Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Pre-Effective Amendment to Registration Statement 170 750K
(General Form)
2: EX-5 Opinion re: Legality 2 10K
4: EX-10.10 Material Contract 17 65K
3: EX-10.9 Material Contract 87 351K
5: EX-23.1 Consent of Experts or Counsel 1 6K
6: EX-23.2 Consent of Experts or Counsel 1 6K
7: EX-23.3 Consent of Experts or Counsel 1 6K
8: EX-23.4 Consent of Experts or Counsel 1 6K
9: EX-27 Financial Data Schedule 1 9K
S-1/A — Pre-Effective Amendment to Registration Statement (General Form)
Document Table of Contents
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 28, 1999
REGISTRATION NO. 333-74439
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PIETRAFESA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 2311 22-3607757
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification Number)
7400 MORGAN ROAD
LIVERPOOL, NY 13090
(315) 453-4300
ATTN: Mr. Richard C. Pietrafesa, Jr.
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
IT IS REQUESTED THAT COPIES OF COMMUNICATIONS BE SENT TO:
L. KEVIN SHERIDAN, JR., ESQ. STEPHEN T. BURDUMY, ESQ.
ROBERTS, SHERIDAN & KOTEL, KLEHR, HARRISON,
A PROFESSIONAL CORPORATION HARVEY, BRANZBURG & ELLERS LLP
12 EAST 49TH STREET, 30TH FLOOR 1401 WALNUT STREET
NEW YORK, NEW YORK 10017 PHILADELPHIA, PENNSYLVANIA 19102-3163
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the Securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Amount Proposed Maximum Proposed Maximum
Title of each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered (1) Per Share Offering Price(2) Registration Fee
--------------------------------- ----------------- -------------------- ------------------- ------------------
Class A Common Stock $50,700,000 $14,095(3)
-----------------------
(1) Includes up to ____ shares that may be purchased from The Pietrafesa
Corporation at the option of the underwriters solely to cover
over-allotments, if any, and _____ shares being registered for sale by a
stockholder of The Pietrafesa Corporation on a continuous basis.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3) $13,900 of this amount has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell and it is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 28, 1999
Shares
Class A Common Stock
[LOGO]
$ per share
Of the shares of The Pietrafesa Corporation's Class A Common Stock
being offered in this prospectus, shares are being offered by The Pietrafesa
Corporation. This prospectus also relates to the offer and sale, from time to
time, of up to shares of Class A Common Stock by a stockholder of The
Pietrafesa Corporation. Prior to this offering, there has been no public market
for our Class A Common Stock. We expect that the initial public offering price
to the public will be between $ and $ per share. The market price of
the shares after the offering may be higher or lower than the offering price.
We have applied for listing of the Class A Common Stock on the Nasdaq National
Market under the symbol "BRND."
The Class A Common Stock is one of two classes of Common Stock of The Pietrafesa
Corporation. Holders of shares of Class A Common Stock will elect 25% of the
directors. Holders of shares of Class B Common Stock will elect 75% of the
directors and will have the power to decide substantially all other matters
submitted to stockholders. The Class B Common Stock is not being offered to the
public and is currently held by a private limited partnership. Holders of shares
of Class A Common Stock will have limited voting rights until all shares of
Class B Common Stock are converted into Class A Common Stock.
Investing in the Class A Common Stock involves risks. See "Risk Factors"
beginning on page 14.
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Per Share Total
--------- -----
Price to the public.......................... $ $
Underwriting discounts and commissions.......
Proceeds to The Pietrafesa Corporation.......
The Pietrafesa Corporation has granted the underwriters an option to purchase up
to an additional shares to cover over-allotments within 30 days following
the date of this prospectus. The underwriters expect to deliver the shares to
purchasers on , 1999.
We will not receive any portion of the proceeds from sales of Class A Common
Stock by the selling stockholder.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
JANNEY MONTGOMERY SCOTT INC.
EVEREN SECURITIES, INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
, 1999
[Artwork]
TABLE OF CONTENTS
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PAGE
Prospectus Summary..................................................................................... 5
Forward Looking Statements............................................................................. 13
Risk Factors........................................................................................... 19
Use of Proceeds........................................................................................ 20
Capitalization......................................................................................... 21
Dividend Policy........................................................................................ 22
Dilution............................................................................................... 22
Selected Historical Consolidated Financial Data........................................................ 24
Pro Forma Combined Financial Data...................................................................... 26
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 38
Business............................................................................................... 51
Management............................................................................................. 62
Certain Relationships and Related Transactions......................................................... 66
Principal Stockholders................................................................................. 68
Selling Stockholder.................................................................................... 69
Description of Capital Stock........................................................................... 70
Shares Eligible for Future Sale........................................................................ 73
Underwriting........................................................................................... 74
Plan of Distribution of Selling Stockholder............................................................ 75
Legal Matters.......................................................................................... 75
Experts................................................................................................ 76
Additional Information................................................................................. 76
Index to Financial Statements.......................................................................... F-1
-----------------------------
You should rely only on the information contained in this prospectus. No dealer,
salesperson or other person is authorized to give information that is not
contained in this prospectus. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer or
sale is not permitted. The information contained in this prospectus is correct
only as of the date of this prospectus, regardless of the time of the delivery
of this prospectus or any sale of these securities.
Our logo and name are trademarks of The Pietrafesa Corporation. Other
trademarks, trade names or service marks appearing in this prospectus are the
property of their respective owners.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You
should read the entire prospectus carefully, especially the "Risk Factors"
section, the financial statements and the notes to those statements, before
making your investment decision. This prospectus contains market data, for the
most recent periods for which such data is generally available, that we obtained
from industry trade groups and from industry publications and other publicly
available information.
The Pietrafesa Corporation was incorporated in 1998 and is the successor to a
business founded in 1922. In October 1998, MS Pietrafesa, L.P., our predecessor
operating partnership and sole Class B stockholder, transferred all of its
assets and liabilities to us. In April 1999, we acquired two independent
merchandising/sourcing businesses. We will complete two additional acquisitions
simultaneously with the consummation of this offering.
Unless otherwise indicated or the context otherwise requires, all share, per
share and business and financial information contained in this prospectus:
o gives effect to our acquisition of Diversified Apparel Group, Ltd.,
Global Sourcing Network, Ltd. and Components by John McCoy, Inc. and our
acquisition of all assets and liabilities of MS Pietrafesa, L.P.;
o gives effect to our acquisition of Windsong, Inc. and the issuance of $4
million worth of Class A Common Stock valued at the offering price as
part of the acquisition consideration;
o assumes that no shares of Class A Common Stock will be issued as part of
the consideration paid in the Diversified Apparel, Global Sourcing
Network and Components acquisitions;
o assumes no exercise of the underwriters' over-allotment option; and
o gives effect to the issuance to MS Pietrafesa, L.P. of a total of shares
of Class B Common Stock prior to the consummation of the offering.
THE PIETRAFESA CORPORATION
General. We believe that we are the only major apparel business that offers
companies that license brand names and major retailers "one-stop shopping" for
dress apparel products for men. By providing design, merchandising, sourcing and
other services, we act as "The Brand behind the Brand." Our product line
includes everything that a man might wear to the office Monday through Friday
and on formal occasions. Our products include suits, sport jackets, dress
shirts, woven sport shirts, casual pants, knitwear, neckwear and topcoats, at a
wide range of price points. Our strategy is to satisfy all the product needs of
our customers who otherwise might have to maintain separate purchasing or
licensing arrangements with different suppliers for each product.
One of our key strengths is the ability to satisfy our customers' cost, quality,
construction and delivery requirements through a worldwide network of third
party manufacturers. This capability is referred to as "sourcing."
We sell men's apparel to a variety of well-known retailers, including:
Belk Neiman Marcus
Bergdorf Goodman Nordstrom
Bijan S & K Famous Brands
Brooks Brothers Saks Fifth Avenue
Dillards Sam's Club
Filene's Basement Sulka
Jos.A.Bank The Men's Wearhouse
Bloomingdale's Today's Man
In 1998, six customers accounted for 67% of our net revenues. None of those
customers individually accounted for more than 20% of our net revenues in 1998.
Industry. Retail sales of men's apparel in the United States in 1998 were
approximately $54 billion, an increase of 6.8% over the prior year, as compared
to increases of 3.7% in women's apparel and 4.7% in all apparel. The men's
apparel industry is highly fragmented and includes a large number of small,
privately-held merchandising/sourcing companies that
5
specialize in specific products, price points or distribution channels. We
believe that two important trends in the apparel industry benefit us:
o Private label apparel represents an increasing percentage of total men's
apparel sales; and
o Retailers are concentrating more business with fewer suppliers to achieve
greater efficiency in merchandising, purchasing and inventory management.
The apparel industry is intensely competitive and includes competitors that are
larger and better capitalized than we are.
Business, Growth and Acquisition Strategies. We seek to be the most efficient
source of men's apparel products for major retailers and companies that license
brand names by offering:
o "one-stop shopping";
o the ability to develop customized lines of men's apparel in a variety of
styles;
o the lowest available cost for each product line, by using third party
manufacturers throughout the world; services such as design,
merchandising, statistical quality control and inventory management;
o technological innovations that enable us to compress delivery schedules;
and
o the scale and financial stability required by major retailers in
connection with long-term supply arrangements.
We believe that our business strategy will create numerous growth opportunities.
The principal components of our growth strategy are:
o to achieve greater penetration among our existing customers and to
develop new customer relationships;
o to acquire, develop and license brands in order to leverage our
merchandising and sourcing capabilities;
o to expand internationally by offering our merchandising/sourcing services
to foreign retailers; and
o to grow revenues through selective acquisitions that are consistent with
our business strategy.
To increase the range of products, price points and sourcing options available
to our customers and to add new customers, we intend to identify and acquire
leading merchandising/sourcing companies. The major elements of our acquisition
strategy are:
o to make, whenever possible, the payment of a significant portion of the
purchase price contingent on achieving projected results for the acquired
business over several years following the acquisition. We will also
include other performance-based incentives for the sellers of each
business;
o to operate each newly-acquired business as an independent unit and to
hold it accountable for its utilization of capital and overhead; and
o to improve and standardize financial controls, quality control practices
and back-office functions of each acquired business and eliminate
duplicative operational facilities.
In addition, we are licensees for Alexander Julian, FUBU, the Greg Norman
Collection and DKNY.
o Alexander Julian is a recognized brand of fashion apparel. We develop and
market a collection of sportswear under this label.
o FUBU is a brand of urban sportswear. We will develop and market a
collection of tailored clothing, neckwear and outerwear.
o The Greg Norman collection is a brand of active sportswear. We will
develop and market a collection of tailored clothing, dress shirts,
neckwear, outerwear and sportswear.
o DKNY is a recognized brand of fashion apparel. We develop and market a
collection of outerwear and topcoats under this label.
6
Upon the completion of this offering, we will have consummated four
acquisitions:
o Diversified Apparel Group, Ltd., which merchandises and sources men's
suits, dress shirts, neckwear and knits primarily from the Caribbean
Basin, the United States and Europe;
o Global Sourcing Network, Ltd., which designs and imports low-to-mid
priced men's suits primarily from Eastern Europe and Asia;
o Components by John McCoy, Inc., which merchandises and sources
higher-priced tailored clothing, sportswear, dress shirts, neckwear,
topcoats and casual slacks from Italy; and
o Windsong, Inc, which merchandises and sources men's sportswear worldwide.
Risk Factors. See the section of this prospectus entitled "Risk Factors" for a
discussion of factors that you should consider before investing in the Class A
Common Stock offered by this prospectus. These risk factors include our customer
concentration, our reliance on third party manufacturers, the unpredictability
of our operating results and the fact that holders of the Class A Common Stock
will have limited voting rights.
The Pietrafesa Corporation is a Delaware corporation. Our principal executive
offices are located at 7400 Morgan Road, Liverpool, New York 13090 and our
telephone number is (315) 453-4300.
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THE OFFERING
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Common Stock offered by The Pietrafesa Corporation............ shares of Class A Common Stock
Common Stock to be outstanding after our offering............. shares of Class A Common Stock (1)
shares of Class B Common Stock, all of which were
issued to MS Pietrafesa, L.P. prior to the consummation
of the offering. Holders of Class B Common Stock may
convert their shares at any time on a one-for-one basis
into shares of Class A Common Stock.
Use of proceeds............................................... To complete the Components and Windsong acquisitions, to repay
indebtedness in connection with the Diversified Apparel and
Global Sourcing Network Acquisitions and other purposes.
Common Stock which may be offered from time to time by
Windsong, Inc............................................... shares of Class A Common Stock
Voting rights................................................. Holders of Class A Common Stock, voting as a class, are
entitled to elect 25% of the members of our Board of
Directors. Other than such right to elect directors,
holders of Class A Common Stock will have very limited
voting rights until all of the shares of Class B Common
Stock are converted into shares of Class A Common Stock
or otherwise cease to be issued and outstanding. See
"Description of Capital Stock."
Nasdaq National Market symbol................................. BRND
-------
(1) Excludes (a) shares of Class A Common Stock reserved for issuance upon the
exercise of options which may be issued from time to time under our Stock Option
Plan, pursuant to which, as anticipated to be adopted prior to the closing of
the offering, options to purchase a number of shares equal to 10% of our
outstanding capital stock immediately following the offering may be granted, (b)
shares of Class A Common Stock that may be issued as deferred purchase price in
lieu of cash pursuant to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisition agreements and (c) up to shares available
for purchase by the underwriters under their over-allotment option. See
"Management," "Principal Stockholders," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Significant Acquisitions" and
"Underwriting."
8
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA COMBINED FINANCIAL DATA
The following tables present our summary historical consolidated financial data
for each year in the five-year period ended December 31, 1998 and for the
three-month periods ended March 31, 1998 and 1999, as well as pro forma combined
and pro forma combined, as adjusted financial data. The summary historical
consolidated annual financial data was derived from our audited consolidated
financial statements. The summary historical consolidated financial data as of
March 31, 1998 and March 31, 1999 and for the three-month periods then ended
were derived from our unaudited interim financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999. You
should read this financial data in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and the notes thereto, included elsewhere in this prospectus.
Our pro forma combined financial data includes (1) our statement of operations
data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and (2) our balance sheet
data, which reflects our balance sheet and the balance sheets of Diversified
Apparel, Global Sourcing Network, Components and Windsong as if the acquisitions
of such businesses had occurred on the respective balance sheet dates. Our 1998
pro forma combined, as adjusted financial data includes our pro forma combined
financial data as adjusted for this offering and the application of the proceeds
of this offering. The pro forma combined and pro forma combined, as adjusted
financial data are based upon preliminary estimates, available information and
assumptions that management deems appropriate, but are not necessarily
indicative of the results that would have been obtained had such events occurred
at the times assumed.. See our Pro Forma Combined Financial Statements included
elsewhere in this prospectus.
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For the Year Ended December 31,
----------------------------------------------------------------------------
Pro Forma
Pro Forma Combined,
Combined As Adjusted
1994 1995 1996 1997 1998 1998 1998
---------- --------- --------- --------- ---------- ----------- ------------
(in thousands, except share and per share data)
Net revenues.......................... $ 42,073 $ 40,009 $ 44,000 $ 37,582 $ 56,763 $161,081 $ 161,081
Cost of sales......................... 34,087 31,631 34,769 29,218 47,062 130,311 130,311
---------- --------- --------- --------- ---------- ----------- ------------
Gross profit.......................... 7,986 8,378 9,231 8,364 9,701 30,770 30,770
Operating expenses:
Selling, general and administrative
expenses............................ 6,066 9,869 7,518 6,118 5,536 18,175 18,175
Depreciation and amortization
expenses............................ 99 102 165 151 222 1,982 1,982
---------- --------- --------- --------- ---------- ----------- ------------
6,165 9,971 7,683 6,269 5,758 20,157 20,157
---------- --------- --------- --------- ---------- ----------- ------------
Operating income (loss)............... 1,821 (1,593) 1,548 2,095 3,943 10,613 10,613
Interest expense...................... 1,044 1,693 1,720 1,446 1,209 2,885 1,929
Public offering costs(1).............. -- -- -- -- 823 823 823
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) from continuing
operations
before income taxes................. 777 (3,286) (172) 649 1,911 6,905 7,861
Provision for income taxes(2)......... -- -- -- -- 514 2,762 3,144
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) from continuing
operations.......................... 777 (3,286) (172) 649 1,397 4,143 4,717
Loss from discontinued operations(3).. (718) (6,236) (321) (93) -- -- --
---------- --------- --------- --------- ---------- ----------- ------------
Income (loss) before extraordinary item. 59 (9,522) (493) 556 1,397 4,143 4,717
---------- --------- --------- --------- ---------- ----------- ------------
Extraordinary item(4)................. -- -- 3,350 -- -- -- --
---------- --------- --------- --------- ---------- ----------- ------------
Net income (loss)..................... $ 59 $(9,522)$ 2,857 $ 556 $ 1,397 $ 4,143 $ 4,717
========== ========= ========= ========= ========== =========== ============
Pro forma net income data:
Income before income taxes,
as reported above................... $1,911 $6,905 $7,861
Pro forma provision for income taxes(7) 764 2,762 3,144
---------- ----------- ------------
Pro forma net income.................. $1,147 $4,143 $4,717
========== =========== ============
Pro forma basic and diluted net income
per common share.................... $ $ $
Pro forma weighted average number of
common shares outstanding (basic and
diluted)(6).........................
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As of December 31, 1998
----------------------------------------------------------------
Pro Forma Combined
Pro Forma Combined As Adjusted
Actual
------------------- ---------------------- ---------------------
(in thousands)
Balance Sheet Data:
Working capital............................... $ 9,239 $ 12,134 $ 12,022
Total assets.................................. 29,375 86,913 86,913
Total long-term debt, net of current
maturities.................................... 12,561 45,802 690
Total stockholders' equity.................... 2,383 6,383 51,383
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For the Year Ended December 31,
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Pro Forma
Pro Forma Combined,
Combined As Adjusted
1994 1995 1996 1997 1998 1998 1998
---------- --------- --------- --------- ---------- ------------ ------------
(in thousands)
Other Data:
EBITDA(5)............................. $ 2,833 $ (396) $ 2,494 $ 2,897 $ 4,731 $13,161 $13,161
Capital expenditures.................. 1,103 368 105 59 592 895 895
Operating cash flows.................. (3,022) 3,779 2,445 3,056 (1,395) (2,217) (1,643)
Cash (used in) provided by investing
activities.......................... (1,035) (265) 419 2,185 (563) (36,501) (36,501)
Cash (used in) provided by financing
activities.......................... 4,540 (4,001) (2,866) (5,242) 1,969 39,581 39,581
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For the Three Months Ended March 31,
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Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999 1998 1999
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(in thousands, except share and per share data)
Statement of Operations Data:
Net revenues............................. $ 9,503 $ 17,803 $ 37,774 $ 46,012 $ 37,774 $ 46,012
Cost of sales............................ 7,028 14,833 29,698 37,445 29,698 37,445
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Gross profit............................. 2,475 2,970 8,076 8,567 8,076 8,567
Operating expenses:
Selling, general and administrative
expenses............................ 1,305 1,201 4,033 4,226 4,033 4,226
Depreciation and amortization expenses 64 68 504 507 504 507
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1,369 1,269 4,537 4,733 4,537 4,733
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Operating income (loss).................. 1,106 1,701 3,539 3,834 3,539 3,834
Interest expense......................... 253 296 577 682 350 498
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Income (loss) before income taxes........ 853 1,405 2,962 3,152 3,189 3,336
Provision for income taxes(2)............ - 565 1,185 1,264 1,276 1,334
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Net income............................... $ 853 $ 840 $ 1,777 $ 1,888 $ 1,913 $ 2,002
==============================================================================
Pro forma net income data:
Income before taxes, as
reported above......................... $ 853 $ 1,405 $ 2,962 $ 3,152 $ 3,189 $ 3,336
Pro forma income tax
expense(7)............................. 341 565 1,185 1,264 1,276 1,334
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Pro forma net income.................... $ 512 $ 840 $ 1,777 $ 1,888 $ 1,913 $ 2,002
==============================================================================
Pro forma basic and diluted net income
per common share ...................... $ $ $ $ $ $
==============================================================================
Pro forma weighted
average number of common
shares outstanding (basic
and diluted) (6) ......................
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As of March 31,
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Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999 1998 1999
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(in thousands)
Balance Sheet Data:
Working capital.......................... $ 5,707 $ 10,520 $ 8,354 $ 14,392 $ 12,392 $ 12,089
Total assets............................. 21,838 29,944 82,908 95,698 85,436 95,698
Total long-term debt, net of current
maturities 8,754 13,054 41,537 47,914 575 611
Total partners' capital and stockholders'
equity 3,562 3,473 7,355 7,473 52,355 52,473
For the Three Months Ended March 31,
------------------------------------------------------------------------------
Pro Forma Pro Forma
Pro Forma Pro Forma Combined, Combined,
Combined Combined As Adjusted As Adjusted
1998 1999 1998 1999 1998 1999
------------------------------------------------------------------------------
(in thousands)
Other Data:
EBITDA(5)................................ $ 1,308 $ 1,886 $ 4,182 $ 4,460 $ 4,182 $ 4,460
Capital expenditures.....................
90 109 186 313 186 313
Operating cash flows.....................
28 (613) (9,039) (4,354) (11,471) (6,868)
Cash (used in) provided by investing
activities.............................
(90) (109) (35,731) (35,858) (35,731) (35,858)
Cash (used in) provided by financing
activities.............................
62 721 42,805 39,905 45,333 39,905
---------------------
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(1) Relates to a public offering that was delayed due to adverse market
conditions.
(2) MS Pietrafesa, L.P., our predecessor, was not subject to state or federal
income taxes. We are a C-corporation. We became subject to federal and
state income tax as of October 1, 1998 when we acquired all of the assets
and liabilities of MS Pietrafesa, L.P.
(3) During 1995, MS Pietrafesa, L.P. discontinued manufacturing of a low priced
tailored clothing line. The loss from disposal and from operations of this
segment is shown as discontinued operations.
(4) In 1996, MS Pietrafesa, L.P. recorded an extraordinary gain related to the
forgiveness of all of its outstanding subordinated debt and related
interest.
