On July 9, 1999, the Company completed a transaction under which the
Company sold its license to manufacture and distribute Jones New York footwear.
In consideration of the sale of the license and certain other assets, the
Company received a cash payment of $25.0 million. In connection with the
license sale, the Company recorded $5.5 million for expenses related to the
transaction, including inventory liquidation. In addition, the proceeds from
the transaction are currently held for the account of the Company by an
independent intermediary pending future utilization for acquisitions. If such
funds are not so utilized on or before January 5, 2000, the funds will be
unrestricted.
In January 1997, the Company entered into a license agreement with Inter-
Pacific Corporation (IPC), which provides IPC with the exclusive rights to
design, manufacture and distribute Sam & Libby beachwear type footwear for an
initial term of January 1997 to May 2000. For the use of the Sam & Libby
trademark, IPC will pay the Company royalties based on qualified product sales
subject to payment of minimum royalties of $396 over the initial term of the
agreement. IPC has exercised its option to extend the license agreement until
May 2003. Minimum royalties for this period, June 2000 until May 2003, are
$651,000.
9. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1998 1999
----- ------ ------
<S> <C> <C> <C>
Numerator:
Net income........................................... $9,030 $13,265 $18,854
====== ======= =======
Denominator:
Denominator for basic earnings per share
Weighted average shares............................ 7,588 8,222 8,796
Denominator for diluted earnings per share
Dilutive stock options............................. 949 1,004 670
------ ------- -------
Adjusted weighted average shares and assumed
conversions...................................... 8,537 9,226 9,466
====== ======= =======
Earnings per share
Basic................................................ $ 1.19 $ 1.61 $ 2.14
====== ======= =======
Diluted.............................................. $ 1.06 $ 1.44 $ 1.99
====== ======= =======
</TABLE>
37
<PAGE>
MAXWELL SHOE COMPANY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Dollars in Thousands--except per share amounts)
10. Supplementary Quarterly Financial Data (Unaudited)
The following is a summary of unaudited quarterly results for the fiscal
years ended October 31, 1998 and October 31, 1999.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------
January 31, April 30, July 31, October 31,
----------- --------- -------- -----------
<S> <C> <C> <C> <C>
Fiscal 1998
Net sales................................ $36,328 $39,786 $47,386 $42,421
Gross profit............................. 9,837 10,924 13,056 11,072
Net income............................... 2,230 3,145 4,468 3,422
Earnings per share
Basic.................................. $ .29 $ .41 $ .51 $ .40
======= ======= ======= =======
Diluted................................ $ .26 $ .35 $ .46 $ .36
======= ======= ======= =======
Fiscal 1999
Net sales................................ $35,906 $36,247 $39,066 $39,101
Gross profit............................. 9,445 10,538 8,313 8,204
Net income............................... 2,168 2,337 13,144 1,205
Earnings per share
Basic.................................. $ .25 $ .27 $ 1.49 $ .14
======= ======= ======= =======
Diluted................................ $ .23 $ .25 $ 1.39 $ .13
======= ======= ======= =======
</TABLE>
11. Subsequent Event
On January 5, 2000, the Company received the $25 million in proceeds from
the sale of the Jones license on an unrestricted basis together with
approximately $660,000 in net interest on the funds.
38
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 13, 2000 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1999 and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 13, 2000 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1999 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 13, 2000 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1999 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be contained in the Company's Proxy
Statement for its Annual Stockholders Meeting to be held April 13, 2000 to be
filed with the Securities and Exchange Commission within 120 days after October
31, 1999 and is incorporated herein by reference.
39
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following financial statements of the Company are included in response to
Item 8 of this report.
<TABLE>
<CAPTION>
Page Reference
Form 10-K
--------------
<S> <C>
Report of Independent Auditors.......................................................... 23
Consolidated Balance Sheets as of October 31, 1998 and 1999............................. 24
Consolidated Statements of Income for each of the three years in the period ended
October 31, 1999...................................................................... 25
Consolidated Statements of Cash Flows for each of the three years in the period ended
October 31, 1999...................................................................... 26
Consolidated Statements of Changes in Stockholders' Equity for each of the three years
in the period ended October 31, 1999.................................................. 27
Notes to Consolidated Financial Statements.............................................. 28
(a) (2) Financial Statements:
Schedule II -- Valuation and qualifying accounts for the years
ended October 31, 1997, 1998 and 1999................................................. 46
Schedules other than those listed above have been omitted since they are either not
required, not applicable, or the information is otherwise included.
