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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended October 31, 2002 |
or
¨ |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from
to
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Commission
File Number 0-24026
MAXWELL SHOE COMPANY INC.
(Exact name of registrant as specified in its charter)
| Delaware |
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04-2599205 |
| (State or other jurisdiction of incorporation or organization) |
|
(IRS Employer 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:
| Title of Each Class:
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Name of Each Exchange on Which
Registered:
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| None |
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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 þ 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. þ
Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
The aggregate market value of the Class A Common Stock of the registrant held by
non-affiliates of the registrant on January 24, 2003 based on the closing price of the Class A Common Stock on the NASDAQ National Market System on such date was $161,810,722.
The number of shares of the registrant’s Class A Common Stock outstanding at January 24, 2003, was 14,696,705 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant’s 2003 Annual Stockholders Meeting are incorporated by reference into Part III herein.
MAXWELL SHOE COMPANY INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended October 31, 2002
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1
PART I
General
All references herein to the “Registrant” or 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 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® and Dockers® Khakis Footwear For Women brand names and in the better market segment under the AK Anne Klein brand
name. 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. In 1997, the Company licensed the J. G. Hook® trademark to source and develop private label products for retailers who require brand
identification. In October 2000, the Company acquired all the trademarks of joan and david helpern, incorporated and JOAN HELPERN DESIGNS, INC. (Joan & David®) and now sells contemporary footwear for women in the bridge segment under the Joan and David brand name. In 2002, the
Company introduced and shipped the Circa Joan & David™ brand. This
footwear is sold in the better market segment.
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®, Dockers® Khakis Footwear For Women and Sam & Libby® brand offerings, from $45 to $95 for the AK Anne Klein product lines, from $90 to $150 for the Circa Joan &
David™ and $180 and higher for Joan & David® footwear. The Company began shipping Joan & David® footwear in the fourth quarter of fiscal 2001. In the first fiscal quarter of 2002, the Company opened the Joan &
David® Outlet store, an approximately 2,200 square foot store located in Wrentham,
Massachusetts in the Wrentham Premium Outlet Mall. 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 November 2001 the Company signed an exclusive licensing agreement with Global Retail Inc. to begin the development of freestanding retail stores throughout Europe and Asia for Joan &
David® sportswear and accessory items as well as the roll-out of Joan &
David® in-store shops in upscale department stores. Global Retail Inc., which is
based in Hong Kong, is a widely-recognized retail development and global manufacturing organization led by its Chairman, Jeffrey Fang. Global Retail has over 300 retail stores worldwide. Under the agreement, Global Retail will design, source,
manufacture and market a full array of Joan & David® sportswear including
knitwear, wovens, outerwear and dresses all incorporating high-end European design elements. The Company’s Joan & David® footwear will be prominently featured throughout the stores complementing the new offerings. The initial six stores and in-store shops were opened in the Fall of 2002.
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 in 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.
2
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 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. In late 1998, the Company licensed the Dockers® Khakis Footwear For Women 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 AK Anne Klein footwear brands. The Company acquired the Joan &
David® worldwide trademarks and tradenames in October 2000. The Joan &
David® brand has served the bridge/designer zone for more than 25 years. The
Company shipped the first Joan & David® footwear for the Fall 2001 footwear
season and Circa Joan & David™ for the Fall 2002 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.
Maxwell Shoe 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. The Company’s Dockers®
Khakis Footwear For Women competes in the upper moderate and better industry segments. The Company believes that the better and bridge segments 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 AK Anne Klein and Joan & David® 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 in 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:
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• |
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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 AK Anne Klein brand for women’s footwear to compete in the better retail segment. The Company licensed the Dockers® 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 retailers that require brand identification. The acquisition |
3
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of the Joan & David® trademarks allowed the Company to compete in the bridge retail segment. In 2002, the Company introduced Circa Joan & David™, footwear offered in the better price segment. The Company continues to seek licensing or acquisition opportunities in order to
expand its current portfolio of brands. |
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• |
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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 uses a dedicated manufacturing facility that recently opened a 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. |
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• |
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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 reducing manufacturing lead times and increasing inventory turns at its distribution center. The Company believes that this approach mitigates the risks of carrying obsolete inventory and poor
retail sell-through. |
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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:
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• |
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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, (iv) increasing the use of advertising to strengthen brand awareness among retailers and consumers and (v) opening retail outlet stores for some of the Company’s brands.
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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.