(5) EBITDA represents income (loss) from continuing operations before provision
(benefit) for income taxes plus depreciation and amortization plus interest
expense plus public offering costs. EBITDA is not intended to represent
cash flows from operations and should not be considered as an alternative
to net income as an indicator of our operating performance or to cash flows
as a measure of liquidity. We believe that EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other
interested parties in the apparel industry. Accordingly, it has been
disclosed in this prospectus to permit a more complete comparative analysis
of our performance relative to other companies in the apparel industry. Our
definition of EBITDA may not be identical to similarly titled measures of
other companies and, therefore, may not necessarily be an accurate basis of
comparison.
(6) Consists of shares of Class A Common Stock to be issued in the offering and
the Windsong acquisition and the shares of Class B Common Stock currently
issued and outstanding. The number of shares of Class B Common Stock
outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a total
of shares of Class B Common Stock prior to the consummation of the
offering for the nominal consideration of the stock's par value per share.
(7) Assumes that the Company was subject to federal and state income taxes for
the entire year, assuming an effective tax rate of 40.0%.
13
RISK FACTORS
You should consider carefully the risks described below and other information in
this prospectus before deciding to invest in shares of Class A Common Stock.
Risks Associated With Our Business
We Generate A Significant Percentage Of Our Revenue From A Limited Number
Of Customers
Sam's Club, S&K Famous Brands, Brooks Brothers, Dillards, Jos. A. Bank and Polo
Retail, our six most significant customers in 1998 accounted for 67% of our net
revenues in 1998. Sam's Club, S&K Famous Brands, Brooks Brothers and Dillards
each accounted for in excess of 10% of our net revenues in 1998. Sales to our
six largest customers in 1997 accounted for 60% of our net revenues in 1997.
In June 1999, our licensing agreement with Polo Corporation will expire and
sales to Polo Retail under this agreement will terminate after the spring 1999
season. A failure to replace such lost business, the loss of or decrease in
business from any other significant customer or the replacement of lost business
with business that produces lower margins would result in a significant decrease
in our revenues. Various factors, including a deterioration in the business or
financial condition of one or more of our customers or in our relationship with
any of these customers, may cause their level of business with us to decrease.
A Substantial Portion Of Our Revenues And Net Income Is Dependent Upon A
Single Licensing Relationship
Approximately 27.0% of our pro forma combined revenues and approximately 24.0%
of our pro forma combined net income during 1998 was attributable to sales of
products which we are entitled to produce and sell under a license agreement
with Alexander Julian, Inc. We have monetary and nonmonetary obligations under
the Alexander Julian license. If we fail to perform our obligations, Alexander
Julian could terminate the license and we would lose the right to sell the
products, which would substantially reduce our revenues and net income. See
"Business--Intellectual Property."
Our Foreign Sourcing Of Products Exposes Us To Delays In Production And
Increased Costs
A significant portion of the products we sell are produced by foreign
manufacturers. Products from Italy, the Dominican Republic, Mexico, Eastern
Europe and the Far East accounted for 66% of our 1998 revenues. Foreign sourcing
exposes us to numerous risks, including work stoppages, natural disasters,
transportation delays and interruptions, political instability, economic
disruptions and the imposition of increased tariffs and more stringent import
and export restrictions. If any of these events were to occur, we may not have
sufficient quantities of raw materials or products to meet our customers' needs
in a timely manner, which could cause us to lose material revenues and customer
orders and goodwill.
Bilateral textile agreements between the United States and a number of other
countries contain provisions that impose quotas on the amount and type of goods
that can be imported into the United States from those countries. These
agreements allow the United States to impose restraints at any time on the
importation of specified categories of merchandise. Substantially all of the
countries from which we import products are subject to these agreements. In
addition, the United States imposes customs duties on our imported products. The
United States may impose additional tariffs on products that are found to have
been manufactured by convict, forced or indentured labor. In addition, the
United States may withdraw the "most favored nation" status of countries in
which our products are manufactured, which could result in the imposition of
reduced quotas and/or higher tariffs on products imported from these countries.
New or less favorable quotas, duties, tariffs or import restrictions could
result in an increase in our cost of products.
See "Business--Imports and Import Regulations."
14
Our International Sourcing Of Products And Raw Materials May Subject Us To
Increased Costs And Unprofitable Transactions
We currently source production and raw materials from providers located outside
the United States. As a result, we are exposed to various risks, including:
o currency exchange rate fluctuations to the extent that our agreements
are denominated in currencies other than U.S. dollars;
o changes to foreign legal and regulatory requirements;
o deterioration in the stability of foreign governments or their trading
relationships with the United States;
o difficulties in staffing and managing foreign operations;
o variances in financial reporting standards; and
o differences in the manner in which different cultures do business.
These items could result in particular transactions being unprofitable to us,
increased costs of doing business in the affected countries or the inability to
do business in the affected countries.
The Adoption Of The Euro May Adversely Affect Our European Suppliers
On January 1, 1999, 11 member countries of the European Union replaced their
local currencies with a single currency, the Euro, in an effort toward the
economic and monetary union of Europe. During a three-year transition period,
the currencies of these countries will continue to circulate but only as fixed
denominations of the Euro. The Euro has become the predominant currency to
settle wholesale transactions previously denominated in the participants'
currencies.
We purchased approximately 46% of our raw materials from European suppliers
based in countries which are participating in the Euro in 1999. The adoption of
the Euro may be disruptive to the operations of some of these suppliers and may
have an adverse impact on the financial results of such suppliers or their
ability to meet their manufacturing obligations. Material delays in
manufacturing by our significant European suppliers could cause us to lose
material revenues, customer orders and goodwill. See "--Reliance on Third
Parties to Perform Manufacturing Function."
We May Be Unable To Compete Successfully In The Highly Competitive Apparel
Industry
The men's tailored clothing and apparel businesses are intensely competitive. We
have experienced and will continue to experience competition from domestic and
international sources, including independent brand name and private label
producers. We also consider retailers' in-house product development and sourcing
capabilities to be a source of competition. Some of our competitors and
potential competitors have greater financial, manufacturing and distribution
resources than us.
Although factors may differ by product line, we believe that we compete
primarily on the basis of quality of design and workmanship, pricing and
customer service. We believe that our success depends in large part upon our
ability to anticipate, gauge and respond to our customers' changing needs in a
timely manner. If we fail to identify and respond appropriately to their
changing needs, or to otherwise compete successfully, it could cause us to lose
market share or require us to reduce our prices or increase our expenditures.
A Recession Or Consolidation In The Apparel Industry May Adversely Affect
Our Sales
The apparel industry has historically been highly cyclical and dependent on
general economic conditions and other factors, including consumer spending and
preferences. An economic recession or a deterioration in consumer confidence
could result in reduced sales volume or lower margins for our retailers, which
in turn could lower our margins or sales volume. In addition, apparel retailers
have experienced significant changes and difficulties over the past several
years, including consolidation of ownership, increased centralization of buying
decisions, restructurings, bankruptcies and liquidations. These developments
have increased our risk of extending credit to our customers. If any of our
customers were to suffer financial problems, it could cause us to reduce or
discontinue business with that customer or require us to assume more credit risk
relating to its receivables. In addition, consolidations, restructurings and
reorganizations involving our customers could decrease the number of stores that
carry our products. Any increase in the ownership concentration within the
retail industry could make us more dependent on a limited number of customers
and could worsen the impact of losing a customer. See "Business -- Industry
Overview."
15
Seasonal Fluctuations In Revenue And Net Income May Affect Our Cash Flow,
Liquidity And Profitability
Some of our principal products are organized into seasonal lines in response to
the marketing strategies of our customers. As a result, our net revenue and net
income have fluctuated and may continue to fluctuate on a seasonal basis. A
disproportionate amount of our net revenue and a majority of our net income are
typically realized during the third quarter of our year. Historically, this
seasonality has resulted in reductions in working capital during the first and
third quarters. If we are unable to finance our seasonal cash requirements
adequately, our ability to conduct business will be restricted. Moreover, as a
result of this seasonality of net revenues, if our net revenues decrease
substantially in the third quarter of the year, it could have a material adverse
effect on our liquidity and on our profitability for the entire year.
Unsold Inventory Could Result In Decreased Profitability
Although we presently commence production of products only upon receipt of firm
purchase orders, we may at times have excess inventory due to the inventory
requirements that may arise for some of our apparel programs. In the future, we
may offer products that are not produced against firm purchase orders to attract
new customers or capture market share in particular products, which will expose
us to more risk of having excess or unsaleable inventory. In addition, our
customers may become entitled to cancel or modify a purchase order after we have
made purchasing commitments related to that order. This could occur due to
various factors, including our failure to fulfill an order on a timely basis for
reasons beyond our control. Holding inventory which could not be resold at
customary prices would decrease our profitability.
We Will Need Additional Financing And A Strong Infrastructure To Support
Our Expansion Plans
In 1998, we experienced rapid sales growth, expansion of our product and service
offerings and an increase in our customer base. Our continued growth will depend
on our ability to successfully develop new product lines, distribution channels
and merchandise categories. The integration of Diversified Apparel, Global
Sourcing Network, Components and Windsong, as well as our future growth
objectives, will require increasing amounts of working capital and financing and
may place a significant strain on our management and information processing
systems. Our failure to respond effectively to the demands associated with our
business expansion could render our growth strategy unsuccessful. For a further
discussion of our growth strategy, see "Business--Growth Strategy."
Variations In Our Historical Financial Performance May Continue
We have experienced inconsistent financial results in recent years. For example,
during the years 1995 through 1998, excluding the financial results of
Diversified Apparel, Global Sourcing Network, Components and Windsong, our net
revenues fluctuated between $40.0 million and $56.8 million, income (loss) from
continuing operations fluctuated between $(3.3) million and $1.4 million, EBITDA
fluctuated between $(0.4) million and $4.7 million and net income (loss)
fluctuated between $(9.5) million and $1.4 million. See "Summary Historical and
Pro Forma Combined Financial Data." Our future financial performance depends on
various factors, including successfully implementing our business plan,
expanding our existing and acquired businesses and developing new sources of
revenues. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
We Depend On Our Key Management Personnel
Our ability to successfully implement our business strategy and operate
profitably depends on the continued employment of our senior management team led
by Richard C. Pietrafesa, Jr., John McCoy, Jarrod Nadel, Joseph Sweedler and
Joseph J. Pietrafesa II, all of whom would be difficult to replace. Our
management team has only recently been assembled and management controls are
still in their formative stages. We cannot assure you that this new team will
perform well together. Although we have entered into or will enter into
multi-year employment and non-competition agreements with Mr. McCoy, Mr. Nadel
and Mr. Sweedler, it is our general policy not to enter into such agreements
with our executives. See "Management." This policy could enable the members of
our management team to change jobs more freely. If the principal members of our
management team become unable or unwilling to continue in their present
positions and qualified replacements are not found, our integration of
Diversified Apparel, Components and Windsong could be materially and adversely
affected.
16
While we generally do not maintain key person life insurance covering our
executive officers or other employees, we intend to purchase key person life
insurance in the amount of $10 million covering Mr. Pietrafesa prior to the
consummation of the offering. In addition, we intend to purchase key person life
insurance for Messrs. McCoy and Nadel in an amount equal to the up-front portion
of the purchase price for Components and Diversified Apparel, respectively. We
cannot assure you that we will be able to maintain such policies in effect or
that the proceeds of such policies would adequately compensate us for the loss
of the services of any of these people.
Our Margins Could Be Affected By Fluctuations In Price And Availability Of
Raw Materials
We principally source wool, camel hair, cashmere, silk, linens, cotton and
blended fabrics for our products. The prices and availability of these fabrics,
as well as related trim and linings, are largely dependent on the market prices
for the raw materials used to produce them. The price and availability of the
fabrics used in our apparel may fluctuate significantly in relation to worldwide
demand and other reasons. While we attempt to fix the cost of our raw materials
at the time that we establish product pricing, we are not always able to do so.
If we fail to fix our raw material costs in this manner, our margins will be
affected by subsequent changes in raw material costs.
In 1998, we purchased 54% (by dollar value) of our total fabric requirements
directly from two suppliers, Burlington Industries and Loro Piana. While we
believe that we have had good relations with each of these two suppliers for
over 10 years, we do not have long-term formal supply contracts with them. If
our relationship with any significant supplier is interrupted, we will have to
purchase fabric from alternate suppliers. These alternate suppliers might not
provide us with fabrics at comparable prices, comparable quality or on a timely
basis. If the price, availability or quality of fabrics or other raw materials
used by us fluctuate significantly, it could increase our cost of sales or
impair our ability to meet our customers' demands. See "Business--Product
Sourcing, Raw Materials Sourcing and Manufacturing."
We Rely On Performance By Third Party Manufacturers
As of December 31, 1998, we sourced approximately 72% of total product orders
(by sales dollar value) with independent manufacturers. We intend for this
percentage to increase. If our independent manufacturers fail to finance
production adequately, maintain production capacity or otherwise produce
finished goods on schedule, it will adversely affect our ability to deliver
products to our customers in a timely fashion. Alternative manufacturers, if
available, may not be able to provide us with products or services of comparable
quality at an acceptable price or on a timely basis. Therefore, a failure by our
independent manufacturers to perform their obligations could prevent us from
meeting our clients' requirements in a timely manner, which could result in
cancelled purchases by our clients and impair our relationships with them. See
"Business--Product Sourcing, Raw Materials Sourcing and Manufacturing."
We Face Risks Relating To The Year 2000 Issue
Arthur Andersen & Co. has advised us that we will have to upgrade, modify or
replace portions of our financial systems to make them Year 2000 compliant. We
currently estimate that the total cost of implementing our Year 2000 program
will be approximately $200,000. If our computer systems or the computer systems
of any of our suppliers or customers are not Year 2000 compliant or are unable
to recover from system interruptions which may result from the Year 2000 date
change, our business could be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Impact
of the Year 2000 Issue."
Risks Relating To Our Acquisition Strategy And Future Acquisitions
Our Combined Operating History May Not Be Indicative Of Future Operating
Results
We recently acquired Diversified Apparel and Global Sourcing Network and will
acquire Components and Windsong simultaneously with the consummation of the
offering. Accordingly, we have just begun to integrate the operations of these
businesses with our pre-existing operations. Our pro forma results of operations
and the historical results of Diversified Apparel, Global Sourcing Network,
Components and Windsong cover periods when these businesses were not under our
control or management and may not be indicative of our future financial or
operating results or the results that would have been achieved if these
businesses had been operating on a consolidated basis with us for the periods
presented.
Our management will be burdened by the integration and supervision of our
combined operations and the implementation of our operating and growth
strategies. We cannot assure you that the managers of Diversified Apparel,
Global Sourcing Network, Components and Windsong will work effectively with our
senior management or as part of a larger entity. Our inability to successfully
integrate and supervise the operations, services, technologies and personnel of
these acquired businesses, or implement our operating or growth strategies,
could reduce our profitability and inhibit future growth.
17
Our Focus On Growth May Divert Management's Attention From Other Business
Concerns
Our growth strategy depends heavily on the identification, acquisition and
successful management of new businesses. Pursuit of this growth strategy will
divert our management's attention from other business concerns. It is also
possible that neither our management nor management of Diversified Apparel,
Global Sourcing Network, Components and Windsong will have the skills necessary
to manage an aggressive acquisition program. Although we may recruit additional
managers to supplement the existing management of any acquired business, we may
not be able to recruit additional managers with the skills necessary to enhance
the management of such businesses. Any or all of these factors could have a
material adverse effect on our business, results of operations and financial
condition.
We May Be Adversely Affected By Unforeseen, Unknown Liabilities In
Connection With The Operation Of Acquired Businesses
Unforeseen, unknown liabilities may arise in connection with the ownership and
operation of Diversified Apparel, Global Sourcing Network, Components, Windsong
or any future acquired business. These liabilities could relate to such matters
as previously unasserted contract or tort claims against such businesses and
product liability claims relating to the design or production of the apparel
distributed by such businesses, among others. Although we believe that the risk
of pre-existing claims being successfully asserted against The Pietrafesa
Corporation has been minimized by the acquisition structures we have employed,
we cannot assure you that no such claims will be asserted or, if asserted, that
such claims will not result in material liabilities to us. Contractual purchase
price adjustments, as well as other contractual rights or other remedies
available to us, may not be sufficient to compensate us in the event that such
unforeseen liabilities arise. The occurrence of any such liability could have a
material adverse effect on our working capital and liquidity.
Future Performance Of The Acquired Businesses May Not Be Commensurate With
The Purchase Prices
Valuations of Diversified Apparel, Global Sourcing Network, Components and
Windsong were not established by independent appraisals, but were determined
through purchase price negotiations between the parties. The consideration paid
for each such business was based exclusively on these negotiations. A variety of
factors played a role in these negotiations, including the financial performance
of each business, its markets and its management. The consideration paid does
not necessarily bear any relationship to the net book value of the acquired
assets or to any other recognized measure of value. We cannot assure you that
independent valuations of Diversified Apparel, Global Sourcing Network,
Components and Windsong would not have been less than the consideration paid or
to be paid by us for the acquisition of any of these businesses. The future
performance of Diversified Apparel, Global Sourcing Network, Components and
Windsong may not be commensurate with the consideration paid to acquire these
businesses.
Reductions In Our Future Net Income Caused By The Amortization Of Goodwill
May Adversely Affect The Market Price Of Our Common Stock
Approximately $29 million, or 34%, of our pro forma combined, as adjusted total
assets as of December 31, 1998 consisted of goodwill arising from the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions. Goodwill is an intangible asset that represents the difference
between the aggregate purchase price for the assets acquired, including deferred
purchase price actually paid, and the amount of such purchase price allocated to
the identified assets for purposes of an as-adjusted balance sheet. We are
required to amortize the goodwill from the acquisitions over a period of time,
with the amount amortized in a particular period constituting an expense that
reduces our net income for that period. The amount amortized will not be less
than $1.6 million per year for 10 years, of which $167,000 per year will not
give rise to a corresponding tax benefit. In addition, we will be required to
amortize the goodwill, if any, from any future acquisitions. Reductions in our
net income resulting from the amortization of goodwill may adversely affect the
market price of our Class A Common Stock. We plan to amortize goodwill
associated with the acquisitions over a period of 20 years for Windsong, 15
years for Global Sourcing Network and Components and 10 years for Diversified
Apparel, in each case beginning at the closing of each such acquisition. We plan
to evaluate continually whether events or circumstances have occurred that could
result in an acceleration of the amount to be amortized.
18
We May Be Unable To Successfully Implement Or Realize Cost Savings
Opportunities Created By Our Acquisitions
We believe that our integration of Diversified Apparel, Global Sourcing Network,
Components and Windsong will result in cost savings, including a reduction in
operating expenses as a result of the elimination of duplicative administrative
functions and personnel. Significant uncertainties, however, accompany any
business combination, and we cannot assure you that we will be able to achieve
our anticipated operating efficiencies or otherwise realize cost savings from
the Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions or future acquisitions. The inability to achieve anticipated
operating efficiencies or cost savings could have a material adverse effect on
our business, results of operations and financial condition.
Some of Our Acquisition Agreements Contain Terms That Could Prevent A
Change In Control of A Change in Management.
If Philip Ean Cohen ceases to control The Pietrafesa Corporation, we will
be required to pay Windsong the present value of the deferred portion of
the purchase price for Windsong. If Richard Pietrafesa is no longer our chief
executive officer, our deferred purchase price obligations under the Components
acquisition agreement will be accelerated. These and other provisions included
the Components and Windsong acquisition arrangements may entrench management or
discourage transactions in which we are assigned an attractive valuation because
a change in control is involved.
Risks Associated With Our Capital Structure
The Interests Of Our Controlling Stockholder May Conflict With The
Interests Of The Holders Of Our Class A Common Stock
Following the offering, MS Pietrafesa, L.P., which is controlled by Phillip Ean
Cohen, will continue to own all of the outstanding shares of Class B Common
Stock. As such, MS Pietrafesa, L.P. will elect 75% of the directors and, except
in very limited circumstances, will have the power to decide all other matters
submitted to our stockholders. Holders of Class A Common Stock will have no
voting rights except the right to elect 25% of our directors, until all shares
of Class B Common Stock are converted into shares of Class A Common Stock or
otherwise cease to be outstanding. As a result, Mr. Cohen will control the
outcome of substantially all matters submitted to a vote of our stockholders.
See "Description of Capital Stock."
The interests of Mr. Cohen may conflict with the interests of holders of Class A
Common Stock. The concentration of voting power described above may make us an
unattractive takeover target and may discourage acquisition proposals, even if
favored by holders of Class A Common Stock. In addition, as long as any Class B
Common Stock is outstanding, MS Pietrafesa, L.P. will be able to transfer voting
control to a third party at a premium that will not be enjoyed by holders of the
Class A Common Stock. Voting power will, in all likelihood, continue to be
concentrated following conversion of all of the outstanding shares of Class B
Common Stock, since MS Pietrafesa, L.P. would own approximately % of the
outstanding shares of Class A Common Stock following the full conversion.
We Are Subject To Risks Relating To Potential Significant Covenant
Restrictions
We may incur substantial additional indebtedness to fund our growth strategy.
Incurring substantial additional indebtedness would reduce our financial
flexibility and expose us to additional risks, including greater vulnerability
to economic downturns and competitive pressures.
Our agreements with our lenders contain significant operating and financial
restrictions. Our current credit agreements and other loan documents contain
restrictive covenants, including restrictions on incurrence of debt, dividend
payments, sales of assets, acquisitions and other business combinations,
transactions with affiliates, liens and investments. If we fail to comply with
existing or future debt covenants, we could default under these agreements. If a
default were to occur, the lender under such agreement could accelerate our
repayment of the indebtedness evidenced by that agreement. Acceleration of our
repayment obligations would also be permitted under any other instruments then
in effect containing cross-acceleration or cross-default provisions, which could
have a material adverse effect on our business, results of operations and
financial condition.
The Market Price Of Our Class A Common Stock Could Be Adversely Affected By
Future Sales Of Substantial Amounts Of Shares In The Public Market
There will be an aggregate of shares of Class A Common Stock outstanding
immediately after the offering. Of these shares, the shares of Class A Common
Stock sold in this offering will be freely tradable under the Securities Act of
1933. The up to shares of Class A Common Stock to be issued upon conversion of
the outstanding shares of Class B Common Stock will be "restricted securities"
and may, in the future, be sold in compliance with Rule 144 under the Securities
Act. In addition, commencing days after the closing of the offering, or sooner
with the consent of the underwriters, such shares of Class A Common Stock may be
sold without registration under the Securities Act to the extent permitted by
Rule 144. See "Shares Eligible for Future Sale."