</TABLE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
fiscal 1999.
(c) Exhibits
3.1 Certificate of Incorporation of Maxwell Shoe Company Inc.
(incorporated by reference to exhibit 3.1 to the registrant's
Form S-1 Registration Statement No. 33-74768)
3.2 Bylaws of Maxwell Shoe Company Inc., as amended (incorporated
by reference to exhibit 3.2 to the registrant's Form S-1
Registration Statement No.33-74768)
4.1 Specimen Maxwell Shoe Company Inc. Class A Common Stock
Certificate (incorporated by reference to exhibit 4.1 to the
registrant's Form 10-K for the fiscal year ended October 31,
1994)
4.2 Specimen Maxwell Shoe Company Inc. Class B Common Stock
Certificate (incorporated by reference to exhibit 4.2 to the
registrant's Form 10-K for the fiscal year ended October 31,
1994)
4.3 Rights Agreement dated as of November 2, 1998 between Maxwell
Shoe Company Inc. and BankBoston, N.A., as Rights Agent
(incorporated by reference to Exhibit 99.1 to the registrant's
Form 8-K filed on November 12, 1998)
40
<PAGE>
10.1 Amended 1994 Stock Incentive Plan (incorporated by reference to
exhibit 4.1 to the registrant's Form S-8 Registration Statement
No. 333-55723)
10.2.1 Form of Employee Nonqualified Stock Option Agreement pursuant
to 1994 Stock Incentive Plan (incorporated by reference to
exhibit 10.2.1 to the registrant's Form S-1 Registration
Statement No. 33-74768)
10.2.2 Form of Employee Incentive Stock Option Agreement pursuant to
1994 Stock Incentive Plan (incorporated by reference to exhibit
10.2.2 to the registrant's Form S-1 Registration Statement No
33-74768)
10.2.3 Form of Nonemployee Director Stock Option Agreement pursuant to
1994 Stock Incentive Plan (incorporated by reference to exhibit
10.2.3 to the registrant's Form S-1 Registration Statement No.
33-74768)
10.3 Form of Restricted Stock Agreement pursuant to 1994 Stock
Incentive Plan (incorporated by reference to exhibit 10.3 to
the registrant's Form S-1 Registration Statement No. 33-74768)
10.4 Form of Indemnity Agreement between Maxwell Shoe Company Inc.
and each of its directors and executive officers (incorporated
by reference to exhibit 10.4 to the registrant's Form S-1
Registration Statement No. 33-74768)
10.5 Form of Tax Indemnification Agreement between Maxwell Shoe
Company Inc. and each of Maxwell V. Blum, Eleanor S. Blum,
Betty Ann Blum and Marjorie Blum (incorporated by reference to
exhibit 10.5 to the registrant's Form S-1 Registration
Statement No.33-74768)
10.6 Lease dated as of May 15, 1991 by and between George Shapiro,
Arthur S. Goldberg and Sidney Shapiro, Trustees of the Shapiro
Properties Realty Trust, as lessor, and Maxwell Shoe Company
Inc., as lessee (incorporated by reference to exhibit 10.7 to
the registrant's Form S-1 Registration Statement No. 33-74768)
10.7 Agreement of Lease between Anon Realty Associates, L.P., as
successor lessor to 1414 Americas Company and Maxwell Shoe
Company Inc., as lessee (incorporated by reference to exhibit
10.9 to the registrant's Form S-1 Registration Statement
No. 33-74768)
10.8 Demand Credit Facility Agreement dated September 2, 1998
between Maxwell Shoe Company Inc. and BankBoston, N.A.
(incorporated by reference to exhibit 10.9 to the registrant's
Form 10-K for the fiscal year ended October 31, 1998 as filed
on January 21, 1999)
10.9 Form of Registration Rights Agreement between Maxwell Shoe
Company Inc. on the one hand and Maxwell V. Blum, Betty A.