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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 |
4
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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® and Joan
& David® brands and the licensing of the AK Anne Klein and
Dockers® Khakis Footwear For Women 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. 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 nine 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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Style
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Industry Segment
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General Retail Price
Range
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Shoes
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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®Khaki |
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Casual |
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Upper Moderate-Better |
|
$ |
40-$65 |
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— |
| AK Anne Klein |
|
Contemporary |
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Better |
|
$ |
45-$79 |
|
$ |
79-$95 |
| Circa Joan & David™ |
|
Contemporary |
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Better |
|
$ |
90-$110 |
|
$ |
120-$150 |
| Joan & David® |
|
Contemporary |
|
Bridge |
|
$ |
180 + |
|
$ |
250-$300 |
| J. G. Hook® Private Label |
|
All |
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Budget-Moderate |
|
$ |
12-$20 |
|
$ |
25-$30 |
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.
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.
5
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.
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® Khaki Footwear For Women
The Dockers® 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 complement
the Dockers® Khakis Footwear For Women apparel
products and is specifically designed to be worn with khakis, complimenting a wide variety of versatile looks.
AK Anne Klein
The AK Anne Klein footwear line focuses on contemporary, quality
footwear targeted at career-oriented women 30 years and older. The line capitalizes 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 AK Anne Klein footwear line consists of approximately 25 styles per season with all leather uppers and soles.
Joan & David® and Circa Joan & David™
Prior to the Company’s ownership, the Joan & David® footwear collection for the last 25 years has focused on selling the high-end “designer” footwear segment. The new
Joan & David® line focuses on the much larger bridge market, one that the
Company believes is significantly larger than the designer market. The line attempts to capitalize on the esteem, recognition and reputation of the brand developed over the past 25 years. The product line targets young women (median age in upper
30s) with high family income well above the national median. The line consists of 30 styles that are contemporary, stylish and tasteful.
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 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 (See also “—Consolidated Financial Statements—”):
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Year Ended October 31
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| Category
|
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2000
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2001
|
|
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2002
|
|
| Women’s |
|
90.5 |
% |
|
92.5 |
% |
|
92.0 |
% |
| Children’s |
|
9.5 |
|
|
7.5 |
|
|
8.0 |
|
| |
|
|
|
|
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| Total |
|
100.0 |
% |
|
100.0 |
% |
|
100.0 |
% |
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6
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 49% and 51% of SLJ Retail, respectively. Subsequently, the Company and the Butler Group LLC owned less than 1% and more than 99% of SLJ Retail, respectively. Effective January 19, 1999, the Company was no
longer the managing member of SLJ Retail. In May 2001, SLJ Retail was sold to Shoebilee, Inc. In December 2001, Shoebilee, Inc. and SLJ Retail filed for protection under Chapter 7 of the United States bankruptcy laws.
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 AK Anne Klein footwear line also meet regularly with The Anne Klein Company to exchange product and fashion concepts. The designer for Dockers® Khakis Footwear For Women line meets regularly with the Dockers
Company to exchange product and fashion concepts. See “—License Agreements.” Each line initially consists of between 100 and 200 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. Substantially all of the Company’s sales are
transacted with customers in the United States.
In fiscal 2002, the Company sold products to approximately 1,100
accounts with over 7,000 retail locations. The Mootsies Tootsies® retailers,
which market moderately priced apparel merchandise, include J. C. Penney Company, Inc., Kohl’s and DSW Shoe Warehouse. The AK Anne Klein footwear is distributed to those retailers who typically market merchandise at higher retail price
points, including Federated Department Stores, Inc. (Macy’s), The May Department Stores Company (Lord & Taylor) and Saks Inc. (Parisian). The Sam & Libby® footwear lines are distributed to retailers such as Federated Department Stores, Inc., The May Department Stores Company, Bon Ton
and Nordstrom. Dockers® Khakis Footwear For Women
distributes footwear to Mervyn’s and specialty stores like Kohl’s. Joan & David® distributes footwear to Nordstrom, Macy’s, Bloomingdale’s and Lord & Taylor. The Company also markets its branded products through national catalog retailers such as Nordstrom and Chadwicks of Boston.
7
The Company’s largest customer, the DSW Shoe Warehouse division of Value
City Department Stores, Inc., accounted for 11.5% and 8.5% of the Company’s net sales in fiscal 2002 and fiscal 2001, respectively. The Company’s top three customers in fiscal 2002 were DSW Shoe Warehouse, The May Department Stores
Company, and The TJX Companies, Inc., which collectively accounted for 32.4% of net sales. In fiscal 2001 the top three customers (The TJX Companies, Inc., The May Department Stores Company and DSW Shoe Warehouse) accounted for 29.5% of net sales.
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.
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 such as
Lucky as well as in general interest publications such as Oprah. 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 AK 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® and
Dockers® Khakis Footwear For Women 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, Lucky and InStyle.
The print advertising program for the Joan & David® collection is appearing in national advertisements and will consist of consumer advertisements focused on upscale publications
(such as The New Yorker, Vogue and Town & Country).
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
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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 brand point-of-sale advertising to further promote its products in the store.