19
The sale or availability for sale of a large number of shares in the market
after the offering could cause a decline in the market price of the Class A
Common Stock. This could make it more difficult for us to raise funds through
future offerings of our stock.
Absence Of Current Public Market And Determination Of Public Offering Price
And Market Uncertainty May Cause The Market Price Of The Class A Common Stock To
Fluctuate
There has not been a public market for the Class A Common Stock. We have applied
for listing of the Class A Common Stock on the Nasdaq National Market. We do not
know the extent to which investor interest in our stock will cause an active
trading market to develop or be sustained, or how liquid that market might be.
The market price for the Class A Common Stock could also fluctuate in response
to various factors and events, including liquidity of the market for our shares,
quarter-to-quarter variations in our results of operations and our significant
developments and of other industry participants, pricing and competition in our
industry, broad market fluctuations and economic and political conditions not
directly related to our business. The initial public offering price of the Class
A Common Stock will be determined by negotiation between us and representatives
of the underwriters. Investors may not be able to resell their shares at or
above the price that they pay in the initial public offering. See
"Underwriting."
Holders Of Class A Common Stock Will Experience Immediate Dilution And Will
Be Subject To Potential Future Dilution
Based upon our pro forma net tangible book value as of December 31, 1998,
purchasers of Class A Common Stock in the offering will experience an immediate
dilution of $ in the pro forma net tangible book value per share of Class A
Common Stock from the initial public offering price of $ per share. Moreover,
additional issuances of Class A Common Stock pursuant to the exercise of stock
options or warrants that we may issue from time to time, or as payment of the
deferred purchase price in connection with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, could cause further
dilution in the net tangible book value per share of the Class A Common Stock.
See "Dilution."
FORWARD-LOOKING STATEMENTS
An investment in the Class A Common Stock offered hereby is speculative in
nature and involves a high degree of risk. Some statements made in this
prospectus under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus are forward-looking
statements. Forward-looking statements are identified by use of terms such as
"may," "will," "expect," "anticipate," "believe," "estimate," "intend," "plan"
and similar expressions, although some forward-looking statements are expressed
differently. Although we believe these statements are reasonable, there are
important risks and uncertainties, including those discussed in the "Risk
Factors" section above, that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements, including
changes in general economic and business conditions, actions of competitors,
changes in our business strategies and the factors set forth above and under the
captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
20
USE OF PROCEEDS
Our net proceeds from the sale of ________ shares of Class A Common Stock in
this offering, after payment of expenses of this offering, are estimated to be
approximately $____ million, or $ ___ million if the underwriters'
over-allotment option is exercised in full, assuming an initial public offering
price of $_____ per share, the midpoint of the range set forth on the cover page
of this prospectus. We intend to apply the net proceeds as follows:
(In thousands)
Windsong acquisition $22,000
Windsong escrow 4,250(1)
Notes due to sellers of
Diversified Apparel and Global Sourcing Network 1,200(2)
Components acquisition 4,700
General corporate purposes 12,850
-------
$45,000
=======
-----------------------
(1) This escrow will be funded to secure a performance-based portion of the
purchase price in the Windsong acqusition.
(2) These notes bear interest at a rate of 10% per annum and mature in May
2002.
The portion of the net proceeds of the offering that has been allocated to
general corporate purposes may be applied to future acquisitions, to repay
indebtedness or for working capital or other purposes. The Company currently has
not entered into any agreements for the acquisition of any company except as set
forth in this prospectus.
21
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, issuance to MS Pietrafesa, L.P. of a total of
shares of Class B Common Stock prior to the consummation of the
offering, our sale of shares of Class A Common Stock pursuant to the
offering, assuming an initial public offering price of $ per share, and
the application of the net proceeds of the offering as described under
"Use of Proceeds." Our pro forma combined capitalization, as adjusted,
set forth below, excludes shares of Class A Common Stock which may be
issued as deferred purchase price under the terms of the Diversified
Apparel, Global Sourcing Network, Components and Windsong acquisitions.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Pro Forma Combined
Financial Data" and the audited financial statements and the notes thereto
included elsewhere in this prospectus.
[Enlarge/Download Table]
As of March 31, 1999
-----------------------------------------------------
Pro Forma
Pro Forma Combined,
Actual Combined As Adjusted
-------------- -------------------- -----------------
(in thousands, except share and per share data)
Long term debt, net of current maturities............... $ 13,054 $ 47,914 $ 611
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
5,000,000 shares authorized, shares issued and
outstanding and shares issued and outstanding pro
forma combined and pro forma combined, as
adjusted..........................................
Class B Common Stock, par value $.001 per share;
10,000,000 shares authorized, shares issued and
outstanding and shares issued and outstanding pro
forma combined and pro forma combined, as
adjusted.....
Additional paid-in capital.............................. 3,191
Retained earnings (deficit)............................. 282
-------- -------- --------
Total stockholders' equity.......................... 3,473 7,473 52,473
======== ======== ========
Total capitalization.................................... $ 16,527 $ 55,387 $ 53,084
======== ======== ========
22
DIVIDEND POLICY
We have not declared or paid any cash or other dividends on our capital stock
and we do not expect to pay dividends for the foreseeable future. We anticipate
that all of our earnings in the foreseeable future will be used for the
operation of our business, to support our growth strategy and to reduce our
indebtedness. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon, among other factors,
our results of operations, financial condition and capital requirements. In
addition, our existing credit facility with PNC Bank, National Association, and
other loan agreements contain, and any successor facility will likely contain,
prohibitions on our ability to pay dividends. Please refer to the "Certain
Relationships and Related Transactions" section of this prospectus, however, for
a description of tax-related distributions required to be made by MS Pietrafesa,
L.P. to its partners under its partnership agreement. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DILUTION
The net tangible book value of our Common Stock as of March 31, 1999, was $
million, or $ per share. Net tangible book value per share represents the amount
of total tangible assets less total liabilities, divided by the aggregate number
of shares of Common Stock outstanding. Dilution in the net tangible book value
per share represents the difference between the amount per share paid by
purchasers of shares of Class A Common Stock in this offering and the net
tangible book value per share of Common Stock immediately afterwards. After
giving effect to the Diversified Apparel, Global Sourcing Network, Components
and Windsong acquisitions, our net tangible book value as of March 31, 1999
would have been $ million or $ per share. After giving effect to the sale of
shares of Class A Common Stock offered hereby at an assumed initial public
offering price of $ per share, and the application of the net proceeds
therefrom, our pro forma net tangible book value as of March 31, 1999 would have
been approximately $ million, or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to the holder of
our Class B Common Stock and an immediate dilution in net tangible book value of
$ per share to purchasers of Class A Common Stock in the offering. The following
table illustrates this per share dilution.
[Enlarge/Download Table]
Assumed initial public offering price per share......................................... $
---------
Net tangible book value per share of Common Stock as of March 31,1999............... $
Decrease in net tangible book value per share of Common Stock
attributable to the Diversified Apparel, Global Sourcing Network,
Components and Windsong acquisitions...........................................
--------
Pro forma net tangible book value per share of Common Stock after the acquisitions..
Increase in pro forma net tangible book value per share of Common Stock attributable
to new investors...............................................................
--------
Decrease in pro forma net tangible book value attributable to the issuance of shares
of Class B Common Stock to MS Pietrafesa, L.P..................................
--------
Pro forma net tangible book value per share of Common Stock after the acquisitions,
the issuance of the Class B Common Stock and the offering......................
---------
Dilution per share of Class A Common Stock to new investors............................. $
=========
23
The following table sets forth, on the pro forma basis described above, as of
March 31, 1999, the difference between the number of shares purchased, the total
consideration paid and the average price per share paid by the existing
stockholders and new investors purchasing shares of Class A Common Stock in this
offering. The information presented is based upon an assumed initial public
offering price of $____ per share, the midpoint of the range set forth on the
cover page of this prospectus, before deducting the estimated offering expenses
and underwriting discounts and commissions:
[Download Table]
Shares Total
Purchased Consideration
---------------- ---------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders(1).. $ % $
New investors.............
Total..................... 100% $ 100%
====== ===== ====== =====
-----------------------
(1) Excludes shares of Class A Common Stock to be reserved for issuance
upon the exercise of options which may be issued from time to time under
our Stock Option Plan, pursuant to which, as anticipated to be adopted
prior to the closing of the offering, options to purchase a number of
shares equal to 10% of our outstanding capital stock immediately following
the offering may be granted. See "Management--Stock Option Plan."
24
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present our selected historical statement of operations and
historical balance sheet data for each year in the five-year period ended
December 31, 1998 and for the three-month periods ended March 31, 1998 and 1999.
The selected annual historical financial data is derived from audited
consolidated financial statements. The selected historical financial data as of
March 31, 1998 and 1999 and for the three-month periods then ended were derived
from our unaudited interim financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which we consider necessary for a fair presentation of the financial position,
and the results of operations for these periods. Operating results for the
three-month period ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending December 31, 1999.
The selected historical financial data set forth below should be read in
conjunction with our financial statements and notes thereto included elsewhere
in this prospectus, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other financial data included herein.
[Enlarge/Download Table]
For the Year Ended December 31, Three Months Ended March 31,
---------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ---------- ------------ ------------
(in thousands, except share and per share data)
Statement of Operations Data:
Net revenues......................... $ 42,073 $ 40,009 $ 44,000 $ 37,582 $ 56,763 $9,503 $ 17,803
Cost of sales........................ 34,087 31,631 34,769 29,218 47,062 7,028 14,833
----------- ----------- ----------- ----------- ---------- ------------ ------------
Gross profit......................... 7,986 8,378 9,231 8,364 9,701 2,475 2,970
Operating expenses:
Selling, general and administrative
expenses........................... 6,066 9,869 7,518 6,118 5,536 1,305 1,201
Depreciation and amortization expenses 99 102 165 151 222 64 68
----------- ----------- ----------- ----------- ---------- ------------ ------------
6,165 9,971 7,683 6,269 5,758 1,369 1,269
----------- ----------- ----------- ----------- ---------- ------------ ------------
Operating income (loss).............. 1,821 (1,593) 1,548 2,095 3,943 1,106 1,701
Interest expense..................... 1,044 1,693 1,720 1,446 1,209 253 296
Public offering costs(1)............. -- -- -- -- 823 -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) from continuing
operations before income taxes..... 777 (3,286) (172) 649 1,911 853 1,405
Provision for income taxes(2)........ -- -- -- -- 514 -- 565
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) from continuing
operations......................... 777 (3,286) (172) 649 1,397 853 840
Loss from discontinued operations(3). (718) (6,236) (321) (93) -- -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Income (loss) before extraordinary item 59 (9,522) (493) 556 1,397 853 840
Extraordinary item(4)................ -- -- 3,350 -- -- -- --
----------- ----------- ----------- ----------- ---------- ------------ ------------
Net income (loss).................... $ 59 $ (9,522) $ 2,857 $ 556 $ 1,397 $ 853 $ 840
=========== =========== =========== =========== ========== ============ ============
Pro forma net income data:
Income before income taxes,
as reported above ............... $1,911 $ 853 $ 1,405
Pro forma provision for
income taxes(8) ................. 764 341 562
-------- ------------ ------------
Pro forma net income $1,147 $ 512 $ 843
======== ============ ============
Pro forma basic and diluted net
income (loss) per common share..... $ $ $
Pro forma weighted average number
of common shares outstanding
(basic and diluted)(5).............
25
[Enlarge/Download Table]
As of December 31, As of March 31,
--------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------- ------------- ------------
(in thousands)
Balance Sheet Data:
Working capital (deficiency)........ $4,713 $(3,287) $(2,412) $4,642 $9,239 $ 5,707 $ 10,520
Total assets........................ 40,035 27,116 23,627 19,673 29,375 21,838 29,944
Total long-term debt, net of current
maturities........................ 7,429 3,746 3,036 8,663 12,561 8,754 13,054
Total partners' capital and
stockholders' equity.............. 8,818 (704) 2,153 2,709 2,383(6) 3,562 3,473
For the Year Ended December 31, Three Months Ended March 31,
--------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1998 1999
----------- ---------- ----------- ---------- ----------- ------------- ------------
(in thousands)
Other Data:
EBITDA(7)........................... $ 2,833 $ (396) $ 2,494 $ 2,897 $ 4,731 $1,308 $1,886
Capital expenditures................ 1,103 368 105 59 592 90 109
Operating cash flows................ (3,022) 3,779 2,445 3,056 (1,395) 28 (613)
Cash (used in) provided by investing
activities........................ (1,035) (265) 419 2,185 (563) (90) (109)
Cash (used in) provided by financing
activities........................ 4,540 (4,001) (2,866) (5,242) 1,969 62 721
---------------------
(1) Relates to a public offering that was delayed due to adverse market
conditions.
(2) MS Pietrafesa, L.P., our predecessor, was not subject to state or federal
income taxes. The Pietrafesa Corporation is a C-corporation. We became
subject to federal and state income tax as of October 1, 1998 when we
acquired all of the assets and liabilities of MS Pietrafesa, L.P.
(3) During 1995, MS Pietrafesa, L.P. discontinued manufacturing of a low price
point tailored clothing line. The loss from disposal and from operations
of this segment is shown as discontinued operations.
(4) In 1996, MS Pietrafesa, L.P. recorded an extraordinary gain related to the
forgiveness of all of its outstanding subordinated debt and related
interest.
(5) Consists of shares of Class A Common Stock to be issued in the offering
and the Windsong acquisition and the shares of Class B Common Stock
currently issued and outstanding. The number of shares of Class B Common
Stock outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a
total of shares of Class B Common Stock prior to the consummation of the
offering for the nominal consideration of the stock's par value per share.
(6) Gives effect to MS Pietrafesa, L.P.'s transfer to us of all of its assets
and liabilities as of October 1, 1998, including a $1.5 million obligation
relating to tax-related distributions to its partners, and to the impact
of the recording of $0.5 million of tax expense as a C-corporation
reflected in our 1998 statement of operations. See "Certain Relationships
and Related Transactions."
(7) EBITDA represents income (loss) from continuing operations before
provision (benefit) for income taxes plus depreciation and amortization
plus interest expense plus public offering costs. EBITDA is not intended
to represent cash flows from operations and should not be considered as an
alternative to net income as an indicator of our operating performance or
to cash flows as a measure of liquidity. We believe that EBITDA is a
standard measure commonly reported and widely used by analysts, investors
and other interested parties in the apparel industry. Accordingly, it has
been disclosed in this prospectus to permit a more complete comparative
analysis of our performance relative to other companies in the apparel
industry. Our definition of EBITDA may not be identical to similarly
titled measures of other companies and, therefore, may not necessarily be
an accurate basis of comparison.
(8) Assumes the Company was subject to federal and state income taxes for the
entire year, assuming an effective tax rate of 40.0%.
26
PRO FORMA COMBINED FINANCIAL DATA
Our 1998 pro forma combined financial data includes (1) our statement of
operations data which reflects our historical results after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions as if they occurred on January 1, 1998, and (2) our balance sheet
data, which reflects our balance sheet and the balance sheets of Diversified
Apparel, Global Sourcing Network, Components and Windsong as if the acquisitions
of such businesses had occurred on the respective balance sheet dates. The pro
forma combined, as adjusted financial data includes our pro forma combined
information as adjusted for this offering and the application of the proceeds of
this offering. The pro forma combined financial data are based upon preliminary
estimates, available information and assumptions that management deems
appropriate, but are not necessarily indicative of the results that would have
been obtained had such events occurred at the times assumed or our future
results. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this prospectus.
The acquisitions have been recorded in the pro forma financial statements as a
purchase in accordance with Accounting Principle Board No. 16. Accordingly, the
purchase price of each acquisition has been allocated to the fair value of the
assets acquired, with the remainder allocated to goodwill. There are no other
intangible assets that have been acquired as part of the acquisitions. A summary
of the purchase price of the acquisition and allocation of that price to the
fair value of assets is shown below:
[Enlarge/Download Table]
Schedule of Allocation of Purchase Price of Acquisitions
(in thousands)
Global
Sourcing Diversified Total
Components Network Apparel Windsong Combined
-------------- --------------- -------------- ---------------- ---------------
Purchase Price:
Cash portion........................ $ 4,695 $ 1,400 $ 800 $ 22,000 $ 28,895
Equity portion...................... -- -- - 4,000 4,000
Sellers' notes...................... -- 800 400 -- 1,200
Assumption of liabilities........... 6,021 1,121 1,955 16,862 25,959
Costs directly associated with the
acquisition......................... 350 350 350 400 1,450
Purchase price adjustment........... -- -- -- -- --
-------------- --------------- -------------- ---------------- ---------------
Total purchase price................ 11,066 3,671 3,505 43,262 61,504
Allocation of Purchase Price:
Fair value of assets acquired....... (8,660) (1,171) (2,457) (19,998) (32,286)
-------------- --------------- -------------- ---------------- ---------------
Goodwill acquired................... $ 2,406 $ 2,500 $ 1,048 $ 23,264 $ 29,218
============== =============== ============== ================ ===============
Pro Forma amortization expense...... $ 160 $ 167 $ 105 $ 1,163 $ 1,595
============== =============== ============== ================ ===============
Pro Forma amortization for qtr...... $ 40 $ 42 $ 26 $ 291 $ 399
============== =============== ============== ================ ===============
Goodwill will be amortized over a period ranging from 10-20 years. The principal
assets acquired or to be acquired for each of the acquisitions are accounts
receivable, inventory and goodwill. The principal liabilities assumed for each
of the acquisitions are accounts payable, accrued expenses and debt facilities.
The amount of goodwill recorded in the pro forma financial statements is based
on asset and liabilities of the acquisitions as of March 31, 1999, which are
estimated to approximate fair value at that date. The actual amount of goodwill
recorded when the acquisitions are completed will vary depending on the actual
amount of assets and liabilities of the acquisitions on the acquisition dates.
However, we do not believe there will be a material difference between the
assumed and actual amount of goodwill recorded since the purchase agreements
contain mandatory purchase price adjustments to the extent that net assets or
working capital do not meet targeted amounts.
27
Pro Forma Combined Statement of Operations Data
Year Ended December 31, 1998
[Enlarge/Download Table]
-----------------------------------------------------------------------------------
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
-------------- -------------- -------------- ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA: (in thousands)
Net revenues................................ $ 56,763 $ 19,993 $ 18,062 $ 2,633 $ 63,630 $ 161,081
Cost of sales............................... 47,062 15,007 16,768 1,590 49,884 130,311
-------------- -------------- -------------- ------------ ------------ ------------
Gross profit................................ 9,701 4,986 1,294 1,043 13,746 30,770
Operating expenses:
Selling, general and administrative expenses 5,536 3,107 1,390 765 10,917 21,715
Depreciation and amortization expenses.... 222 1 4 3 157 387
-------------- -------------- -------------- ------------ ------------ ------------
5,758 3,108 1,394 768 11,074 22,102
-------------- -------------- -------------- ------------ ------------ ------------
Operating income (loss)..................... 3,943 1,878 (100) 275 2,672 8,668
Interest expense............................ 1,209 293 -- 1 1,661 3,164
Public offering costs....................... 823 -- -- -- -- 823
-------------- -------------- -------------- ------------ ------------ ------------
Income (loss) before income taxes .......... 1,911 1,585 (100) 274 1,011 4,681
Provision for income taxes.................. 514 158 (46) 24 46 696
-------------- -------------- -------------- ------------ ------------ ------------
Net income (loss)........................... $ 1,397 $ 1,427 $ (54) $ 250 $ 965 $ 3,985
============== ============== ============== ============ ============ ============
[Enlarge/Download Table]
-------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Offering Combined,
Adjustments Adjustments Combined Adjustments As Adjusted
-------------- -------------- ------------- -------------- --------------
(in thousands)
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ -- $ -- $ 161,081 $ -- $ 161,081
Cost of sales............................... -- -- 130,311 -- 130,311
-------------- -------------- -------------- ------------- --------------
Gross profit................................ -- -- 30,770 -- 30,770
Operating expenses:
Selling, general and administrative expenses -- (3,540)(2) 18,175 -- 18,175
Depreciation and amortization expenses.... -- 1,595 (3) 1,982 -- 1,982
-------------- -------------- -------------- ------------- --------------
-- (1,945) 20,157 -- 20,157
-------------- -------------- -------------- ------------- --------------
Operating income (loss)..................... -- 1,945 10,613 -- 10,613
Interest expense............................ -- (279)(4) 2,885 (956)(5) 1,929
Public offering costs....................... -- -- 823 -- 823
-------------- ----- -------- -------------- ------------- --------------
Income (loss) before income taxes .......... -- 2,224 6,905 956 7,861
Provision for income taxes.................. 250(1) 1,816(1) 2,762 382(6) 3,144
-------------- ----- -------- ---- --------- ------------- ---- ---------
Net income (loss)........................... $ (250) $ 408 $ 4,143 $ 574 4,717
============== ============== ============== ============= ==============
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
28
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1999
[Enlarge/Download Table]
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (in thousands)
Net revenues................................. $ 17,803 $ 5,384 $ 6,040 $ 2,233 $ 14,552 $46,012
Cost of sales................................ 14,833 4,123 5,622 1,697 11,170 37,445
---------------------------------------------------------------------------
Gross profit................................. 2,970 1,261 418 536 3,382 8,567
Operating expenses:
Selling, general and administrative
expenses................................. 1,201 604 261 336 2,030 4,432
Depreciation and amortization expenses.... 68 -- -- -- 40 108
---------------------------------------------------------------------------
Total operating expenses.................. 1,269 604 261 336 2,070 4,540
---------------------------------------------------------------------------
Operating income (loss) ..................... 1,701 657 157 200 1,312 4,027
Interest expense............................. 296 76 -- 4 334 710
Public offering costs........................ -- -- -- -- -- --
---------------------------------------------------------------------------
Income (loss) before income taxes............ 1,405 581 157 196 978 3,317
Provision for income taxes................... 565 -- -- (1) 44 608
===========================================================================
Net income (loss)............................ $ 840 $ 581 $ 157 $ 197 $ 934 $ 2,709
===========================================================================
[Enlarge/Download Table]
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined As
Adjustments Adjustments Combined Adjustments Adjusted
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (in thousands)
Net revenues................................. $ -- $ -- $ 46,012 $ -- $ 46,012
Costs of sales............................... 37,445 37,445
----------------------------------------------------------------------------
Gross profit................................. -- -- 8,567 -- 8,567
Operating expenses:
Selling, general and administrative (206)(2) 4,226 -- 4,226
expenses.....................................