Blum, Marjorie Blum, Mark J. Cocozza, and Joseph Aborn, as
trustee of the Eleanor S. Blum Trust (incorporated by reference
to exhibit 10.13 to the registrant's Form S-1 Registration
Statement No. 33-74768)
10.10 Employment Agreement dated as of April 8, 1999 between Maxwell
Shoe Company Inc. and Mark J. Cocozza (incorporated by
referenced to exhibit 99.1 to registrant's Form 8-K filed on
June 14, 1999)
10.11 Employment Agreement dated as of April 8, 1999 between Maxwell
Shoe Company Inc. and James J. Tinagero (incorporated by
referenced to exhibit 99.2 to registrant's Form 8-K filed on
June 14, 1999)
41
<PAGE>
10.12 Agreement dated as of April 8, 1999 between Maxwell Shoe
Company Inc. and Richard J. Bakos (incorporated by referenced
to exhibit 99.3 to registrant's Form 8-K filed on June 14,
1999)
10.13 Stock Option and Registration Rights Agreement dated as of
January 26, 1994 between Maxwell Shoe Company Inc. and Mark
J.Cocozza (incorporated by reference to exhibit 10.15 to the
registrant's Form S-1 Registration Statement No. 33-74768)
10.14 Master Lease Agreement dated as of July 18, 1994 between
Maxwell Shoe Company Inc. and BancBoston Leasing Inc.
(incorporated by reference to exhibit 10.23 to the registrant's
Form 10-K for the fiscal year ended October 31, 1994)
10.15 Assumption Agreement dated July 7, 1995 between BancBoston
Leasing Inc. and Maxwell Shoe Company Inc. (incorporated by
reference to exhibit 10.24 to the registrant's Form 10-K for
the fiscal year ended October 31, 1995)
10.16 Letter Agreement dated January 25, 1995 between Legas Realty
Corp., as successor lessor to S.L. Green Properties Inc., as
successor to Anon Realty Associates, L.P., and Maxwell Shoe
Company Inc. (incorporated by reference to exhibit 10.25 to the
registrant's Form 10-K for the fiscal year ended October 31,
1995)
10.17 Sublease Agreement dated June 16, 1997 between Macy's East,
Inc. and Maxwell Shoe Company Inc. (incorporated by reference
to exhibit 10.32 to the registrant's Form 10-K for the fiscal
year ended October 31, 1997)
10.18 Lease Agreement dated June 16, 1997 between John H. Finley, III
as trustee of Brockton Oak Real Estate Trust and Maxwell Shoe
Company Inc. (incorporated by reference to exhibit 10.33 to the
registrant's Form 10-K for the fiscal year ended October 31,
1997
10.19 Contribution Agreement dated as of April 14, 1997, by and among
The Butler Group Inc., Maxwell Shoe Company Inc., and Maxwell
Retail Inc. (incorporated by reference to exhibit 10.1 to the
registrant's Form 8-K filed on May 5, 1997)
10.20 Operating Agreement of SLJ Retail LLC dated as of April 14,
1997 by and between the Butler Group, Inc. and Maxwell Retail
Inc. (incorporated by reference to exhibit 10.2 to the
registrant's Form 8-K filed on May 5, 1997)
10.21 First Amendment to Operating Agreement dated as of June 24,
1998 by and among Butler Group LLC. and Maxwell Retail Inc.
(incorporated by reference to exhibit 10.23 to the registrant's
Form 10-K for the fiscal year ended October 31, 1998 as filed
on January 21, 1999)
10.22 Option Agreement dated as of April 14, 1997 by and among The
Butler Group Inc., Maxwell Shoe Company Inc., Maxwell Retail
Inc. and SLJ Retail LLC (incorporated by reference to exhibit
10.3 to the registrant's Form 8-K filed on May 5, 1997)
10.23 First Amendment to Option Agreement dated as of June 24, 1998
by and among Maxwell Shoe Company Inc., Maxwell Retail Inc. and
SLJ Retail LLC (incorporated by reference to exhibit 10.25 to
the registrant's Form 10-K for the fiscal year ended October
31, 1998 as filed on January 21, 1999)
10.24 Services Agreement dates as of April 14, 1997 by and between
Maxwell Shoe Company Inc. and SLJ Retail LLC (incorporated by
reference to exhibit 10.4 to the registrant's Form 8-K filed on
May 5, 1997)
42
<PAGE>
10.25 First Amendment to Services Agreement dated as of June 24, 1998
by and among Maxwell Shoe Company Inc. and SLJ Retail LLC
(incorporated by reference to exhibit 10.27 to the registrant's
Form 10-K for the fiscal year ended October 31, 1998 as filed
on January 21, 1999)
10.26 Non-Compete Agreement dated as of April 14, 1997 by and among
SLJ Retail LLC, Maxwell Shoe Company Inc. Maxwell V. Blum,
Betty Ann Blum, Marjorie W. Blum, Mark J. Cocozza, David
Andelman, as trustee of the Eleanor S. Blum Trust, Maxwell
Retail Inc. and Sprague Company (incorporated by reference to
exhibit 10.5 to the registrant's Form 8-K filed on May 5, 1997)
10.27 Retail Opportunity Agreement dates as of April 14, 1997 by and
among SLJ Retail LLC, Maxwell Shoe Company Inc., Maxwell V.