Point-of-sale techniques used by the Company include point-of-sale displays, counter cards, banners and other visual in store 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
The Company manufactures none of its products and does not own any manufacturing facilities. Mootsies
Tootsies®, Mootsies Kids®, Sam & Libby® and Dockers® Khakis Footwear For Women are manufactured by unaffiliated third parties primarily in China and Brazil because of the ability of the suppliers in these countries to manufacture quality products at affordable
prices. The AK Anne Klein and Circa Joan & David™ footwear brands are
primarily manufactured in China and also manufactured in Spain and Italy because Spanish and Italian suppliers can meet the Company’s quality requirements and their reputation for quality footwear is consistent with the brands’ image. The
Joan & David® collection is primarily manufactured in Italy where fine
craftsmanship and innovative footwear can be sourced.
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, materials and 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 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.
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 assesses 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 and Italy, the Company generally buys forward exchange contracts for Euro dollars in connection with the placement of orders for products.
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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 EDI 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 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 2002, approximately 91% of the Company’s footwear was imported from China. As a result of a previous dispute with China over the protection of intellectual
property rights, the United States Trade Representative (“USTR”) is currently monitoring China’s adherence to an agreement to enforce intellectual property protections, and the failure of China to meet its obligations could result in
the imposition of trade sanctions by USTR. Any such sanctions could affect the ability of the Company to continue to import from China.
Backlog
At October 31, 2000, 2001 and 2002, the Company had unfilled customer orders of
$72.3 million, $78.6 million and $84.9 million, respectively. The backlog as of October 31, 2002 represents an increase of 8.0% over fiscal year end 2001. 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. The Company expects that substantially all of its backlog as of October 31, 2002 will be filled during the first six months of fiscal 2003.
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Compliance With Environmental Regulations
Compliance with federal, state and local provisions enacted or adopted for protection of the environment has had no material effect upon the Company’s operations.
License Agreements
AK Anne Klein
Effective in July 1999, the Company entered into a license
agreement (the “Anne Klein Agreement”), as amended, 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 AK Anne Klein names in connection with the
manufacture, advertising, promotion, distribution and sale of footwear for women. The Anne Klein Agreement, which was amended in March 2002, covers the United States, Canada and Puerto Rico. The Company extended the term of the Anne Klein
Agreement for an additional five (5) year terms ending December 31, 2007, with an option to extend the agreement, subject to certain conditions, through December 2012. 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 Anne Klein
Agreement and bankruptcy of the licensee.
Dockers® Khakis Footwear For Women
In November 1998, the Company entered into a license agreement (the “Dockers® Khakis Footwear For Women Agreement”) with Levi Strauss Co. under which the Company has the exclusive
right to use the Dockers® Khakis Footwear For Women
name in connection with the development, manufacturing and marketing of footwear for women. The Dockers® Khakis Footwear For Women Agreement covers the United States (including its territories and possessions). The initial term of the agreement ended December 31, 2001 and was extended
until May 2002, at which time the Company and Levi Strauss Co. entered into a new license agreement effective through December 31, 2005. The Company is obligated to pay Levi Strauss Co. a royalty on all net sales and is responsible for a guaranteed
minimum royalty payment during each year of the Dockers®
Khakis Footwear For Women 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.
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 J. G. Hook® License Agreement through September 1999. The Company later exercised its second one-year option and renewed the J. G. Hook® License Agreement through September 2000. In May 2000 the Company extended the license until December 2003. 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 there under. The Company plans to use the J. G. Hook® label to sell footwear on a first cost basis.
The aggregate minimum
royalty payments for all license agreements are $2.1 million, $2.1 million and $2.1 million for December 31, 2002, 2003 and 2004, respectively.
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Inter-Pacific Corporation
In January 1997, the Company entered into a license agreement with Inter-Pacific Corporation (“IPC”), a 40-year-old
California-based seller and distributor of men’s, women’s and children’s footwear. IPC had 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.
Global Retail Inc.
In November 2001 the Company signed an exclusive multi-year licensing
agreement with Global Retail Inc. to begin the development of freestanding retail stores throughout Europe and Asia for Joan & David® sportswear and accessory items as well as the roll-out of Joan & David® in-store shops in upscale department stores. Global Retail Inc., which is based in Hong Kong, is a widely recognized retail development and global manufacturing organization led by
Chairman Jeffrey Fang. Global Retail Inc. has over 300 retail stores worldwide. Under the agreement, Global Retail Inc. will design, source, manufacture and market a full array of Joan & David® sportswear including knitwear, wovens, outerwear and dresses all incorporating high-end European design elements. The
Company’s Joan & David® footwear will be prominently featured
throughout the Global Retail-owned stores complementing the new offerings. The six initial stores and in-store shops opened in the Fall 2002 season.
Trademarks
Mootsies Tootsies® and Mootsies Kid