Depreciation and amortization expenses.... 399 (3) 507 -- 507
----------------------------------------------------------------------------
Total operating expenses.................. -- 193 4,733 -- 4,733
----------------------------------------------------------------------------
Operating income (loss) ..................... -- (193) 3,834 -- 3,834
Interest expense............................. -- (28)(4) 682 (184)(5) 498
Public offering costs........................ -- -- -- --
----------------------------------------------------------------------------
Income (loss) before income taxes............ -- (165) 3,152 184 3,336
Provision for income taxes................... -- 656(1) 1,264 70(6) 1,334
----------------------------------------------------------------------------
Net income (loss)............................ -- $ (821) $ 1,888 $ 114 $ 2,002
============================================================================
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
29
Pro Forma Combined Statement of Operations Data
For the Three Months Ended March 31, 1998
[Enlarge/Download Table]
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (in thousands)
Net revenues................................. $ 9,503 $ 4,868 $ 5,831 $ 260 $ 17,312 $37,774
Cost of sales................................ 7,028 3,596 5,372 18 13,684 29,698
---------------------------------------------------------------------------
Gross profit................................. 2,475 1,272 459 242 3,628 8,076
Operating expenses:
Selling, general and administrative
expenses..................................... 1,305 509 324 176 2,090 4,404
Depreciation and amortization expenses.... 64 -- -- -- 41 105
---------------------------------------------------------------------------
Total operating expenses.................. 1,369 509 324 176 2,131 4,509
---------------------------------------------------------------------------
Operating income (loss) ..................... 1,106 763 135 66 1,497 3,567
Interest expense............................. 253 67 -- -- 448 768
Public offering costs........................ -- -- -- -- -- --
---------------------------------------------------------------------------
Income (loss) before income taxes............ 853 696 135 66 1,049 2,799
Provision for income taxes................... -- 16 2 13 47 78
---------------------------------------------------------------------------
Net income (loss)............................ $ 853 $ 680 $ 133 $ 53 $ 1,002 $ 2,721
===========================================================================
[Enlarge/Download Table]
Company Acquisition Pro Forma
Pro Forma Pro Forma Pro Forma Offering Combined As
Adjustments Adjustments Combined Adjustments Adjusted
----------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (in thousands)
Net revenues................................. $ -- $ -- $ 37,774 $ -- $ 37,774
Costs of sales............................... -- -- 29,698 -- 29,698
----------------------------------------------------------------------------
Gross profit................................. -- -- 8,076 -- 8,076
Operating expenses:
Selling, general and administrative
expenses..................................... -- (371)(2) 4,033 -- 4,033
Depreciation and amortization expenses.... -- 399 (3) 504 -- 504
----------------------------------------------------------------------------
Operating income (loss) ..................... -- (28) 3,539 -- 3,539
Interest expense............................. -- (191)(4) 577 (227)(5) 350
Public offering costs........................ -- -- -- --
----------------------------------------------------------------------------
Income (loss) before income taxes............ -- 163 2,962 227 3,189
Provision for income taxes................... 341(1) 766(1) 1,185 91(6) 1,276
----------------------------------------------------------------------------
Net income (loss)............................ $ (341) $ (603) $ 1,777 $ 136 $ 1,913
============================================================================
Basic and diluted net income (loss) per common
share.....................................
Weighted average number of common shares
outstanding (basic and diluted)(7)........
-----------------------
(1) Reflects the income tax effect of the pro forma adjustments and the
additional tax expense necessary to adjust our historical income tax
expense to a combined effective federal and state tax rate of 40%. This pro
forma adjustment was made to reflect this effective rate as the income of
The Pietrafesa Corporation and the combining companies was not all taxable
in 1998 but would have been taxable had the transaction been consummated on
January 1, 1998.
30
(2) Reflects (1) the elimination of $1.1 million for 1998, $0.2 million for the
first quarter of 1999, or $0.3 million for the first quarter of 1998 of
royalty and commissions expenses of Global Sourcing Network, which expenses
will not continue under the terms of the Global Sourcing Network
acquisition agreement, (2) the reduction of $2.6 million of compensation
and benefits incurred in 1998 or $0.1 million of benefits incurred in the
first quarter of 1999 over the amount of compensation and benefits
specified for the former owners of Diversified Apparel, Components and
Windsong under their respective acquisition agreements.
(3) Gives effect to the amortization of goodwill that results from the
acquisition of Diversified Apparel, Global Sourcing Network, Components and
Windsong as if the acquisitions occurred on January 1, 1998.
(4) Reflects the reduction of interest expense incurred during 1998, the first
quarter of 1999 or the first quarter of 1998 on indebtedness of Windsong
that we will not assume as part of the Windsong acquisition.
(5) Reflects the reduction of interest expense resulting from repayment of debt
with the proceeds from the offering. Also, includes a fee for unused
availability under the PNC credit facility that will result from the
repayment of the PNC credit facility with the proceeds from this offering.
(6) Reflects the income tax effect of the pro forma adjustments assuming an
effective tax rate of 40%.
(7) Consists of shares of Class A Common Stock to be issued in the offering
and the Windsong acquisition and the shares of Class B Common Stock
currently issued and outstanding. The number of shares of Class B Common
Stock outstanding gives effect to the issuance to MS Pietrafesa, L.P. of a
total of _____ shares of Class B Common Stock prior to the consummation of
the offering.
31
Pro Forma Combined Balance Sheet Data
As of December 31, 1998
[Enlarge/Download Table]
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
--------------- -------------- ------------- -------------- ------------ ------------
Balance Sheet Data: (in thousands)
Assets
Current assets
Cash ............................... $ 14 $ 45 $ 154 $ 211 $ 126 $ 550
Accounts receivable ................ 7,967 4,463 19 252 5,643 18,344
Inventories ........................ 13,117 2,311 908 1,047 6,585 23,968
Prepaid expenses and other assets .. 1,131 -- 57 204 1,167 2,559
-------- -------- -------- -------- -------- --------
Total current assets ................. 22,229 6,819 1,138 1,714 13,521 45,421
Property, plant and equipment, net ........ 6,586 181 10 13 566 7,356
Goodwill .................................. -- -- -- -- -- --
Other assets .............................. 560 28 -- 9 71 668
-------- -------- -------- -------- -------- --------
Total assets .............................. $ 29,375 $ 7,028 $ 1,148 $ 1,736 $ 14,158 $ 53,445
======== ======== ======== ======== ======== ========
Liabilities and stockholders' equity
Current liabilities
Credit facility .................... $ -- $ 2,462 $ -- $ 150 $ 7,301 $ 9,913
Account payable .................... 7,893 2,459 1,026 1,049 3,261 15,688
Other current liabilities .......... 3,054 49 229 71 2,295 5,698
Tax distribution payable to partner 1,516 -- -- -- -- 1,516
Current maturities of long-term debt 527 -- -- -- 125 652
-------- -------- -------- -------- -------- --------
Total current liabilities ............ 12,990 4,970 1,255 1,270 12,982 33,467
Deferred tax liability .................... 1,441 -- -- -- -- 1,441
Long-term debt, net of current maturities . 12,561 -- -- -- 228 12,789
Stockholders' equity
Common stock ......................... -- 300 1 -- 1 302
Additional paid in capital ........... 2,941 -- -- -- 6 2,947
Retained earnings .................... (558) 1,758 (108) 466 941 2,499
-------- -------- -------- -------- -------- --------
Total stockholders' equity ................ 2,383 2,058 (107) 466 948 5,748
-------- -------- -------- -------- -------- --------
Total liabilities and stockholders equity . $ 29,375 $ 7,028 $ 1,148 $ 1,736 $ 14,158 $ 53,445
======== ======== ======== ======== ======== ========
32
[Enlarge/Download Table]
As of December 31, 1998
--------------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Offering Combined,
Adjustments Adjustments Combined Adjustments As Adjusted
---------------- --------------- -------------- --------------- ----------------
Balance Sheet Data (Cont.): (in thousands)
Assets
Current assets
Cash.............................. $-- $ -- $ 550 $ -- $ 550
Accounts receivable............... -- -- 18,344 -- 18,344
Inventories....................... -- -- 23,968 -- 23,968
Prepaid expenses and other assets. -- -- 2,559 -- 2,559
---- -------- ------- ---- -------
Total current assets................ -- -- 45,421 -- 45,421
Property, plant and equipment, net....... -- -- 7,356 -- 7,356
Goodwill................................. -- 29,218 (1) 29,218 -- 29,218
Other assets............................. -- 4,250 (2) 4,918 -- 4,918
---- -------- ------- ---- -------
Total assets............................. $ -- $ 33,468 $86,913 $ -- $86,913
==== ======== ======= ==== =======
Liabilities and stockholders' equity
Current liabilities.................
Credit facility................... $-- $ -- $ 9,913 $1,688 (7) $11,601
Account payable................... -- (1,380) (3) 14,308 -- 14,308
Other current liabilities......... -- 1,200 (4) 6,898 (1,200) (8) 5,698
Tax distribution payable to partner -- -- 1,516 -- 1,516
Current maturities of long-term debt -- -- 652 (376) (8) 276
---- -------- ------- ---- -------
Total current liabilities........... -- (180) 33,287 112 33,399
Deferred tax liability................... -- -- 1,441 -- 1,441
Long-term debt, net of current maturities -- 33,013 (4) 45,802 (45,112) (8) 690
Stockholders' equity
Common stock........................ -- (302) (5) -- -- --
Additional paid in capital.......... -- 3,994 (6) 6,941 45,000 (9) 51,941
Retained earnings................... -- (3,057) (5) (558) -- (558)
Total stockholders' equity............... -- 635 6,383 45,000 51,383
---- -------- ------- ---- -------
Total liabilities and stockholders equity $-- $ 33,468 $86,913 $ -- $86,913
==== ======== ======= ==== =======
33
Pro Forma Combined Balance Sheet Data
As of March 31, 1999
[Enlarge/Download Table]
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
----------------------------------------------------------------------------------
BALANCE SHEET DATA: (in thousands)
Assets
Current assets
Cash.................................... $ 13 $ 187 $ -- $ 116 $ 21 $ 337
Accounts receivable..................... 8,488 5,199 589 1,471 8,527 24,274
Inventories............................. 12,682 2,454 434 792 9,473 25,835
Prepaid expenses and other assets....... 1,313 - 139 56 1,308 2,816
----------------------------------------------------------------------------------
Total current assets....................... 22,496 7,840 1,162 2,435 19,329 53,262
Property, plant and equipment, net............ 6,523 312 9 13 598 7,455
Goodwill...................................... -- -- -- -- -- --
Other assets.................................. 925 508 -- 9 71 1,513
----------------------------------------------------------------------------------
Total assets.................................. $ 29,944 $ 8,660 $ 1,171 $ 2,457 $ 19,998 $ 62,230
==================================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities........................
Credit facility......................... $ -- $ 3,369 $ -- $ 150 $ 10,707 $ 14,226
Accounts payable........................ 7,166 2,494 898 1,300 6,365 18,223
Other current liabilities............... 2,767 158 223 357 859 4,364
Tax distribution payable to partner..... 1,516 -- -- 70 -- 1,586
Current maturities of long-term debt.... 527 -- -- -- 124 651
----------------------------------------------------------------------------------
Total current liabilities.................. 11,976 6,021 1,121 1,877 18,055 39,050
Deferred tax liability........................ 1,441 -- -- -- -- 1,441
Long-term debt, net of current maturities..... 13,054 -- -- -- 187 13,241
Stockholders' equity
Common stock............................... -- 300 1 1 1 303
Additional paid in capital................. 3,191 -- -- -- 6 3,197
Retained earnings.......................... 282 2,339 49 579 1,749 4,998
----------------------------------------------------------------------------------
Total stockholders' equity.................... 3,473 2,639 50 580 1,756 8,498
----------------------------------------------------------------------------------
Total liabilities and stockholders' equity.... $ 29,944 $ 8,660 $ 1,171 $ 2,457 $ 19,998 $ 62,230
==================================================================================
34
[Enlarge/Download Table]
As of March 31, 1999
--------------------------------------------------------------------------
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Combined
Adjustments Adjustments Combined Offering As Adjusted
--------------------------------------------------------------------------
BALANCE SHEET DATA (Cont.): (in thousands)
Assets
Current assets
Cash....................................... $ -- $ -- $ 337 $ -- $ 337
Accounts receivable........................ -- -- 24,274 -- 24,274
Inventories................................ -- -- 25,835 -- 25,835
Prepaid expenses and other assets.......... -- -- 2,816 -- 2,816
--------------------------------------------------------------------------
Total current assets......................... -- -- 53,262 -- 53,262
Property, plant and equipment, net.............. -- -- 7,455 -- 7,455
Goodwill........................................ -- $ 29,218 (1) 29,218 -- 29,218
Other assets.................................... -- 4,250 (2) 5,763 -- 5,763
--------------------------------------------------------------------------
Total assets.................................... $ -- $ 33,468 $ 95,698 $ -- $ 95,698
==========================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility............................ $ -- $ -- $ 14,226 $ 3,879 (7) $ 18,105
Accounts payable........................... -- (1,380)(3) 16,843 -- 16,843
Other current liabilities.................. -- 1,200 (4) 5,564 (1,200)(8) 4,364
Tax distribution payable to partner........ -- -- 1,586 -- 1,586
Current maturities of long-term debt....... -- -- 651 (376)(8) 275
--------------------------------------------------------------------------
Total current liabilities.................... -- (180) 38,870 2,303 41,173
Deferred tax liability........................... -- -- 1,441 -- 1,441
Long-term debt, net of current maturities........ -- 34,673 (4) 47,914 (47,303)(8) 611
Stockholders' equity
Common stock.................................. -- (303) 5) -- -- --
Additional paid in capital.................... -- 3,994 (6) 7,191 45,000 (9) 52,191
Retained earnings............................. -- (4,716)(5) 282 -- 282
--------------------------------------------------------------------------
Total stockholders' equity....................... -- (1,025) 7,473 45,000 52,473
--------------------------------------------------------------------------
Total liabilities and stockholders' equity....... $ -- $33,468 $ 95,698 $ -- $ 95,698
==========================================================================
35
Pro Forma Combined Balance Sheet Data
As of March 31, 1998
[Enlarge/Download Table]
The Global
Pietrafesa Sourcing Diversified Total
Corporation Components Network Apparel Windsong Combined
----------------------------------------------------------------------------------
BALANCE SHEET DATA: (in thousands)
Assets
Current assets
Cash.................................... $ 3 $ 39 $ 13 $ 193 $ 1 $ 249
Accounts receivable..................... 4,335 3,940 338 122 13,275 22,010
Inventories............................. 10,536 1,409 -- 15 5,748 17,708
Prepaid expenses and other assets....... 355 2 244 58 1,744 2,403
----------------------------------------------------------------------------------
Total current assets....................... 15,229 5,390 595 388 20,768 42,370
Property, plant and equipment, net............ 6,446 3 12 7 305 6,773
Goodwill...................................... -- -- -- -- -- --
Other assets.................................. 163 28 15 -- 91 297
----------------------------------------------------------------------------------
Total assets.................................. $ 21,838 $ 5,421 $ 622 $ 395 $ 21,164 $ 49,440
==================================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility......................... $ -- $ -- $ -- $ -- $ 11,929 $ 11,929
Accounts payable........................ 7,455 1,726 68 35 6,088 15,372
Other current liabilities............... 1,607 2,290 473 9 1,768 6,147
Tax distribution payable to partner..... -- -- -- 81 -- 81
Current maturities of long-term debt.... 460 -- -- -- -- 460
----------------------------------------------------------------------------------
Total current liabilities.................. 9,522 4,016 541 125 19,785 33,989
Deferred tax liability........................ -- -- -- -- -- --
Long-term debt, net of current maturities..... 8,754 -- -- -- -- 8,754
Partners' capital and stockholders' equity
General partner............................ 31 -- -- -- -- 31
Limited partner............................ 3,531 -- -- -- -- 3,531
Common stock............................... -- 300 1 1 1 303
Additional paid in capital................. -- -- -- -- 6 6
Retained earnings.......................... -- 1,105 80 269 1,372 2,826
----------------------------------------------------------------------------------
Total partners' capital and stockholders'
equity..................................... 3,562 1,405 81 270 1,379 6,697
----------------------------------------------------------------------------------
Total liabilities, partners' capital
and stockholders' equity................... $ 21,838 $ 5,421 $ 622 $ 395 $ 21,164 $ 49,440
==================================================================================
36
[Enlarge/Download Table]
March 31, 1998
Company Pro Acquisition Pro Forma
Forma Pro Forma Pro Forma Combined
Adjustments Adjustments Combined Offering As Adjusted
--------------------------------------------------------------------------
BALANCE SHEET DATA (Cont.): (in thousands)
Assets
Current assets
Cash....................................... $ -- $ -- $ 249 $ 2,528 $ 2,777
Accounts receivable........................ -- -- 22,010 -- 22,010
Inventories................................ -- -- 17,708 -- 17,708
Prepaid expenses and other assets.......... -- -- 2,403 -- 2,403
--------------------------------------------------------------------------
Total current assets......................... -- -- 42,370 2,528 44,898
Property, plant and equipment, net -- -- 6,773 -- 6,773
Goodwill........................................ -- $29,218 (1) 29,218 -- 29,218
Other assets.................................... -- 4,250 (2) 4,547 -- 4,547
--------------------------------------------------------------------------
Total assets.................................... $ -- $33,468 $ 82,908 $ 2,528 $ 85,436
==========================================================================
Liabilities, partners' capital and stockholders' equity
Current liabilities
Credit facility............................ $ -- $ -- $ 11,929 $ -- $ 11,929
Accounts payable........................... -- (1,380)(3) 13,992 -- 13,992
Other current liabilities.................. -- 1,200 (4) 7,347 (1,200)(8) 6,147
Tax distribution payable to partner........ 207 (10) -- 288 -- 288
Current maturities of long-term debt....... -- -- 460 (310)(8) 150
--------------------------------------------------------------------------
Total current liabilities..................... 207 (180) 34,016 (1,510) 32,506
Deferred tax liability.......................... -- -- -- -- --
Long-term debt, net of current maturities....... -- 32,783 (4) 41,537 (40,962)(8) 575
Stockholders' equity
General Partner.............................. (31)(11) -- -- -- --
Limited Partner.............................. (3,531)(11) -- -- -- --
Common stock................................. -- (303)(5) -- -- --
Additional paid in capital................... 3,355 (11) 3,994 (6) 7,355 45,000 (9) 52,355
Retained earnings............................ -- (2,826)(5) -- -- --
--------------------------------------------------------------------------
Total partners' capital and stockholders'
equity....................................... (207) (865) 7,355 45,000 52,355
--------------------------------------------------------------------------
Total liabilities and stockholders' equity...... $ -- $33,468 $ 82,908 $ 2,528 $ 85,436
==========================================================================
-----------------------
(1) Reflects the additional goodwill as a result of the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions.
(2) Reflects the deposit of $4.25 million in escrow which will be paid to the
sellers of Windsong if Windsong achieves specified earnings targets during
1999.
(3) Reflects the elimination of certain liabilities that are not being assumed
as part of the acquisition of Windsong.
(4) Reflects the assumption of debt in order to finance the acquisitions. The
majority of this debt will be repaid through use of the proceeds of the
offering. See note (8) below.
(5) Reflects the elimination of common stock and retained earnings of the
acquisitions.
(6) Reflects the elimination of the additional paid-in capital of the
acquisitions and $4 million of additional equity associated with the
acquisition of Windsong.
(7) Reflects the additional advances required under the PNC credit facility
necessary to finance a portion of the acquisitions.
(8) Reflects the use of our net proceeds of the offering. See "Use of
Proceeds."
(9) Reflects the assumed net proceeds of approximately $45 million from this
offering.
(10) An adjustment to reflect the tax distributions payable to partners for
taxable income earned in 1997, but paid after March 31, 1998.
(11) Reflects the transfer of partners' captial to additional paid in capital
assuming the Company became a C-Corporation as of January 1, 1998.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Historical and Pro Forma Combined Financial Data and the Combined Financial
Statements and Notes thereto included in this prospectus.
OVERVIEW
We began our business in 1922 as a contract manufacturer of branded tailored
clothing, and in the 1970's started producing directly for large retailers. In
1990, an investment group led by Richard C. Pietrafesa, Jr. and Joseph J.
Pietrafesa II created MS Pietrafesa, L.P. and acquired the business in a
management buyout from their father and uncle. In the early 1990s, we formalized
our growth strategy of focusing on developing proprietary brand programs for
major retailers. Our strategy at that time was to support these programs by
increasing production capacity to serve a broader range of price points and to
develop state-of-the-art manufacturing capabilities at our Liverpool, New York
facility. Our proprietary brand strategy produced significant revenue growth.
Despite material revenue growth from 1993 to 1994, profitability suffered, with
operating income increasing only $0.84 million during this period. Our
profitability was adversely impacted during this period by the costs of
expanding operations and manufacturing facilities to support planned growth and
meet customers' expanding production needs, as well as by competition from
products supplied by foreign sources. See "Risk Factors--A Recession Or
Consolidation In The Apparel Industry May Adversely Affect Our Sales."
During the period 1995 through 1997, we divested all of our manufacturing assets
other than the Liverpool facility, refinanced our secured lending arrangements
and negotiated the forgiveness of our subordinated indebtedness.
Beginning in 1997, we developed a new business strategy designed to leverage our
reputation as a developer of innovative dress apparel programs for retailers.
This strategy was far less reliant on our own manufacturing assets, and
emphasized our expertise in garment design and production management through
sourcing arrangements with third-party manufacturers. As part of this new
strategy, in 1998 we commenced acquisition discussions with various independent
merchandising and sourcing companies. See "Risk Factors--We Rely On Performance
Of Third Party Manufacturers," "Business--Business Strategy" and
"Business--Acquisition Strategy."