Blum, Betty Ann Blum, Marjorie W. Blum, David Andelman, as
trustee of the Eleanor S. Blum Trust, Maxwell Retail Inc. and
Sprague Company (incorporated by reference to exhibit 10.6 to
the registrant's Form 8-K filed on May 5, 1997)
10.28 Registration Rights Amendment dates as of April 14, 1997 by and
among Maxwell Shoe Company Inc., The Butler Group Inc., Maxwell
V. Blum, Betty Ann Blum, Marjorie W. Blum, Mark J. Cocozza and
David Andelman, as trustee of the Eleanor S. Blum Trust
(incorporated by reference to exhibit 10.7 to the registrant's
Form 8-K filed on May 5, 1997)
10.29 Trademark Sublicense Agreement dated as of April 14, 1997 by
and between Maxwell Shoe Company Inc. and SLJ Retail LLC
(incorporated by reference to exhibit 10.9 to the registrant's
Form 8-K filed on May 5, 1997)
10.30 Sublease Agreement dated June 16, 1997 between Macy's East Inc.
and Maxwell Shoe Company Inc. (incorporated by reference to
exhibit 10.33 to the registrant's Form 10-K for the fiscal year
ended October 31, 1998 as filed on January 21, 1999)
10.31 Contribution Agreement dated as of June 24, 1998 by and among
The Butler Group LLC, Maxwell Shoe Company Inc, and Maxwell
Retail Inc. (incorporated by reference to exhibit 10.34 to the
registrant's Form 10-K for the fiscal year ended October 31,
1998 as filed on January 21, 1999)
10.32 Consulting Agreement dated as of April 27, 1998 between Maxwell
Shoe Company Inc. and Maxwell V. Blum (incorporated by
reference to exhibit 10.37 to the registrant's Form S-2/A
Registration Statement No. 33-48199)
10.33 Amendment to Consulting Agreement dated as of June 24, 1999
between Maxwell Shoe Company Inc. and Maxwell V. Blum
10.34 Agreement dated June 10, 1999 regarding the sale of the Jones
New York footwear license to Jones Apparel Group, Inc. and
certain other matters (incorporated by reference to exhibit
10.1 to registrant's Form 8-K filed on June 14, 1999)
21 Subsidiaries of Maxwell Shoe Company Inc.
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MAXWELL SHOE COMPANY INC.
/s/ Mark J. Cocozza
By --------------------------------------
Mark J. Cocozza,
Chairman and Chief Executive Officer
January 19, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MARK J. COCOZZA Chairman of the Board and January 19, 2000
------------------------------------ Chief Executive Officer
Mark J. Cocozza (Principal Executive Officer)
/s/ JAMES J. TINAGERO Executive Vice President and Director January 19, 2000
- ------------------------------------ (Principal Financial Officer)
James J. Tinagero
/s/ RICHARD J. BAKOS Vice President Finance and January 19, 2000
- ------------------------------------ Chief Financial Officer
Richard J. Bakos (Principal Accounting Officer)
/s/ KERRY M. PRENTKI Controller January 19, 2000
- ------------------------------------
Kerry M. Prentki
/s/MAXWELL V. BLUM Director January 19, 2000
- ------------------------------------
Maxwell V. Blum
/s/ STEPHEN A. FINE Director January 19, 2000
------------------------------------
Stephen A. Fine
/s/ JONATHAN K. LAYNE Director January 19, 2000
------------------------------------
Jonathan K. Layne
</TABLE>
44
<PAGE>
MAXWELL SHOE COMPANY INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance at End
Beginning of Costs and of Period
Description Period Expenses Deductions/1/
----------- ------------ ---------- ------------- -----------------
<S> <C> <C> <C> <C>
Year ended October 31, 1997
Allowance for doubtful account........... $730 $ 125 $ 116 $739
Year ended October 31, 1998
Allowance for doubtful account........... $739 $ 125 $ 283 $581
Year ended October 31, 1999
Allowance for doubtful account........... $581 $1,496 $1,292 $785
</TABLE>
- --------------
/1/Uncollectible accounts written off, net of recoveries.
45
<PAGE>
EXHIBIT 10.33
AGREEMENT TO AMEND CONSULTING AGREEMENT
---------------------------------------
This Agreement to amend Consulting Agreement is made as of the 27th day of
April 1999 (the "Effective Date"), by and between Maxwell V. Blum (the
"Consultant") and Maxwell Shoe Company Inc., a Delaware corporation (the
"Company").
WHEREAS, the Consultant and the Company are currently parties to a certain
consulting agreement dated as of April 27, 1998 (the "Consulting Agreement");
and
WHEREAS, the Board of Directors of the Company (the "Board") deems it to be
in the best interests of the Company to amend the Consulting Agreement and has
approved on June 24, 1999 certain amendments to the Consulting Agreement; and
WHEREAS, the Consultant and the Company each wishes to amend the Consulting
Agreement to incorporate the amendments approved by the Board; and
WHEREAS, the Consultant and the Company each agrees that the terms and
conditions of the Consulting Agreement shall remain in full force and effect
except as such terms and conditions may be amended herein; and
WHEREAS, the Company desires to continue to engage Consultant as an
independent contractor to provide advice in connection with the business of the
Company and related strategic planning, customer relations and marketing issues
of the Company and the Consultant desires to continue to provide such services
on the terms and conditions set forth in the Consulting Agreement and as amended
by this Agreement;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, the parties hereto
acknowledge and agree that the Consulting Agreement is amended and modified as
follows:
1. Section 2 of the Consulting Agreement is hereby amended by replacing
such Section in its entirety with the following:
"This Agreement shall commence on the date hereof and shall continue
through and including April 26, 2002 ("Term")."
2. Section 3.2 of the Consulting Agreement is hereby amended by replacing
the first sentence of such Section in its entirety with the following:
"During the Term, the Consultant agrees to perform such services as may be
specifically requested by the Chief Executive Officer of the Company for up to
240 hours per year consistent with the knowledge and expertise of the
Consultant."
3. This Agreement (i) shall be binding upon the parties hereto and their
respective successors, agents, representatives, assigns, officers, directors and
employees; (ii) may not be amended or modified except in writing; (iii)
represents the entire understanding between the
<PAGE>
parties with respect to the subject matter hereof; and (iv) may be executed in
separate counterparts, each of which shall be deemed an original but all such
counterparts shall together constitute one and the same instrument. Except for
the foregoing, the provisions of the Consulting Agreement shall govern the
subject matter hereof; provided that, in the event of any conflict between the
Consulting Agreement and this Agreement, the provisions of this Agreement shall
govern.
IN WITNESS WHEREOF, the Company and Consultant have duly executed this
Agreement on June 24, 1999, which shall be effective as of April 27, 1999.
MAXWELL SHOE COMPANY INC. CONSULTANT
By:_______________________________ ______________________
Mark J. Cocozza Maxwell V. Blum
Chairman and Chief Executive
Officer
2
<PAGE>
Exhibit 21
Exhibit 21
Subsidiaries of Maxwell Shoe company Inc.
Sprague Company
101 Sprague Street
P.O. Box 37
Readville (Boston), Massachusetts 02137
State or other jurisdiction of incorporation or organization--Delaware
Ownership by Maxwell Shoe Company Inc.--100%
Maxwell Retail Inc.
101 Sprague Street
P.O. Box 37
Readville (Boston), Massachusetts 20137
State or other jurisdiction of incorporation or organization--Delaware
Ownership by Maxwell Shoe Company Inc.--100%
Maxwell Footwear, Inc.
870 Market Street, Room 1210
San Francisco, California 94102
State or other jurisdiction of incorporation or organization--Delaware
Ownership by Maxwell Shoe Company Inc.--100%
MSC Holdings LLC
23455 Cloverdale Court
Newall, CA 91321
State or other jurisdiction of incorporation or organization--Delaware
Ownership by Maxwell Shoe Company Inc.--100%
<PAGE>
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-83438 and Form S-8 No. 333-55723) pertaining to the 1994 Stock
Incentive Plan of Maxwell Shoe Company Inc. of our report dated December 20,
1999, except for Note 11, as to which the date is January 5, 2000, with respect
to the consolidated financial statements of Maxwell Shoe Company Inc. included
in the Annual Report (Form 10-K) for the year ended October 31, 1999.
Our audits also included the financial statement schedule of Maxwell Shoe
Company Inc. listed in Item 14(a)(2). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Boston, Massachusetts
January 21, 2000
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