SIGNIFICANT ACQUISITIONS
Terms of the Acquisitions. In addition to the measures described above and taken
during 1995 through 1997, we have completed the acquisitions of Diversified
Apparel and Global Sourcing Network. We will complete the acquisitions of
Components and Windsong simultaneously with the consummation of this offering.
We believe that the terms of each acquisition satisfy all elements of our
acquisition strategy. See "Business--Reorganization, Acquisitions and Operating
Unit Structure." The terms of each acquisition are as follows:
On April 15, 1999, we purchased all of the assets of Diversified Apparel. Under
the terms of the Diversified Apparel acquisition agreement, we paid $0.8 million
in cash and issued a promissory note in the principal amount of $0.4 million. In
addition, we assumed some existing liabilities of Diversified Apparel,
consisting of approximately $1.3 million of trade payables, as well as third
party indebtedness that will be repaid from the proceeds of this offering. See
"Use of Proceeds." Diversified Apparel merchandises and sources apparel,
including lower to mid-priced suits and dress shirts, to value-priced apparel
retailers. The purchase price also includes a potential five-year earn-out of
$0.8 million payable in cash or, in limited circumstances, shares of Class A
Common Stock at our option, based on Diversified Apparel's achievement of
specified annual pre-tax earnings targets. These targets require aggregate
growth of 46% in pre-tax earnings over the five-year period from 1999 through
2003. These targets are measured annually and, if an annual target is missed,
the earn-out payment for such year will be deferred or forfeited, depending on
the extent to which actual performance falls short of the target.
On April 15, 1999, we purchased all of the issued and outstanding capital stock
of Global Sourcing Network. Under the terms of the Global Sourcing Network
acquisition agreement, the initial purchase price consists of $1.4 million in
cash and the issuance of a promissory note payable to the sole stockholder of
Global Sourcing Network, in the principal amount of $0.8 million. Global
Sourcing Network sources men's suits for S&K Famous Brands. The purchase price
also includes a potential five-year earn-out of $2.2 million payable in cash
based on Global Sourcing Network's achievement of specified annual pre-tax
earnings targets. These targets require aggregate growth of 31% in pre-tax
earnings over the five-year period from 1999 through 2003. These targets are
measured annually and, if an annual target is missed, the earn-out payment for
such year will be deferred or forfeited, depending on the extent to which actual
performance falls short of the target.
38
Concurrent with the closing of this offering, we will acquire all of the assets
of Components. The purchase price will consist of $4.7 million in cash. In
addition, we will assume some existing liabilities of Components, consisting of
approximately $5.0 million of trade payables and factor advances, as well as
third party indebtedness that will be repaid from the proceeds of this offering.
See "Use of Proceeds." Components merchandises and sources St. Andrews tailored
clothing, as well as sportswear, dress shirts, neckwear, topcoats and casual
slacks in Italy. The purchase price also includes a potential six-year earn-out
of $4.7 million payable in cash or, in limited circumstances, shares of Class A
Common Stock at our option, based on Components' achievement of specified annual
pre-tax earnings targets. These targets require aggregate growth of 76.5% in
pre-tax earnings over the six-year period from 1999 through 2004. These targets
are measured annually and, if an annual target is missed, the earn-out payment
for such year will be deferred or forfeited, depending on the extent to which
actual performance falls short of the target.
In addition, concurrently with the closing of this offering, we will acquire
substantially all of the assets of Windsong. The purchase price will consist of
$22.0 million in cash, $4.0 million in shares of Class A Common Stock valued at
the offering price, and our assumption of approximately $16.9 million of
Windsong liabilities. See "Use of Proceeds." The liabilities to be assumed
include all operating liabilities with the exception of subordinated accounts
payable of $1.4 million at March 31, 1999 and liabilities associated with
Windsong's defined benefit pension plan. Windsong merchandises and sources men's
sportswear worldwide. The purchase price also includes a potential six-year
earn-out of $22.0 million, based on Windsong's achievement of specified annual
pre-tax earnings targets. These targets require Windsong to achieve $6.275
million in pre-tax earnings during 1999 and to increase pre-tax earnings by
approximately 33% by 2004. These targets are measured annually and, if an annual
target is missed, the earn-out payment for such year will be deferred or
forfeited, depending on the extent to which actual performance falls short of
the target. If at any time Philip Ean Cohen ceases to control The Pietrafesa
Corporation, other than because of his death or disability, the then present
value of the remaining earn-out payments will become immediately due to
Windsong. Following the acquisition, the operations of the Windsong unit will be
under the day-to-day control of an advisory board consisting principally of
executives of Windsong, Inc.
Possible Impact of Acquisitions on Results of Operations. The consummation of
the Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions is expected to affect our results of operations in significant
respects. Our depreciation and amortization will be significantly higher than
the corresponding amounts from prior to the acquisitions and will never be less
than $1.6 million per year over the next 10 years. See "Risk Factors-- Reduction
In Net Income Caused By The Amortization Of Goodwill May Adversely Affect The
Market Price Of Our Common Stock."
RESULTS OF OPERATIONS
As an aid to understanding The Pietrafesa Corporation's, Global Sourcing
Network's, Components' and Windsong's results of operations on a comparative
basis, we have prepared the following discussion setting forth items within The
Pietrafesa Corporation's, Components', Global Sourcing Network's and Windsong's
statements of income as a percentage of net revenues for the periods indicated.
Financial information for Diversified Apparel has not been included because its
historical results of operations are not material as compared to the results of
operations of such other companies.
The following discussion of the results of operations and financial position
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this prospectus.
THE PIETRAFESA CORPORATION
The following table sets forth financial data as a percentage of net revenues
for The Pietrafesa Corporation. This information may not be indicative of our
future results. For more information, see the financial statements of The
Pietrafesa Corporation, including the notes thereto, appearing elsewhere in this
prospectus.
39
[Enlarge/Download Table]
For the
For the Year Ended Three Months Ended
December 31, March 31,
---------------------------------- -----------------------
1996 1997 1998 1998 (1) 1999 (1)
----------- ---------- ----------- ----------- -----------
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 79.0 77.7 82.9 74.0 83.3
----- ----- ----- ----- -----
Gross profit......................... 21.0 22.3 17.1 26.0 16.7
Selling, general and administrative.. 16.7 16.3 9.8 13.7 6.7
Impairment loss on fixed assets...... 0.4 -- -- -- --
Depreciation and amortization........ 0.4 0.4 0.4 0.7 0.4
----- ----- ----- ----- -----
Operating income..................... 3.5 5.6 6.9 11.6 9.6
Interest expense..................... 3.9 3.8 2.1 2.7 1.7
Public offering costs................ -- -- 1.4 -- --
----- ----- ----- ----- -----
Income (loss) from continuing
operations before income taxes..... (0.4) 1.7 3.4 8.9 7.9
Provision for income taxes........... -- -- 0.9 -- 3.2
----- ----- ----- ----- -----
Income (loss) from continuing
operations......................... (0.4) 1.7 2.5 8.9 4.7
Discontinued operations.............. (0.7) (0.2) -- -- --
----- ----- ----- ----- -----
Net income (loss) before
extraordinary item................. (1.1) 1.5 2.5 8.9 4.7
Extraordinary item................... 7.6 -- -- -- --
----- ----- ----- ----- -----
Net income........................... 6.5% 1.5% 2.5% 8.9% 4.7%
===== ===== ===== ===== =====
-------------------
(1) Derived from unaudited financial information
40
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999 increased
by 87.4% to $17.8 million from $9.5 million for the three months ended March 31,
1998. The increase in net revenues was due principally to our commencement of
sales to Jos.A.Bank under a long-term arrangement. This increase represented
approximately 63% of the increase in net revenues. The balance of the increase
in net revenues was due to increased sales to existing customers.
Cost of sales. Cost of sales for the three months ended March 31, 1999 increased
by 111.4% to $14.8 million from $7.0 million for the three months ended March
31, 1998 consistent with our increased net revenues. Cost of sales as a
percentage of net revenue increased for the three months ended March 31, 1999 to
83.3% from 74.0% for the three months ended March 31, 1998, due primarily to the
new cost-plus sourcing/manufacturing services arrangement with Jos.A.Bank. Under
this long-term arrangement, Jos.A.Bank receives a cost-plus pricing structure in
consideration for minimum annual purchase commitments. Gross margin on sales to
Jos.A.Bank is less than gross margin earned on seasonal business. However, this
lower gross margin did not reduce the operating income that we realized from
such revenues because our sales to Jos.A.Bank do not require us to make capital
investments or overhead expenditures.
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended March 31, 1999 decreased by 7.7% to $1.2
million from $1.3 million for the three months ended March 31, 1998, due to the
implementation of cost control programs. Despite this decline, we anticipate
that such expenses will continue to increase in the future to support growth in
revenues.
Operating income. Operating income for the three months ended March 31, 1999
increased by 54.5% to $1.7 million from $1.1 million for the three months ended
March 31, 1998, due primarily to increased gross profit associated with
increased revenue and the reduction of selling, general and administrative
expenses.
Interest expense. Interest expense for the three months ended March 31, 1999
increased by 20.0% to $0.3 million from $0.25 million for the three months ended
March 31, 1998, due primarily to increased borrowing.
Provision for income taxes. Provision for income taxes for the three months
ended March 31, 1999 was $0.6 million as compared to $0 for the three months
ended March 31, 1998, due to MS Pietrafesa, L.P.'s transfer of its assets and
liabilities to The Pietrafesa Corporation, a C-corporation, on October 1, 1998.
Net income. As a result of the above factors, net income of $0.8 million for the
three months ended March 31, 1999 was the same as net income for the three
months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenues. Net revenues for 1998 increased by 51.1% to $56.8 million from
$37.6 million for 1997. The increase in net revenues was due principally to our
commencement of sales to Jos.A.Bank under a long term arrangement. This increase
represented approximately 74% of the increase in net revenues. The balance of
the increase in net revenues was due to increased sales to existing customers.
41
Cost of sales. Cost of sales for 1998 increased by 61.3% to $47.1 million from
$29.2 million for 1997 consistent with our increased net revenues. Cost of sales
as a percentage of net revenue increased in 1998 to 82.9% from 77.7% for 1997,
due primarily to the new cost-plus sourcing/manufacturing services arrangement
with Jos.A.Bank. Under this long-term arrangement, Jos.A.Bank receives a
cost-plus pricing structure in consideration for minimum annual purchase
commitments. Gross margin on sales to Jos.A.Bank is less than gross margin
earned on seasonal business. However, this lower gross margin did not reduce the
operating income that we realized from such revenues because our sales to
Jos.A.Bank do not require us to make capital investments or overhead
expenditures. Additionally, 0.8% of the increase in cost of sales as a percent
of net revenues resulted from an increase in inventory reserves.
Selling, general and administrative expense. Selling, general and administrative
expense for 1998 decreased by 9.8% to $5.5 million from $6.1 million for 1997,
due to the cost-plus nature of the Jos.A.Bank arrangement and the elimination of
advertising and licensing expenses incurred in 1997 under an agreement with Polo
Corporation which expires in June 1999. This decline in selling, general and
administrative expenses was partially offset by costs associated with
establishing new customer relationships. Despite this decline, we anticipate
that such expenses will increase in the future to support growth in revenues.
Operating income. Operating income for 1998 increased by 85.7% to $3.9 million
from $2.1 million for 1997, due primarily to increased gross profit associated
with increased revenue and the elimination of advertising and license expenses
to Polo Corporation.
Interest expense. Interest expense for 1998 decreased by 14.3% to $1.2 million
from $1.4 million for 1997, due primarily to lower outstanding principal
balances, a result of improved operating cash flow.
Public offering costs. In 1998, MS Pietrafesa, L.P. incurred $0.8 million of
public offering costs. Such costs related to a public offering that was delayed
due to adverse market conditions. The public offering costs include cost for
legal ($0.2 million), accounting ($0.3 million) and investment banking services
($0.06 million) and travel-related expenses ($0.2 million).
Provision for income taxes. Provision for income taxes for 1998 was $0.5 million
as compared to $0 for 1997, due to MS Pietrafesa, L.P.'s transfer of its assets
and liabilities to The Pietrafesa Corporation, a C-corporation, in October 1998.
Net income. As a result of the above factors, net income for 1998 increased by
133.3% to $1.4 million from $0.6 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenues. Net revenues for 1997 decreased by 14.8% to $37.5 million from
$44.0 million for 1996, due principally to the discontinuance of Polo
Corporation's "Ralph Lauren" labeled products and a decline in sales to Brooks
Brothers. In 1996, our net revenues from sales to Brooks Brothers were unusually
high because of the launch of, and initial product deliveries for, the new
"Brooksease" product program. In 1997, our net revenues from sales to Brooks
Brothers for such program, although lower, were consistent with our past
experiences involving the production of replenishment inventory for existing
programs.
Cost of sales. Cost of sales for 1997 decreased by 16.1% to $29.2 million from
$34.8 million for 1996, primarily due to overall lower sales. As a percentage of
net revenues, cost of sales declined to 77.7% in 1997 from 79.0% in 1996 due to
lower overhead costs and a shift in the business away from general manufacturing
to the sourcing of a greater percentage of total product.
Selling, general and administrative expense. Selling, general and administrative
expense for 1997 decreased by 16.7% to $6.1 million from $7.3 million for 1996,
due primarily to the impact of reductions in management personnel implemented in
late 1996. This reduction was partially offset by a reduction of bad debt
expenses in 1996 of $0.18 million due to lower bad debt exposures in 1996.
There was no similar reduction in 1997. Selling, general and administrative
expense as a percentage of net revenues decreased to 16.3% in 1997 from 17.1% in
1996.
Impairment loss on fixed assets. At the end of 1996, we determined that assets
held for sale would be disposed of at a loss of $170,000 which we recorded in
1996. Such loss was actually realized in 1997.
42
Interest expense. Interest expense for 1997 decreased by 17.6% to $1.4 million
from $1.7 million for 1996, due primarily to lower outstanding principal
balances resulting from improved operating cash flow.
Income (loss) from continuing operations. Income (loss) from continuing
operations for 1997 increased to $0.7 million from $(0.2) million for 1996, due
to lower cost of sales and decreases in selling, general and administrative
expenses.
Discontinued operations. The loss on discontinued operations for 1997 decreased
by 66.6% to $0.1 million from $0.3 million for 1996, due primarily to reduced
interest expense under indebtedness relating to such discontinued operations. In
1995, MS Pietrafesa, L.P. decided to discontinue the domestic manufacture of low
price point tailored clothing and closed a manufacturing facility in Georgia. MS
Pietrafesa, L.P. continued to realize a loss on disposal of such discontinued
operations through 1997.
Extraordinary item. There was no extraordinary item for 1997 as compared to an
extraordinary item of $3.4 million for 1996. This item resulted from an
agreement between the owners of a predecessor company of MS Pietrafesa, L.P. to
forgive its subordinated indebtedness in exchange for an equity interest in a
limited partnership that is a limited partner of MS Pietrafesa, L.P.
Net income. As a result of the above factors, net income for 1997 decreased
79.3% to $0.6 million from $2.9 million for 1996.
COMPONENTS
The following table sets forth financial data as a percentage of net revenues
for Components. This information may not be indicative of the future results of
Components' business. See Financial Statements, including the Notes thereto,
appearing elsewhere in this prospectus.
[Enlarge/Download Table]
For the
For the Year Ended Three Months Ended
December 31, March 31, (1)
-------------------------- -----------------------
1997 1998 1998 1999
---- ---- ---- ----
Net revenues......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 78.8 75.1 73.9 76.6
----- ----- ----- -----
Gross profit......................... 21.2 24.9 26.1 23.4
Selling, general and administrative.. 14.1 15.5 10.5 11.2
----- ----- ----- -----
Operating income..................... 7.1 9.4 15.6 12.2
Interest expense..................... 1.6 1.5 1.4 1.4
----- ----- ----- -----
Income before taxes.................. 5.5 7.9 14.2 10.8
Provision for income taxes........... 0.5 0.8 .3 0
----- ----- ----- -----
Net income........................... 4.9% 7.1% 13.9% 10.8%
===== ===== ===== =====
-------------------
(1) Derived from unaudited financial information
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Net revenues. Net revenues for the three months ended March 31, 1999 increased
by 10.2% to $5.4 million from $4.9 million for the three months ended March 31,
1998. The increase in net revenues was due principally to increased volume of
sportswear sales through existing distribution channels.
Cost of sales. Cost of sales for the three months ended March 31, 1999 increased
by 13.9% to $4.1 million from $3.6 million for the three months ended March 31,
1998 due primarily to our increased net revenues. Cost of sales as a percentage
of net revenue increased for the three months ended March 31, 1999 to 76.6% from
73.9% for the three months ended March 31, 1998, due primarily to an increase in
sales allowances and discounts.
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended March 31, 1999 increased by 20.0% to $0.6
million from $0.5 million for the three months ended March 31, 1998, due to
increased commission and travel expenses.
43
Operating income. Operating income for the three months ended March 31, 1999
decreased by 12.5% to $0.7 million from $0.8 million for the three months ended
March 31, 1998, due primarily to increased sales volume offset by increases in
sales allowances and selling expenses.
Provision for income taxes. A provision for income taxes for the three months
ended March 31, 1999 was not established due to immateriality. Provision for
income taxes for the three months ended March 31, 1998 was $0.02 million.
Net income. As a result of the above factors, net income for the three months
ended March 31, 1999 decreased by 14.3% to $0.6 million from $0.7 million for
the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenues. Net revenues for 1998 increased by 34.2% to $20.0 million from
$14.9 million for 1997, due principally to increased sales to Brooks Brothers
and Tommy Hilfiger.
Cost of sales. Cost of sales for 1998 increased by 27.1% to $15.0 million from
$11.8 million for 1997, due primarily to overall increased sales. Cost of sales
for 1998 as a percentage of net revenue decreased to 75.1% as compared to 78.8%
for 1997, due primarily to cost efficiencies in sourcing larger quantities of
products.
Selling, general and administrative expense. Selling, general and administrative
expense for 1998 increased 47.6% to $3.1 million from $2.1 million for 1997, due
primarily to a $0.4 million increase in salary payable to the business owner, as
well as bad debt expense and advertising expense. Historically, such owner's
salary has varied considerably because, as an S-corporation, all year-end net
cash balances were paid as salary. Selling, general and administrative expense
as a percentage of net revenues increased to 15.5% in 1998 from 14.1% in 1997.
Operating income. Operating income for 1998 increased by 72.7% to $1.9 million
from $1.1 million for 1997. The increase was due to increases in net revenue and
gross profit.
Net income. As a result of the above factors, net income for 1998 increased by
100% to $1.4 million from $0.7 million for 1997.
GLOBAL SOURCING NETWORK
The following table sets forth financial data as a percentage of net revenues
for Global Sourcing Network. This information may not be indicative of the
future results of Global Sourcing Network's business. See Financial Statements,
including the Notes thereto, appearing elsewhere in this prospectus.
[Enlarge/Download Table]
For the
For the Year Ended Three Months Ended
December 31, March 31, (1)
-------------------------- ------------------------
1997 1998 1998 1999
---- ---- ---- ----
Net revenues......................... 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 93.4 92.8 92.1 93.1
----- ----- ----- -----
Gross profit......................... 6.6 7.2 7.9 6.9
Selling, general and administrative.. 1.5 1.7 .9 .9
Royalties and commissions............ 5.2 6.1 4.7 3.4
----- ----- ----- -----
Operating (loss) income.............. (0.1) (0.6) 2.3 2.6
Provision for income taxes........... 0.0 (0.3) 0 --
----- ----- ----- -----
Net loss............................. (0.1)% (0.3)% 2.3% 2.6%
===== ===== ===== =====
-------------------
(1) Derived from unaudited financial information
44
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Net revenues. Net revenues for the three months ended March 31, 1999 increased
by 3.4% to $6.0 million from $5.8 million for the three months ended March 31,
1998. The increase in net revenues was due principally to the timing of S&K
Famous Brands' acceptance of seasonal product.
Cost of sales. Cost of sales for the three months ended March 31, 1999 increased
by 3.7% to $5.6 million from $5.4 million for the three months ended March 31,
1998 consistent with our increased net revenues. Cost of sales as a percentage
of net revenue increased for the three months ended March 31, 1999 to 93.1% from
92.1% for the three months ended March 31, 1998, due primarily to a sale of
higher margin product during the first quarter of 1998.
Selling, general and administrative expense. Selling, general and administrative
expense for the three months ended March 31, 1999 increased by 17.4% to $0.054
million from $0.046 million for the three months ended March 31, 1998, due to
increased legal and accounting expenses associated with the sale of the company.
Royalties and commissions. Royalties and commissions decreased by 33.3% to $0.2
million from $0.3 million for the three months ended March 31, 1998. Royalties
and commissions decreased due to the termination of the remaining commission
relationship early in the first quarter of 1999. Historically, Global Sourcing
Network has paid significant royalties and commissions on its total net sales.
All such royalties and commission costs were eliminated upon our acquisition,
with no anticipated adverse effect on the generation of sales.
Provision for income taxes. A provision for income taxes for the three months
ended March 31, 1999 was not established due to the anticipated sale of the
business. A provision for income taxes for the three months ended March 31, 1998
was $0.002 million.
Net income. As a result of the above factors, net income for the three months
ended March 31, 1999 increased by 23.1% to $0.16 million from $0.13 million for
the three months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenues. Net revenues for 1998 decreased by 4.7% to $18.1 million from
$19.0 million for 1997, due principally to a decline in sales to Global Sourcing
Network's primary customer, S&K Famous Brands.
Cost of sales. Cost of sales for 1998 decreased by 5.6% to $16.8 million from
$17.8 million for 1997. Cost of sales as a percentage of net revenue decreased
to 92.8% for 1998 from 93.4% as compared to 1997. The reduction in cost of sales
was due to reduced revenue.
Selling, general and administrative expense. Selling, general and administrative
expense for 1998 remained constant at $0.3 million.
Royalties and commissions. Royalties and commissions increased by 11.0% to $1.1
million for 1998. Royalties and commissions increased due to an increase in
commission rate. Historically, Global Sourcing Network has paid significant
royalties and commissions on its total net sales. All such royalties and
commission costs were eliminated upon our acquisition, with no anticipated
adverse effect on the generation of sales.
Net loss. As a result of the above factors, net loss for 1998 increased to
$(0.05) million from a loss of $(0.01) million for 1997.
45
-- WINDSONG
The following table sets forth financial data as a percentage of net revenues
for Windsong. This information may not be indicative of our future results. For
more information, see the financial statements of Windsong, including the notes
thereto, appearing elsewhere in this prospectus.
[Enlarge/Download Table]
For the
For the Year Ended Three Months Ended
December 31, March 31, (1)
---------------------------------- -----------------------
1996 1997 1998 1998 1999
----------- ---------- ----------- ----------- -----------
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................ 87.8 78.7 78.4 79.0 76.8
----------- ---------- ----------- ----------- -----------
Gross profit......................... 12.2 21.3 21.6 21.0 23.2
Selling and distribution expenses.... 6.4 6.1 7.1 5.8 5.9
General and administrative expenses.. 5.5 12.8 10.3 6.5 8.3
----------- ---------- ----------- ----------- -----------
Operating income..................... 0.3 2.4 4.2 8.7 9.0
Interest expense..................... (0.2) (1.3) (2.7) (2.6) (2.3)
Other income......................... -- 0.2 0.1 -- --
----------- ---------- ----------- ----------- -----------
Income before taxes.................. 0.1 1.3 1.6 6.1 6.7
Provision for income taxes........... (0.1) 0.1 0.1 0.3 0.3
----------- ---------- ----------- ----------- -----------
Net income........................... --% 1.2% 1.5% 5.8% 6.4%
=========== ========== =========== =========== ===========
(1) Derived from unaudited financial information
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Net Revenues. Net revenues decreased by $2.7 million, or 15.6%, from $17.3
million in the first quarter of 1998 to $14.6 million in the first quarter of
1999. The decrease in net revenues was a result of a management decision to
reduce low margin private label sales and reduce certain department store sales
due to their increased markdowns and allowances. Overall, sales to the most
significant customer in the first quarter of 1999 amounted to 57.8% of total net
sales, as compared to 33.8% in the comparable prior year period.
Cost of Sales. Cost of sales for the three months ended March 31, 1999 decreased
by 18.4% to $11.2 million from $13.7 million for the three months ended March
31, 1998. This decline resulted from decreased net revenues. Cost of sales as a
percentage of net revenue decreased for the three months ended March 31, 1999 to
76.8% from 79.0% for the three months ended March 31, 1998, due primarily to the
reduction in low margin private label sales and a decrease in markdowns and
allowances in the first quarter of 1999 compared to the first quarter of 1998.
Selling and Distribution Expenses. Selling and distribution expenses decreased
$0.1 million in the first quarter of 1999 as compared to the first quarter of
1998. As a percentage of net sales, these expenses increased from 5.8% in the
first quarter of 1998 to 5.9% in the first quarter of 1999 as a result of
decreased sales, a net increase in royalty fees on license sales offset by a
decrease in warehouse expense due to less labor intensive department store sales
which decreased in the quarter compared to 1998.
General and Administrative Expenses. General and administrative expenses
increased from $1.1 million in the first quarter of 1998 to $1.2 million in the
first quarter of 1999. As a percentage of net sales, these expenses increased
from 6.5% in the first quarter of 1998 to 8.3% in the first quarter of 1999.
This percentage increase was primarily due to a general increase in the payroll
and payroll related expenses and lower sales.
Operating Income. Operating income in the first quarter of 1999 was $1.3
million, or 9.0% of net sales, compared to $1.5 million, or 8.7% of net sales,
in the comparable prior year period, an increase in operating income percentage
of 0.3% due to the factors described above. The 0.3% improvement in operating
income as a percentage of net sales is attributable to a 2.2% increase in gross
profit margin and a 1.9% increase in operating expenses.
46
Interest Expense. Interest expense for the three months ended March 31, 1999
decreased 25.4% to $0.3 million from $0.4 million for the three months ended
March 31, 1998, due primarily to interest expense on accounts
payable-subordinated debt.
Net Income before Income Taxes. As a result of the above factors, net income
before income taxes of $1.0 million for the three months ended March 31, 1999
was the same net income before income taxes for the three months ended March 31,
1998.
Net Income. As a result of the above factors, net income for the three months
ended March 31, 1999 decreased to $0.9 million from $1.0 million for the three
months ended March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Net revenues. Net revenues increased by $33.3 million, or 109.8%, from $30.3
million in 1997 to $63.6 million in 1998. The increase in net revenues included
an aggregate increase in sales of $21.0 million to the most significant
customer, $10.2 million to department stores, and $3.2 million to the second
most significant customer, primarily as a result of an increased volume of unit
sales.
Cost of Sales. Cost of sales for 1998 increased by 109.1% to $49.9 million from
$23.9 million for 1997 which is consistent with increased net revenues. Cost of
sales as a percentage of net revenue decreased to 78.4% from 78.7% due to a
management decision to reduce low margin private label sales and increase
licensed product sales that carry higher margins.
Selling and distribution expenses. Selling and distribution expenses increased
from $1.9 million in 1997 to $4.5 million in 1998. As a percentage of net sales,
these expenses increased from 6.1% in 1997 to 7.1% in 1998. This percentage
increase is primarily due to the opening of a new, expanded, computerized
warehouse facility, higher royalty expenses due to increased sales volume for
all customers, and in particular, increased sales with department stores that
required increased expenses as compared to other customers.
General and administrative expenses. General and administrative expenses
increased from $3.9 million in 1997 to $6.5 million in 1998. As a percentage of
net sales, these expenses were 10.3% and 12.8% in 1998 and 1997, respectively.
Overall, 1998 expenses included increases in officer bonus accruals, increased
staffing, insurance, travel and entertainment, computer costs, and training,
offset by a decrease in the pension expense. The allowance for bad debts
includes an allowance for returns and discounts as well as bad debt expense.
Special officers, bonus accruals were $1.6 million, including payroll taxes, in
1998 as compared to $0 in 1997.
Operating income. Operating income was $0.7 million in 1997, or 2.4% of net
sales, compared to $2.7 million in 1998, or 4.2% of net sales, due to increased
sales to significant customers and management decision to reduce low margin
private label sales and increase licensed product sales that carry higher
margins. This increase in operating income as a percentage of net sales was due
to the increase in gross profit, which amounted to $7.3 million reduced by an
increase in selling and distribution expenses, which amounted to a $2.7 million
and an increase in general and administrative expenses of $2.7 million.
Interest Expense. Interest expense for 1998 increased 351.9% to $1.7 million
from $0.4 million for 1997, due primarily to increased borrowings and factor
costs consistent with sales growth.
Income before income taxes. Income before income taxes was $0.4 million in 1997
and $1.0 million in 1998, representing 1.3% and 1.6% of net sales, respectively.
This increase in income before taxes, as a percentage of net sales, was due to
the factors described above.
Net Income. As a result of the above factors, net income for 1998 increased to
$1.0 million from $0.4 million for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Net revenues. Net revenues increased by $24.1 million, or 388.6%, from $6.2
million in 1996 to $30.3 million in 1997. The increase in net sales included an
aggregate increase in sales of $19 million to the primary customers.
47
Cost of Sales. Cost of sales for 1997 increased by 338.3% to $23.9 million from
$5.4 million for 1996, and is consistent with increased net revenues. Cost of
sales as a percentage of net revenue decreased to 78.7% from 87.8% due to better
margins with significant customers.
Selling and distribution expenses. Selling and distribution expenses increased
from $0.4 million in 1996 to $1.9 million in 1997. As a percentage of net sales,
these expenses decreased from 6.4% in 1996 to 6.1% in 1997. The increase of $1.5
million is primarily due to an increase in royalty and commission expenses,
which amounted to 2.6% and 1.8% of net sales, respectively.
General and administrative expenses. General and administrative expenses
increased from $0.3 million in 1996 to $3.9 million in 1997. As a percentage of
net sales, these expenses increased from 5.5% in 1996 to 12.8% in 1997. This
increase was primarily due to the significant increase in sales growth in 1997.
Operating income. Operating income was $0.017 million in 1996, or 0.3% of net
sales, compared to $0.7 million in 1997, or 2.4% of net sales, due to the
factors described above.
Interest expense. Interest expense increased from $0.015 million in 1996 to $0.4
million, or 0.2% of net sales in 1996 to 1.3% of sales in 1997. This increase is
primarily the result of increased borrowings in working capital due to growth in
1997.
Income before taxes. Income before taxes was $0.003 million in 1996 and $0.4
million in 1997, representing 0.1% and 1.3% of net sales, respectively. This
increase in income before taxes as a percentage of net sales was due to factors
discussed previously.
Net Income. As a result of the above factors, net income increased to $0.4
million for 1997 from $0 for 1996.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of liquidity and capital resources is derived from our
historical consolidated financial statements.
Our primary capital requirements are the funding of operations and capital
expenditures. MS Pietrafesa, L.P. historically financed its growth in sales and
the resulting increases in inventory and receivables through a combination of
operating cash flow and borrowings under its working capital facilities.
During the three months ended March 31, 1999, we used $0.6 million for operating
activities. This was primarily the result of net income of $0.8 million offset
by a $1.0 million decrease in current liabilities and a $0.5 million increase in
accounts receivable.
During the year ended December 31, 1998, we generated negative cash from
operations of $1.4 million. This was primarily the result of a $3.9 million
increase in accounts receivable and a $4.8 million increase in inventories
offset by net income of $1.4 million and a $4.6 million increase in other
current liabilities. The increase in accounts receivable was primarily the
result of a 51.0% increase in net revenues for the year ended December 31, 1998
as compared to the year ended December 31, 1997. The increases in other current
liabilities and inventories were due primarily to the sourcing of product for
Jos.A.Bank and other customers at manufacturing facilities managed by an
affiliate.
48
On April 15, 1999, we, together with our subsidiaries, entered into a senior
secured credit facility with PNC Bank, National Association. The PNC Bank credit
facility consists of (1) an $18.0 million revolving credit line, $1.0 million of
which can be utilized for the issuance of letters of credit, and (2) a $7.0
million term note. The amount available for borrowing under the revolving credit
line at any given time is determined pursuant to a formula based upon the levels
of qualifying accounts receivable and eligible inventory and the credit balance
owed us under our factoring agreement, subject to the $18.0 million maximum. The
term note is payable in 33 monthly payments of $116,667 commencing on May 1,
1999, with a final payment of all unpaid principal on April 15, 2002. As of
April 30, 1999, $7.4 million was outstanding under the revolving credit line and
$7.0 million was outstanding under the term note. Amounts outstanding under the
credit facility are secured by a senior lien on substantially all of our assets.
We have also pledged all of the stock of our subsidiaries as collateral.
Borrowings under the PNC Bank credit facility bear interest, at our option,
based upon either domestic interest rates or Euro interest rates. Under the
revolving credit line, the domestic interest rate is 0.5% per annum above the
higher of (a) PNC Bank's base commercial lending rate and (b) 0.5% per annum
above the Fed Funds rate. Under the revolving credit line, the Euro interest
rate is a multiple of 2.75% above LIBOR, where the multiple is equal to 1.00
minus the Federal Reserve's reserve requirement percentage. Under the term note,
the domestic interest rate is 1.00% higher than the domestic interest rate
calculated under the revolving credit line, and the Euro interest rate is 0.75%
higher than the Euro interest rate calculated under the revolving credit line.
Upon consummation of the offering, all of the foregoing domestic and Euro
interest rates shall decrease by 0.25%, provided that we receive net proceeds of
at least $20 million from the offering. The PNC Bank credit facility includes
significant financial and operating covenants, including requirements that we
maintain a minimum fixed charge coverage ratio, prohibitions on our ability to
incur additional indebtedness or to pay dividends and restrictions on our
ability to make capital expenditures and acquisitions. We are currently in
compliance with all covenants under the PNC Bank credit facility. The PNC Bank
credit facility contains customary events of default, including a cross-default
to our obligations under the Diversified Apparel and Global Sourcing Network
acquisition agreements.
In November 1995, MS Pietrafesa, L.P. entered into a loan agreement with the New
York State Urban Development Corporation ("UDC"), pursuant to which MS
Pietrafesa, L.P. borrowed $1.0 million from UDC to finance the purchase of
machinery and equipment. As of December 31, 1998, $0.6 million of the UDC loan
was outstanding. The UDC loan matures January 2003, bears interest at 1.0% and
is secured by a senior lien on specified machinery and equipment and a
subordinate mortgage on the Liverpool facility. The UDC loan agreement contains
restrictive covenants similar to those contained in the PNC Bank credit
facility. We are currently in compliance with all covenants under the UDC loan
agreement.
Our capital expenditures were $0.6 million for 1998. We expect capital
expenditures to be approximately $0.7 million during 1999. We anticipate that
operating income and the amounts available under the PNC Bank credit facility
will be sufficient to fund our capital expenditures in 1999.
We had working capital of $10.5 million at March 31, 1999 and $9.2 million at
December 31, 1998. The increase in working capital was due primarily to a $1.0
million decrease in current liabilities, a $0.5 million increase in accounts
receivable offset by a $0.4 million decrease in inventory. We expect that our
working capital needs will continue to fluctuate based on seasonal increases in
sales and accounts receivable and seasonal decreases in trade accounts payable.
We had working capital of $9.2 million at December 31, 1998 and $4.6 million at
December 31, 1997. The increase in working capital was due primarily to a $3.9
million increase in accounts receivable. In addition, inventories increased by
$4.8 million, which was offset by a $4.6 million increase in accounts payable.
In part, the new sourcing/manufacturing services arrangement with Jos.A.Bank
accounted for the changes in accounts receivable, inventories and other current
liabilities. We expect that our working capital needs will continue to fluctuate
based on seasonal increases in sales and accounts receivable and seasonal
decreases in trade accounts payable.
49
Management believes that the combination of existing working capital, funds
anticipated to be generated from operating activities, the borrowing
availability under the PNC credit facility and the anticipated net proceeds of
the offering will be sufficient to fund both our short-term and long-term
capital and our liquidity needs, other than in respect of future acquisitions.
As part of our growth strategy, we intend to seek out and acquire
merchandising/sourcing businesses. These acquisitions may require additional
capital in the form of equity, debt or a combination of the two. We cannot
assure you that additional capital will be available to us if and when required,
or, if available, that the terms of such additional capital will be acceptable
to us.
MARKET RISK
Our earnings are affected by changes in short-term interest rates as a result of
our variable rate debt instruments. If market interest rates for similar debt
obligations averaged 10% more in 1998, interest expense for The Pietrafesa
Corporation, excluding any of the acquired businesses, would increase, and
income before taxes would decrease by $103,803. This analysis does not consider
the effects of the reduced level of borrowings that could exist in such an
environment if management took actions to mitigate our exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, this sensitivity analysis assumes no change in our debt
structure.
BACKLOG
Our backlog of orders is affected by a number of factors, including revisions in
the scheduling of manufacturing and shipment of product which, in some
instances, depends on the demands of the retail consumer. Accordingly, a
comparison of unfilled orders from period to period is not necessarily
meaningful, and the level of unfilled orders at any given time may not be
indicative of actual shipments.
SEASONALITY
Some of our principal products are organized into seasonal lines in response to
the seasonal marketing of such products by our customers. As a result, our net
revenue and net income may fluctuate on a seasonal basis. A disproportionate
amount of our net revenue and a majority of our net income are typically
realized during the third quarter. Given that orders are usually placed six to
nine months in advance of shipping, net revenue and net income are generally
weakest during the second and fourth quarters, the two peak retail seasons of
our customers. Our greatest cash requirements occur in the later part of the
first and third quarters to support production and sales costs and a buildup in
customer receivables, resulting in reductions in working capital in each of
those quarters. If we are unable to finance our seasonal cash requirements
adequately, our ability to conduct business will be restricted. Moreover, as a
result of this seasonality of net revenues, a substantial decrease in our net
revenues in the third quarter of the year could have a material adverse effect
on our liquidity and on our profitability for the entire year. See "Risk
Factor--Seasonal Fluctuations In Revenue And Net Income May Affect Cash Flow,
Liquidity And Profitability."
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
We believe that inflation has not had a material impact on our results of
operations for the periods discussed herein. Because a significant portion of
our purchases of raw materials are denominated in U.S. dollars, to date we have
not been materially adversely affected by foreign currency fluctuations. See
"Risk Factors-- Our Foreign Sourcing Of Products Exposes Us To Delays In
Production And Increased Costs" and "--Our International Sourcing Of Products
And Raw Materials May Subject Us To Increased Costs And Unprofitable
Transactions."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement amends the accounting for
derivatives and hedging activities effective for fiscal years beginning after
June 15, 1999. We have not historically engaged in hedging activities to
mitigate foreign currency risk. In the event that we engage in hedging
activities in the future, SFAS No. 133 may have an impact on the accounting
treatment of these hedging activities.
IMPACT OF THE YEAR 2000 ISSUE
Many institutions around the world are currently reviewing and modifying their
computer systems to ensure that they are Year 2000 compliant. The issue, in
general terms, is that many existing computer systems and microprocessors with
date functions use only two digits to identify a year in the date field with the
assumption that the first two digits are always "19". Consequently, on January
1, 2000, any computers that are not Year 2000 compliant may read the year as
1900. The failure to correct any computers that calculate, compare or sort using
the incorrect date could result in system failures or malfunctions causing
disruptions of operations, including a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
50
Our computerized production and sourcing systems are not reliant on
date-sensitive information. We are working to resolve the potential impact of
the Year 2000 on the ability of our computerized financial information systems
to accurately process date-sensitive information. We engaged Arthur Andersen &
Co. to conduct an analysis of our financial information processing systems to
determine whether we are Year 2000 compliant. Based on their study it was
determined that we will have to upgrade, modify or replace portions of our
financial systems to make them Year 2000 compliant. All related software has
been installed and testing and training are expected to commence shortly. We
plan to complete the modifications and replacements necessary to correct those
systems prior to September 30, 1999. In the event that we fail to correct our
computerized financial information systems prior to December 31, 1999, we will
out-source appropriate aspects of our financial systems and manually execute any
functions we retain. We will implement standardized financial controls and
back-office functions of Diversified Apparel, Global Sourcing Network,
Components and Windsong and hope to resolve all Year 2000 issues with regard to
these acquired businesses at the same time we resolve our own issues. We believe
that completing the program within the time-frame we have set will avoid any
adverse impact on our operating systems. We currently estimate that the total
cost of implementing our Year 2000 program will be approximately $200,000, of
which $160,000 had been spent as of March 31, 1999. We believe, however, that
such Year 2000 compliance costs, including the possible costs relating to
outsourcing appropriate aspects of our financial systems, will not have a
material adverse impact on our financial condition. Year 2000 compliance costs
are expected to be funded from our working capital.
During 1997, MS Pietrafesa, L.P. initiated formal communications with its
customers to determine the business risk to it related to customer Year 2000
compliance issues. Communications with other third parties, such as suppliers,
commenced in 1998. The majority of our customers and suppliers have responded
positively to our Year 2000 inquiries. Contingency plans are in the process of
being formalized with customers and suppliers to assure the continuance of
business. We believe the majority of our customers and suppliers will be Year
2000 compliant and that any non-compliant customers or suppliers would have
minimal impact on our business. In the event that any of our customers or
suppliers are not Year 2000 compliant, we will implement manual processes to
minimize the impact on our business. The founders of Diversified Apparel, Global
Sourcing Network, Components and Windsong have initiated formal communications
with their customers and other third parties to determine their business risks
related to Year 2000 compliance issues. Our failure, the failure of such
founders or the failure of third parties with which we do business or upon which
we rely, to address Year 2000 compliance issues in a timely manner could have a
material adverse effect on our business, results of operations and financial
condition.
51
BUSINESS
GENERAL
The Pietrafesa Corporation develops and manages men's dress apparel programs for
proprietary and third party brands. Our brand development and management
programs include comprehensive design, merchandising and sourcing services for
apparel covering a broad range of price points and products, including suits,
sport jackets, dress shirts, woven sport shirts, casual pants, knitwear,
neckwear and topcoats.
We have been a contract manufacturer for branded tailored clothing since 1922
and started producing directly for large retailers after entering into a
contract with Brooks Brothers in the 1970s. As a result of this experience, we
have identified and responded to two significant apparel industry trends.
o Private label apparel represents an increasing percentage of total
men's apparel sales; and
o Retailers are concentrating more business with fewer suppliers to
achieve greater efficiency in merchandising, purchasing and inventory
management.
By capitalizing on these trends, we believe that we are positioned to best
address the men's dress apparel needs of national retailers and to increase our
market share across all price points and distribution channels.
One of our key strengths is the ability to satisfy our customers' cost, quality,
construction and delivery requirements through a worldwide network of third
party manufacturers. This capability is referred to as sourcing.
INDUSTRY OVERVIEW
Retail sales of men's apparel in the United States in 1998 were approximately
$54 billion in sales, an increase of 6.8% over the prior year, as compared to
retail sales increases of 3.7% in women's apparel and 4.7% in all apparel. The
following important trends in the apparel industry have redefined the manner in
which our business must be conducted:
Private label apparel represents an increasing percentage of total men's apparel
sales. Based upon our 1998 sales and the announced store opening plans of our
customers, we believe that there is an increased consumer acceptance of and
demand for high quality, private label apparel such as that sold by Brooks
Brothers and Jos.A.Bank. Private label apparel bears the retailer's own name or
a brand name exclusive to the retailer.
Retailers are concentrating more business with fewer suppliers to achieve
greater efficiency in merchandising, purchasing and inventory management. Many
larger retailers are concentrating more business with fewer suppliers to achieve
greater efficiency in distribution and quality control, to reduce the retailers'
merchandising costs and to ensure that their most important requirements are
satisfied with reliable and financially stable organizations. Retailers are also
requiring higher levels of service from all suppliers, such as operating through
network computer systems through which retailers electronically submit purchase
orders, receive invoices and pay bills, maintaining strict quality control
procedures, creating a system for maintaining inventories of private label
products at specified levels, as well as placing size and price information on
products and shipping to the retail outlet. We believe that many
merchandising/sourcing businesses, however, lack the systems, capital or scale
to comply with the increasingly strict demands of larger retailers.
Specialty Chains are Achieving Strong Sales Growth. Over the last five years,
sales of clothing by chain retailers and high-end specialty chains, many of
which sell private label brands primarily or exclusively, have grown
significantly due to both new store openings and comparable store sales
increases. In 1998, specialty chains reported dollar increases in sales of men's
clothing of 6.5% and captured 10.5% of all dollars spent on men's clothing. This
growth is evidenced by the growth of men's apparel retailers such as The Men's
Wearhouse and Today's Man and the publicly announced national store opening
plans of Brooks Brothers and Jos.A.Bank.
BUSINESS STRATEGY
Our business strategy is to become the global leader in developing and managing
branded men's apparel products for major retailers and for companies that
license independent brands by offering:
52
o the ability to develop collections of men's apparel that are
customized to each retailer's quality, composition, styling and other
needs. The collections we develop span styles ranging from the
traditional tailored look of Saville Row to FUBU's urban contemporary
look, at a full range of price points;
o the lowest available cost for each product line, by using third party
manufacturers throughout the world to satisfy the specifications,
country of origin and delivery requirements of each customer. Unlike
traditional clothing manufacturers, this strategy permits us to seek
the best manufacturer worldwide for a specific product at the lowest
marginal cost, and minimizes our investments in plant and equipment;
o valuable services such as design and merchandising services,
statistical quality control and inventory management, which permit
major retailers to achieve greater efficiency by outsourcing many
aspects of their private label product offerings;
o technological innovations, such as interactive sales software and
inventory management and replenishment systems, that enable us to
compress delivery schedules and better manage product selection for
our customers; and
o the scale and financial stability required of vendors by major
retailers in connection with long-term supply arrangements.
We believe that our business strategy is unique in its focus on the constantly
changing merchandising and sourcing needs of retailers. By contrast, our
competitors continue to emphasize product lines and sourcing options that are
tied to the capabilities of their own manufacturing facilities.
GROWTH STRATEGY
We believe that our business strategy will create numerous growth opportunities.
The principal components of our growth strategy are to:
o achieve greater penetration among our existing customers. In
particular, we believe that our ability to develop a broad range of
product lines, as well as our sophisticated services, scale and
financial stability, will result in increased sales to our existing
customers;
o develop new customer relationships by aggressively marketing our
capabilities. We believe that our development of such new
relationships will be enhanced by the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, each of which
have unique customer relationships;
o acquire, develop and license brands in order to leverage our existing
merchandising and sourcing capabilities. We believe that licensed
brands such as Alexander Julian, FUBU, the Greg Norman Collection and
DKNY and acquired brands such as Pivot Rules have significant growth
potential and will complement our private label business;
o expand internationally by offering our merchandising/sourcing services
to foreign retailers. We believe that our strong global sourcing
relationships, along with our merchandising and production expertise,
position us to capitalize on the fundamental dynamics of the menswear
market in Europe both through securing foreign retailers as customers
in Europe and through participation in global distribution
arrangements involving merchandise supplied to our customers; and
o grow revenues through selective acquisitions. Our acquisition strategy
is to identify and acquire leading merchandising/sourcing companies
that specialize in specific menswear products and specific quality or
price segments. In addition to increasing revenues, these acquisitions
will increase the range of products, price points and sourcing options
available to our customers and add new customers. We believe this will
lead to significant opportunities to sell products to, and source
products for, customers of one business unit that were previously sold
to or sourced for customers of another business unit, thereby
increasing the value of each customer and sourcing relationship.
53
ACQUISITION STRATEGY
We believe that the merchandising and sourcing industry is highly fragmented.
Our growth strategy includes selective strategic acquisitions within this
industry that expand and complement our product lines and sourcing and
distribution capabilities. Major elements of our acquisition strategy include:
o identifying and acquiring leading merchandising and sourcing companies
that specialize in specific menswear products and specific quality or
price segments, in order to increase the range of products, price
points and sourcing options available to our customers and to add new
customers;
o including in each acquisition, when possible, incentives for the
sellers of each acquired business that are realized only if the
acquired business meets or exceeds growth and profitability targets
subsequent to the closing of the acquisition, including by
conditioning payment of a substantial portion of the purchase price on
the achievement of such targets for several years;
o allowing newly acquired businesses to operate as an independent
operating unit, while holding each accountable for its profitability,
utilization of capital and overhead; and
o improving and standardizing financial controls, quality control
practices and back-office functions of each acquired business. We will
eliminate duplicative operational facilities, such as leased office
and warehouse space and personnel, whenever possible.
We believe that many of our potential acquisition candidates are unable to fully
serve the needs of their customers or effectively market product lines developed
for one retailer to other customers. We believe that these limitations are often
due to their narrow product offerings, limited systems expertise, capital
constraints and lack of an industry-wide reputation. Our acquisition strategy is
intended to address these limitations and to provide acquisition candidates with
a compelling opportunity to leverage their existing customer base and to build
new customer relationships. Our acquisition strategy offers each candidate:
o the opportunity to be a part of a diversified apparel products
company, thereby enhancing the candidate's competitive position in its
particular product segment through an expansion of distribution
channels and improved production and distribution capacities;
o greater purchasing power of raw materials and other supplies and
services, and other economies of scale;
o enhanced financial strength and visibility as part of a public
company;
o the opportunity for its management to remain involved in, and to
profit from, future operations; and
o an opportunity for liquidity through the receipt of cash or
securities.
See "Risk Factors--Risks Relating To Our Acquisition Strategy And Future
Acquisitions" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Significant Acquisitions."
54
PRODUCTS
We produce high quality men's tailored clothing, trousers, outerwear, sportswear
and accessories across a variety of fashion directions, price points and
distribution channels. We focus primarily on developing a style for each private
label or licensed product line that is distinctive to the relevant brand, yet
not susceptible to fashion obsolescence. Key fabrics include 100% wool, camel
hair, cashmere, silk, cotton and linen. Key fabric constructions include 100%
mechanical stretch, 4-ply worsteds, storm proof wovens and worsted camel hair.
The table below sets forth our sales by product category, expressed as a
percentage of net revenue.
For the
Year Ended
December 31,
1997 1998
----------- -----------
Sport shirts 28.4% 38.2%
Men's suits 33.6 25.7
Men's sport jackets 13.5 14.0
Suit separates (trousers) 7.9 7.9
Outerwear 4.2 5.1
Suit separates (jackets) 4.4 4.8
Women's tailored 3.4 2.3
Dress shirts 1.3 1.1
Other 3.3 0.9
------ ------
100.0% 100.0%
====== ======
Our design staff examines domestic and international trends in the apparel
industry to determine trends in styling, color, consumer preferences and
lifestyle. Virtually all of our products are designed by our in-house staff,
utilizing computer-aided design technology, through which we can quickly
generate samples in response to customer input. The use of computer-aided design
technology minimizes the time and costs associated with producing sewn samples
prior to production and allows us to create custom designed products meeting the
specific needs of each customer.
DISTRIBUTION CHANNELS, CUSTOMERS AND SALES AND MARKETING
Distribution Channels and Customers. We market our products across all major
apparel retail channels. Because we market private label products designed
specifically for each of our customers, our sales are not constrained by
competition among our customers.
We supply product to national chains, high-end specialty chains, value-priced
retailers and department stores. Our six largest customers in 1998 were Sam's
Club, S&K Famous Brands, Brooks Brothers, Jos.A.Bank, Polo Retail and Dillards.
Combined sales to these six customers represented approximately 67% of net
revenue during 1998. Sales to our six largest customers in 1997 represented
approximately 60% of our net revenues in 1997. See "Risk Factors--We Generate A
Significant Percentage Of Our Revenue From A Limited Number Of Customers."
We derived our net revenues from the following distribution channels:
For the Year Ended
December 31,
1997 1998
----------- -------------
Mass Merchandise Chain 37.2% 37.7%
National chain 16.7 22.9
Department store 14.5 16.2
High-end specialty chain (1) 19.0 13.3
Other 12.6 9.9
------ -------
100.0% 100.0%
====== =======
----------------------------
(1) Includes net revenues from single location high-end specialty stores of
1.8% for 1997 and 1.9% for 1998.
55
Sales and Marketing. In contrast to traditional apparel companies, which attempt
primarily to sell customers product that they manufacture, we apply our sourcing
relationships and contacts and our ability to provide sophisticated design, raw
material procurement, merchandising, statistical quality control and other
services to solve customer problems and/or create new retail opportunities for
our customers. We believe that this consultative approach to sales and marketing
results in long-term relationships with successful retailers.
Our flexibility in sourcing products does not restrict us to offering solutions
that are dependent on our manufacturing capabilities. Our consultative approach
to sales and marketing has evolved over the last decade, and involves providing
both products and services. For example, in 1991 MS Pietrafesa, L.P. analyzed a
manufacturing facility owned by a major national retailer, and we concluded that
there were structural barriers that precluded that facility from ever becoming
an efficient manufacturing source. We proposed closing the facility and moving
the relevant production to our Liverpool facility, where production lines were
established specifically for that product. In 1994, MS Pietrafesa, L.P.
performed a similar analysis for a major brand, resulting in the closure of the
brand's manufacturing facility and the sourcing of its product between the
Liverpool facility and two other contractors. Most recently, MS Pietrafesa, L.P.
assisted a national chain in phasing out its manufacturing division and its
exclusive reliance on its in-house merchandisers.
We assign each of our major customers their own sales teams -- which include
design, specification, quality control and sales administration personnel --
focused on the needs and requirements of that particular customer. In order to
maintain exclusivity for each customer, all products remain unique to their
respective sales team. On a seasonal basis, merchandising concepts, including
exclusive or special fabrics, model enhancements and marketing ideas, are
presented to customers. When a customer adopts one of our merchandising
strategies, that strategy is executed exclusively for that customer unless
otherwise agreed.
MERCHANDISING TECHNOLOGY
Systems Expertise. We continually develop new systems, services and production
methods that make buying from us more attractive to retailers. We generally use
computer-aided design systems to develop products and program fabric cutting for
all products to ensure color consistency and maximize material yield. We employ
a proprietary system to insure consistency of products among production
facilities. In addition, our interactive system for ordering, invoicing and
payment significantly enhances customer order execution and inventory tracking.
All such systems are intended to enhance customer profitability and loyalty. In
addition, our sales forecasting, production planning and logistics and inventory
management are performed on systems that are unique to us.
Made-to-Measure Software. In November 1998, we launched a point-of-sale
made-to-measure system at two retail stores and introduced the system in five
Brooks Brothers stores in the first quarter of 1999. This system, which uses
software developed exclusively by us, offers retailers the opportunity
simultaneously to electronically capture a customer profile and a
made-to-measure suit order, automatically alter a standard computer-aided design
pattern based on the customer's measurements, and is intended to deliver a
custom suit to the customer in less than four weeks.
PRODUCT SOURCING, RAW MATERIALS SOURCING AND MANUFACTURING
Product Sourcing. During 1998, approximately 72% (by sales dollar volume) of our
products were outsourced worldwide to over 50 independent manufacturers.
Further, 66% (by sales dollar volume) of our products were produced outside the
United States in 1998, principally in Italy, the Dominican Republic, Mexico,
Eastern Europe and the Far East. No manufacturer accounted for more than 10% of
our total production in 1998. We monitor our selection of independent factories
to attempt to minimize the instances in which one manufacturer or country is the
source of a disproportionate amount of our merchandise. These manufacturers are
selected, monitored and coordinated by our employees located in regional offices
to assure conformity to strict quality standards. We believe the use of
dedicated sourcing personnel rather than independent agents reduces our sourcing
costs and cycle times. Personnel who are focused narrowly on our interests are
more responsive to our needs than independent agents would be, and are more
likely to build long-term relationships with key vendors. We believe that the
use of these independent manufacturers increases our production capacity and
delivery flexibility, reduces our costs and allows us to match each of these
criteria to specific customer needs. See "Risk Factors-- Our Foreign Sourcing Of
Products Exposes Us To Delays In Production And Increased Costs."
56
We have long-standing relationships with our most important independent
manufacturers. In a number of cases, we are the largest customer of our
independent manufacturers, providing as much as 50% of such manufacturers'
annual order volume (by unit). As a result, we are able to pass through to our
customers the benefits of the significant leverage we have with such
manufacturers and the resulting production, delivery and cost flexibility. For
many of our lower priced products, we have established numerous alternative
manufacturing sources. As a result, production of such products can be placed on
the most competitive delivery and price terms on a season-by-season basis, and
significant dependence on single manufacturers of such products is minimized. We
believe that our sourcing relationships enable us to offer our customers
valuable brand management services, including risk reduction achieved through
decreasing reliance on particular product sources.
Raw Materials Sourcing. We obtain our raw materials, which include fabric,
linings, thread, buttons and labels, from domestic and foreign sources based on
quality, pricing, customer requirements and availability. Our principal raw
material is fabric, including woolens, cashmere, camel hair, silks, linen,
cotton and blends of wool with other fibers, as well as thread, trim and
labeling and packaging materials. Whenever practicable, fabric is procured by
our contract manufacturers directly but in accordance with our specifications,
thus reducing capital employed by us in work-in-process inventory. For some of
our product offerings, we select fabric suppliers to jointly develop fabric for
our exclusive use. In order to assure quality control, we send samples of all
new fabrics to laboratories in order to test their sewing characteristics. For a
significant portion of the products we sell, the customer or manufacturer
purchases the raw materials. A substantial portion of these purchases are
denominated in U.S. dollars. We purchased 54% (by dollar value) of our total
fabric requirements in 1998 from two suppliers. No other supplier accounted for
more than 10% of our purchases. As is customary in our industry, we do not have
long-term contracts with our suppliers. We believe that there are alternative
sources of supply available to satisfy our raw material requirements. See "Risk
Factors--Our Margins Could be Affected By Fluctuations In Price And Availability
Of Raw Materials."
Manufacturing. We have over 75 years of experience as a leading domestic
manufacturer of premium tailored clothing. As a result, unlike many of our
small, entrepreneurial competitors, we have the expertise to offer retailers
private label services that include styling developments, quick replenishment,
statistical quality control, delivery reliability and systems integration that
are competitive with the largest domestic manufacturers. In addition, we believe
that we can improve retailer margins by leveraging our experience in
manufacturing technology. In particular, we believe that our fabric-maximizing
manufacturing technology, our unit production process, and "just-in-time"
inventory and distribution management systems, which reduce customers' working
capital costs by lowering stocking and warehousing requirements, will lower raw
material and inventory costs, and result in better customer order fulfillment.
In 1998, approximately 28% of our products (by sales dollar volume) were
produced at our manufacturing facility, located in Liverpool, New York, and at
two facilities in Baltimore, Maryland. The Baltimore facilities are operated by
SourceOne, L.L.C., a subsidiary of the general partner of MS Pietrafesa, L.P.
See "Certain Relationships and Related Transactions." Our business and growth
strategies focus on growth through worldwide sourcing and diminished reliance on
manufacturing facilities owned and operated by us. See "Risk Factors-- Our
Foreign Sourcing Of Products Exposes Us To Delays In Production And Increased
Costs."
SourceOne took over operation of the Baltimore facilities in April 1998. We are
not financially liable, or otherwise obligated, for any overhead or other
operating expenses or liabilities of the Baltimore facilities. We source
approximately one-third of our production for Jos.A.Bank with SourceOne pursuant
to a subcontractor agreement. Under that agreement, SourceOne is paid based on
the production costs of the agreement, without mark-up. None of our employees
receive additional compensation from SourceOne. The Baltimore facilities were
formerly operated by Jos.A.Bank. As part of its announced plan to phase out its
domestic manufacturing operations and focus on a publicly announced national
five-year store opening plan, Jos.A.Bank sought our assistance in executing this
plan. SourceOne was established to ensure an orderly continuation of the
operations of the Baltimore facilities, without exposing us to any associated
overhead or other operating liabilities. SourceOne is obligated to operate the
Baltimore facilities through February 2000. In addition, SourceOne's obligations
are contingent on Jos.A.Bank satisfying its minimum order commitments to us for
the corresponding period.
Quality Control. As of March 1, 1999 we had eight quality control personnel in
three foreign centers, as well as four additional inspectors for U.S. and
Caribbean based manufacturing contractors. In addition, as of such date, we had
nine people in our headquarters facility overseeing and coordinating global
quality control standards and efforts. We believe our quality control program is
an important component of our private label and licensed brand product
capabilities.
57
Our quality control program is designed to ensure that our products meet high
quality standards. This program is based on the "green seal/black seal" process
to ensure that all garments we source or produce meet specifications and
original expectations for the production of such garments. Before a new product
order is placed, an exact sample garment is sent to the customer. Upon customer
approval, a "green seal" tag is placed on the garment to indicate acceptance by
both us and the customer and to provide a standard for future reference. Prior
to shipping the first production unit of the green sealed product, a size run
from the order is shipped to the customer for "black seal" approval. If the
items sufficiently match the "green seal" garment, "black seal" approval is
given, and the balance of the order is completed and distributed.
We also monitor the quality of fabrics and inspect each roll before production
runs are commenced. We perform in-line inspections during and after production
before garments leave the factory. Our quality control personnel visit most of
our independent manufacturers' facilities at least once every two weeks.
Delivery and Customer Orders. In most cases, our independent manufacturers are
at risk for the quality and timely delivery of the products. Our international
production requirements are financed with letters of credit or under open credit
terms. Whenever possible, we push related financing requirements down to our
contractors, matching payment terms to the contractor with payment terms from
our customers. This minimizes inventory financing and keeps the contractors
vested in the process.
We transact business on an order-by-order basis and do not maintain any
long-term or exclusive commitments or arrangements to purchase from any vendor
other than SourceOne in respect of minimum product quantities for Jos.A.Bank. We
receive most of our customers' orders prior to placing our manufacturing orders,
except in instances where our customers have agreed to purchase specific amounts
of products in order to maintain desired inventory levels on a continuing basis.
OPERATING UNITS
Upon the consummation of the offering, our operations will be divided into five
business units: the Pietrafesa Unit, the Windsong Unit, the Components Unit, the
Global Sourcing Network Unit and the Diversified Apparel Unit. Each of our
current business units operates, and it is intended that each new business unit
will operate, as a separate unit accountable for its own profitability,
utilization of capital and overhead. Each business unit's operations will
conform to our standardized financial controls, quality practices and
back-office functions.
The following table summarizes the percentage of our 1998 net revenues
attributable to each operating business unit on a pro forma basis giving effect
to the acquisition of Diversified Apparel, Global Sourcing Network, Components
and Windsong as of January 1, 1998.
Percentage of Pro Forma
Combined Net Revenues
Business Unit 1998
-------------
Windsong 39.5%
Pietrafesa 35.2
Components 12.4
Global Sourcing Network 11.2
Diversified Apparel 1.7
-------
Total 100.0%
=======
The Pietrafesa Unit, our oldest unit, merchandises, sources and manufactures
tailored clothing, including suits, suit separates, sport coats, dress trousers
and formal wear. The Pietrafesa Unit consists primarily of a Men's Division
which is headed by Joseph J. Pietrafesa II, the brother of our Chief Executive
Officer. Mr. Pietrafesa joined the predecessor of MS Pietrafesa, L.P. in 1979 as
Director of Sales, becoming Vice President of Sales and Merchandising when MS
Pietrafesa, L.P. was formed in 1990. For the years 1993 through 1996 Mr.
Pietrafesa served as President of our Polo Clothing Unit. The Pietrafesa Unit
also operates a Women's Division. The Women's Division is headed by Alisa
Rothstein, who joined MS Pietrafesa, L.P. in October 1991 as President of the
Women's Division. Ms. Rothstein is responsible for product design,
merchandising, and marketing of all products promoted by this Division. Prior to
joining MS Pietrafesa, L.P., Ms. Rothstein spent eight years as President of
Pincus Brothers-Maxwell's women's unit.
58
The Windsong Unit is a large supplier of designer label and private label
sportswear to departments store, specialty store and mass merchandise chains.
This unit will be headed by Joseph Sweedler with whom we will enter into a five
year employment contract upon the consummation of the offering. See
"Management." Windsong supplies knit shirts at retail price points from $28 to
$75, woven shirts from $35 to $65 and sweaters from $55 to $150 to customers
that include major retailers such as Belk, Dillards and Sam's Club. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Significant Acquisitions."
The Components Unit merchandises and sources tailored clothing, as well as
sportswear, dress shirts, neckwear, topcoats and casual slacks in Italy. This
unit will be headed by John McCoy with whom we will enter into a six year
employment contract upon the consummation of the offering. Customers of
Components are the highest tier retailers including Bergdorf Goodman, Saks Fifth
Avenue, Brooks Brothers and Sulka, at retail price points from $695 to $3,000
for men's suits, $125 to $400 for dress shirts and $65 to $95 for silk neckwear.
Mr. McCoy founded Components in 1985 after spending three years as an
independent sales representative for a variety of imported apparel lines. Mr.
McCoy served as President of Fitzgerald, Inc., a men's clothing unit of Warren
Sewell, for the years 1977 through 1979, and a unit of the Palm Beach Company
for the years 1979 through 1982. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations--Significant Acquisitions."
The Global Sourcing Network Unit designs and imports men's suits. This unit is
headed by Peter Lister with whom we have entered into a five year employment
contract. Using manufacturers in Slovakia, the Czech Republic, Bulgaria,
Moldova, Indonesia, the Philippines, India and China, Global Sourcing Network
contracts for the production and delivery of men's suits. In all cases, Global
Sourcing Network takes ownership of products while in transit, but ships
directly to customers against firm orders. Global Sourcing Network's largest
customer is S & K Famous Brands. Typical retail price points are $99 to $295 for
men's suits. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations--Significant Acquisitions."
The Diversified Apparel Unit merchandises and sources apparel, including lower
to mid-priced suits and dress shirts, to value-priced apparel retailers. This
unit is headed by Jarrod Nadel with whom we have entered into a five year
employment contract. Using manufacturers in the United States, Italy, the
Dominican Republic and Korea, Diversified Apparel merchandises a specific
product around a customer's need and executes the production and delivery,
typically on a commission basis without owning inventory. Customers of
Diversified Apparel include The Men's Wearhouse, Bloomingdales, S & K Famous
Brands, K & G Men's Center, Bachrach and Filene's Basement. Typical retail price
points are $195 to $495 for men's suits and $29.95 to $39.95 for dress shirts.
Mr. Nadel founded Diversified Apparel in 1994 as a full service sourcing,
merchandising and design company with offices in New York City and in Italy.
Prior to 1994, Mr. Nadel spent two years as Director of Sourcing for After Six
Ltd. For the years 1988 to 1992, Mr. Nadel served as Vice President of Sales and
Merchandising for the Pierre Balmain Division of Capital Fashions Corporation.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Significant Acquisitions."
IMPORTS AND IMPORT REGULATIONS
We presently import garments under four separate scenarios having distinct
customs consequences: (1) imports of finished goods mostly from the Pacific Rim
and the Middle East; (2) imports from the Caribbean Basin and Central America;
(3) imports from Mexico and Canada; and (4) imports from Europe.
For direct importations, mostly from the Pacific Rim and the Middle East,
imported garments are normally assessed with customs duties at "most favored
nation" tariff rates. The tariffs for most of the countries from which we
currently import or intend to import have been set by international negotiations
under the auspices of the World Trade Organization and implemented into U.S.
law. These tariffs generally range between 17% and 35%, depending upon the
nature of the garment, such as shirt or pants, its construction and its chief
weight by fiber. Currently, the only countries not enjoying "most favored
nation" treatment are Afghanistan, Cuba, Laos, North Korea, and Vietnam.
In addition to tariffs, merchandise from virtually all of the countries from
which we import is also subject to bilateral quota restraints, pursuant to U.S.
domestic law or the Multi-Lateral Agreement on Textile and Clothing, which
exists under the auspices of the World Trade Organization. Most bilateral quotas
are negotiated on a calendar year basis. After the United States and a
particular country agree to a particular level of exports in a particular quota
category (for instance, wool men's suits), the country that receives the quota
has the right to determine the method by which such quota is assigned to its
manufacturers. Some jurisdictions, such as Hong Kong, have a free market under
which quotas are bought and sold. Most countries, however, assign it to the
factories that actually produce the garments. Shipments which are exported to
the United States must, in addition to the usual commercial documentation, have
appropriate and official textile visas, in either an electronic or paper format,
which confirm their quota status. This documentation must be filed prior to the
admission and clearance of the merchandise into the United States.
Accordingly, we usually demand that this paperwork be submitted prior to
payment.
59
We also import garments from countries in the Caribbean Basin and Central
America, most notably the Dominican Republic and Costa Rica. Although
merchandise imported from these jurisdictions is potentially subject to tariffs
and quotas of the kind described for Far Eastern importations, there are special
programs which provide for reduced tariffs for some merchandise sourced from the
Caribbean Basin and Central America. The principal program is the so-called
"807" program. Under this program, merchandise described by tariff subheading
9802.00.80, Harmonized Tariff Schedule ("HTS"), is admitted into the United
States with a substantial tariff reduction when the standards of subheading
9802.00.80 are met. Specifically, in qualifying circumstances, the provision
exempts from collection that duty which would be based on the value of exported
U.S. components assembled into a product in a foreign jurisdiction which is
subsequently re-imported into the United States. In essence, the duty reduction
is equal to the duty that would otherwise be assessed on the value of the
components incorporated into these assembled goods plus southbound international
freight and insurance. For apparel products, such U.S. components normally
consist of cut-to-shape U.S. fabric parts, finishing and trim, such as buttons
or thread.
In addition, if the fabric which is cut to create the cut component parts is
also knitted, woven or formed in the United States, there is a special program
which provides for more liberalized access to the U.S. marketplace. This program
is applicable only to some Caribbean Basin, Central American and northern Latin
American countries which have signed special agreements with the United States
known as Guaranteed Access Level ("GAL") agreements. Under these agreements,
qualifying products, known in the trade as "807A" or "Super 807" or GAL
products, are eligible to enter the United States free of any quota restraints.
Accordingly, a country such as the Dominican Republic would have the normal
advantages of the "807" process, as well as the advantages of the GALS program
if the GAL standards are met. We produce a significant amount of garments that
qualify for one or both of these particular programs. In circumstances where
garments qualify for both preferences, i.e., "807" and "807A," the merchandise
is accorded both substantial and significant quota and tariff advantage over
Pacific Rim, Middle Eastern or non-qualifying Western hemisphere goods.
We also import finished goods from Mexico and Canada under the North American
Free Trade Agreement, commonly known as NAFTA. Under NAFTA, merchandise which
qualifies, is accorded reduced or duty-free access, depending upon the type of
merchandise involved. For many garments, the key requirement for NAFTA
qualification is that the yarn, cloth, cut, sew and finish of the garments all
take place within North America. This is commonly known as the "yarn-forward
rule," which is a general guideline, not a legal rule. Merchandise qualifying
under NAFTA enters the United States at a preferential or at a zero rate and is
not subject to any quota.
In addition to our imports eligible for entry under the NAFTA program, some
imports made by us are also subject to a tariff preference which was created and
enacted as part of the NAFTA-enabling legislation. This tariff provision,
subheading 9802.00.90, HTS, provides for immediate duty-free entry into the
United States from Mexico of garments made from components which are cut to
shape in the United States from U.S. knit, woven or formed cloth. Such articles
enter quota-free. This duty-free, quota-free entry would be available for
articles produced in Mexico from U.S. components cut from U.S. knitted/woven
fabric. This merchandise, therefore, has an even more favorable treatment than
merchandise being imported from the Caribbean Basin. We currently import a
limited amount of such merchandise from Mexico.
Finally, non-NAFTA qualifying goods may be imported from Mexico. As noted, this
merchandise could be imported with reduced duties under the 807 program, as well
as under special tariff rate quotas called "TPLs." Otherwise, it is subject to
full "most favored nation" duty. Such merchandise may also be subject to Mexican
quotas which are effective for some products until 2004.
COMPETITION
The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers and a
larger number of specialty manufacturers, including brand name and private label
producers. We have the ability to compete with internal product development and
sourcing capabilities of retailers. Our products also compete with a substantial
number of designer and non-designer product lines. Some of our competitors and
potential competitors have greater financial, manufacturing and distribution
resources than our resources. We believe that we compete favorably based on the
quality and value of our programs and products, price, the production
flexibility resulting from of our cutting and sourcing network, and the
long-term customer relationships we have developed. See "Risk Factors--We May Be
Unable To Compete In The Highly Competitive Apparel Industry."
INTELLECTUAL PROPERTY
In connection with the Windsong acquisition, Windsong's exclusive license to the
"Colours by Alexander Julian" trademark will be assigned to us. The Alexander
Julian license covers sales of sport shirts, knit shirts and sweaters in the
United States. The initial term of the Alexander Julian license agreement will
terminate on December 31, 2001, but if our net sales of specified items of
"Colours by Alexander Julian" apparel exceed a specified sales target for the
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twelve-month period ending December 31, 2000, we will have the option to extend
the term of the Alexander Julian license agreement until December 31, 2006.
Windsong's sales of such apparel were substantially in excess of this sales
target in 1998. We will be obligated under this license to make annual minimum
payments to Alexander Julian, Inc., as well as royalty payments based on net
sales of Colours by Alexander Julian apparel. The Alexander Julian license
represents 27% of our pro forma combined revenues and 24% of our pro forma
combined net income for 1998.
Our exclusive sublicense of the FUBU trademark covers the sale of men's tailored
clothing and specified accessories in the United States and Canada. The FUBU
sublicense will terminate on June 30, 2004. We are entitled to renew the FUBU
sublicense for an additional five-year term if our net sales of sublicensed
products exceed a specified target during the twelve months preceding our
sending of a renewal notice. We will be obligated under the FUBU sublicense to
make royalty payments based on net sales of FUBU apparel.
In connection with the Components acquisition, Components' nonexclusive
sublicense to the DKNY trademark covering the sale of overcoats in the United
States, Canada, Mexico and the Caribbean will be assigned to us. The initial
term of the DKNY sublicense agreement will terminate on December 31, 2000, but
if our net sales of specified items of DKNY apparel as of June 30, 2000 exceed a
specified target in connection with the Fall/Winter 1999 and Spring/Summer 2000
seasonal collections, we will have the option to extend the term of the DKNY
license agreement until December 31, 2002. We will be obligated under this
sublicense to make annual minimum payments, as well as royalty payments based on
net sales of DKNY apparel.
Our exclusive license of the Greg Norman collection trademark covers the sale of
men's tailored clothing in the United States and Canada. The Greg Norman
collection license will terminate on December 31, 2004, but we will have the
right to elect two three-year extensions so long as we obtain minimum sales
targets and make minimum royalty payments. We will be obligated under the Greg
Norman collection license to make royalty payments based on net sales of Greg
Norman collection apparel.
Although we have applied for a number of registered U.S. trademarks, including
the Pietrafesa name and the Pivot Rules brand name, such trademarks do not
represent a material asset of ours. In addition, we own the software used in our
point-of-sale made-to-measure programs. We have the exclusive right to use the
Polo trademark on tailored clothing subject to a license agreement. We are not
required to pay any royalties under this license agreement, which will expire in
June 1999.
PROPERTIES
We own our corporate headquarters, principal manufacturing facility and
warehouse facility, all of which are located in Liverpool, New York. Such
facilities are the subject of a lease and lease-back transaction with the
Onondaga County Industrial Development Authority, pursuant to which we received
a Payment In Lieu Of Taxes agreement which significantly reduced real estate
taxes on the facility, and fixed the assessment for a period of 18 years. Our
Liverpool facility is also subject to mortgages held by PNC and the UDC securing
indebtedness owed to such parties. See "Management's Discussion and Analysis of
Results of Operations--Liquidity and Capital Resources." During 1998, our
Liverpool facility operated at approximately 62.5% of space capacity and 75% of
current machine capacity. We also lease one retail store in Syracuse, New York,
at which we operate under the name Learbury Clothes. This store has been in
continuous operation since 1941. The Learbury lease expires in 2007. We also
maintain an office in New York City. The lease on this space commenced in 1994
and expires in August 2000.
Diversified Apparel, Global Sourcing Network, Components and Windsong each lease
office space in New York City and Windsong leases office space in Connecticut,
in each case to conduct administrative and sales operations. In addition,
Windsong leases warehouse space in New Jersey. None of these businesses own any
real property.
We believe that our existing facilities are adequate to meet our current and
foreseeable needs. We also believe our existing facilities are well maintained
and in good operating condition.
EMPLOYEES
As of March 1, 1999, we had 542 employees. Of the total, approximately 50 hold
executive and administrative positions, approximately eight are engaged in
design and merchandising, approximately 412 are engaged in production activities
such as marking, cutting and labeling, approximately 33 are engaged in sales,
approximately 18 are engaged in distribution and approximately 21 are engaged in
quality control. Approximately 70% of our work force is covered under collective
bargaining agreements, which expire in 2002. We have not experienced work
stoppages in the past and believe that our relations with our employees are
satisfactory.
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LEGAL PROCEEDINGS
From time to time, we are a party to litigation arising in the ordinary course
of our business. We are not currently a party to any litigation that, if
determined adversely to us, we believe would have a material adverse effect on
us.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of December 31, 1998 with respect
to the members of our Board of Directors and our executive officers:
[Enlarge/Download Table]
NAME AGE TITLE
---- --- -----
Richard C. Pietrafesa, Jr. (1)... 42 President & Chief Executive Officer, Director
Sterling B. Brinkley, Jr. (1).... 46 Chairman of the Board
Thomas A. Minkstein (1).......... 52 Chief Operating Officer, Director
Eugene R. Sunderhaft............. 51 Vice President - Finance, Chief Financial Officer,
Secretary, Treasurer
David McDonough.................. 35 Vice President - Business Development
Mark C. Pickup (2)............... 47 Director
Robert J. Bennett (2)(3)......... 57 Director
Paul M. McNicol (2)(3)........... 43 Director
------------------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
RICHARD C. PIETRAFESA, JR. -- has served as our President, Chief Executive
Officer and Director since June 1990. Mr. Pietrafesa is also a member of our
Executive Committee. Mr. Pietrafesa joined our predecessor in 1979 and became
Director of Operations in 1981. Over his 20 years in the men's apparel industry,
Mr. Pietrafesa has been awarded the U.S. Senate Medal for Productivity in 1984,
the Apparel Industry Magazine All Star Award in 1985 and again in 1991, the
Bobbin Magazine C.E.O. of the Year Award in 1994, and, along with his brother
Joseph J. Pietrafesa II, the President of the Pietrafesa for Men Unit, the Sales
and Marketing Association Award for Innovation in 1997. Mr. Pietrafesa earned an
honors degree in Economics and Government from Harvard College.
STERLING B. BRINKLEY, JR. -- serves as our Chairman of the Board of Directors
and as Chairman of our Executive Committee. Mr. Brinkley was a Managing Director
of Morgan Schiff & Co., Inc., one of the underwriters of this offering, for the
years 1986 to 1990. Since 1990, Mr. Brinkley has been a consultant to Morgan
Schiff. Prior to 1986, Mr. Brinkley was a Managing Director in the Corporate
Finance Department of Shearson Lehman Brothers, Inc. Mr. Brinkley is also
Chairman of the Board of Directors of EZCORP, Inc., a publicly-traded pawnshop
chain, and Friedman's Inc., a publicly-traded retail jewelry chain, and Chairman
of the Executive Committee of the Board of Directors of The Farm Journal
Corporation, a publisher of agricultural information. All three companies are
affiliates of The Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley also
serves on the boards of directors of various privately held companies that are
affiliates of The Pietrafesa Corporation and Morgan Schiff. Mr. Brinkley
received a B.A. from Yale University and an M.B.A. from the Stanford Graduate
School of Business.
THOMAS A. MINKSTEIN -- joined us in August 1998 as Chief Operating Officer and
Director. Mr. Minkstein is also a member of our Executive Committee. Prior to
joining us, Mr. Minkstein served for 10 years as Chief Operating Officer of
Empire Vision, a division of Highmark, Inc., and the thirteenth largest optical
retailer in the United States. In this position, Mr. Minkstein was responsible
for the operation of over 4,000 distribution points and six manufacturing
facilities throughout the United States, and managed that division's rapid
growth and earnings expansion through acquisitions and the operations of large
managed care programs. For the years 1973 through 1988, Mr. Minkstein held
various management positions with Frank's Nursery & Craft, a division of General
Host, a publicly-traded company.
EUGENE R. SUNDERHAFT -- joined us in August 1998 as Vice President - Finance,
Chief Financial Officer, Secretary, Treasurer. Prior to joining us, Mr.
Sunderhaft served for four years as Senior Vice President-Finance, Chief
Financial Officer and Secretary of The Penn Traffic Company, a publicly-traded
$3.2 billion retail, wholesale and manufacturing company, where he was
responsible for all accounting activities, treasury functions, strategic and
tactical planning, SEC compliance, investor relations and information
technology. For the years 1972 through 1993, Mr. Sunderhaft served P&C Foods, a
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subsidiary of Penn Traffic, in a variety of management positions including
controller for the years 1982 through 1989, and Chief Financial Officer for the
years 1989 through 1993. Prior to joining P&C, Mr. Sunderhaft was employed by
Ernst & Ernst, the predecessor of Ernst & Young LLP. Mr. Sunderhaft is a
graduate of the University of Dayton.
DAVID McDONOUGH -- currently serves as our Vice President - Business
Development. In this position, Mr. McDonough is responsible for financial and
structural analysis of all acquisitions, and implementation of consolidation
efficiencies and back office integration efforts. Mr. McDonough joined us in
January 1995 as Controller, and became Chief Financial Officer in 1996, a
position held until August of 1998. Prior to joining us, Mr. McDonough was Vice
President-Finance of Ferris Industries, a $14 million equipment manufacturer for
two years. Prior to that, Mr. McDonough was Corporate Finance Manager at CIS
Corporation, a publicly-traded company, where he worked for six years. Mr.
McDonough holds a B.S. in Economics from Cornell University.
MARK C. PICKUP -- serves as a Director and Chairman of our Audit Committee. Mr.
Pickup is also a director of EZCORP, Inc., Friedman's Inc. and The Farm Journal
Corporation, each an affiliate of ours and Morgan Schiff. Since 1995, he has
served as an independent business consultant with a variety of companies. Mr.
Pickup served as Vice Chairman of Crescent Jewelers, a privately-held retail
jewelry chain which is an affiliate of ours and Morgan Schiff, from December
1994 until February 1995, and served as President and Chief Executive Officer of
Crescent Jewelers from August 1993 to December 1994. From October 1992 until
August 1993, Mr. Pickup served as the Senior Vice President and Chief Financial
Officer for Crescent Jewelers. For more than five years prior to October 1992,
Mr. Pickup held various positions with the predecessors of Ernst & Young LLP,
leaving as a partner in its San Francisco, California office in October 1992.
Mr. Pickup received a B.S. in mathematics from Brigham Young University.
ROBERT J. BENNETT -- serves as a Director and as a member of our Audit Committee
and as Chairman of our Compensation Committee. Mr. Bennett is also Chairman of
the Board of M&T Bank Corporation, Vice-Chairman of the Board of Manufacturers
and Traders Trust Company and a director of Traders Mutual Life Insurance Co. He
also serves as Director for the Syracuse University School of Management, Crouse
Hospital, the Federal Home Loan Bank of New York, the Metropolitan Development
Association of Syracuse and Central NY, the Pan African Business Association and
the New York Bankers Association. Mr. Bennett was also the Chairman, President
and CEO of ONBANCorp, Inc. for the years 1987 until April 1998 when it merged
with M&T Bank Corporation. Mr. Bennett received his B.S. from Babson College and
his M.B.A. from the University of Massachusetts, Amherst, and holds a graduate
degree from the Harvard Business School Advanced Management Program.
PAUL M. McNICOL -- serves as a Director and member of our Audit and Compensation
Committees. Mr. McNicol is also Senior Vice President-Legal, Cendant
Corporation. For the years 1994 to 1996, Mr. McNicol served as Senior Vice
President-General Counsel of Six Flags Theme Parks, Inc. Mr. McNicol received
his B.A. from Harvard College and his J.D. from Fordham University School of
Law.
Our directors are currently elected annually, 25% by the holders of the Class A
Common Stock and 75% by the holders of the Class B Common Stock, to serve during
the ensuing year or until their respective successors are duly elected and
qualified. Officers serve at the discretion of our Board of Directors. For a
description of class voting rights see "Description of Capital Stock."
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors currently has three committees: (1) an Audit Committee;
(2) an Executive Committee; and (3) a Compensation Committee.
The Audit Committee is comprised of Messrs. Pickup, Bennett and McNicol, with
Mr. Pickup as Chairman. The Audit Committee recommends the independent
accountants appointed by the Board to audit our financial statements which
includes an inspection of our books and accounts. The Audit Committee reviews
with such accountants the scope of their audit and their report thereon,
including any questions and recommendations that may arise relating to such
audit and report or our internal accounting and auditing procedures.
The Executive Committee is comprised of Messrs. Pietrafesa, Minkstein and
Brinkley, with Mr. Brinkley as Chairman. The Executive Committee exercises the
authority of the Board, to the extent permitted by law, in the management of our
business between meetings of the Board. The Executive Committee of the Board
also serves as the nominating committee in connection with annual meetings of
stockholders.
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The Compensation Committee is comprised of Messrs. Bennett and McNicol, with Mr.
Bennett as Chairman. The function of the Compensation Committee is to review and
approve the compensation of executive officers and establish targets and
incentive awards under our incentive compensation plans.
COMPENSATION OF THE BOARD OF DIRECTORS
Sterling Brinkley, the Chairman of the Board and Chairman of our Executive
Committee, will receive fees of $100,000 per year. All other directors who are
not our current employees will receive an annual retainer of $10,000 payable
quarterly, plus an additional fee of $1,500 per meeting, and will be eligible to
receive stock option grants under our Stock Option Plan. See "--Stock Option
Plan." Committee members, other than Mr. Brinkley, who are not our current
employees will receive an additional fee of $500 for each committee meeting
attended. In addition, our directors may be eligible to participate in other
incentive arrangements from time to time.
We will reimburse directors for travel and other out-of-pocket expenses incurred
in connection with their services as directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To date, executive compensation has been determined by our Chief Executive
Officer. Upon completion of this offering, the Compensation Committee will make
all compensation decisions. No interlocking relationship exists between the
Board or Compensation Committee and the board of directors or compensation
committee of any other company.
COMPENSATION OF EXECUTIVE OFFICERS
The following table presents summary information concerning compensation that we
paid or accrued for services rendered in all capacities during the last three
years for our Chief Executive Officer, our other most highly compensated
executive officer and one additional individual who served as one of our
executive officers for a portion of the last completed year. With respect to the
persons and periods covered in the following table, we made no restricted stock
awards and had no long-term incentive plan pay-outs. Our contributions to our
401(k) retirement plan, as well as premium amounts paid for Mr. Pietrafesa's
life insurance benefits, are included under "All Other Compensation." 1998 bonus
amounts include payments related to performance in prior years
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
Annual Compensation
-------------------
All Other
Name and Principal Position Year Salary Bonus Compensation
-----------------------------------------------------------------------------------------------------------------
Richard C. Pietrafesa, Jr................ 1998 $100,000 $255,600 $38,729
President, Chief Executive Officer 1997 $100,000 $100,000 $33,650
and Director 1996 $100,000 $40,000 $34,602
David McDonough.......................... 1998 $90,000 $30,000 $1,698
Vice President of Business Development 1997 $90,000 $20,000 $1,683
1996 $90,000 $10,000 $1,050
Ross W. Stefano(1)....................... 1998 $50,000 $155,000 $1,689
Chief Operating Officer and Director 1997 $100,000 $100,000 $1,171
1996 $100,000 $100,000 $1,546
--------------------------
(1) Mr. Stefano ceased to be an employee and director on June 22, 1998.
STOCK OPTION PLAN
We intend to establish our 1999 Stock Option Plan for key employees and
directors prior to the closing of the offering. Under the Stock Option Plan,
awards of options to purchase shares of Class A Common Stock may be made to our
key employees and directors, including employees who are also our officers or
directors. We may award
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options to purchase a number of shares equal to 10% of our outstanding capital
stock immediately following the offering. Options awarded under the Stock Option
Plan may be either "incentive stock options," as that term is defined in Section
422 of the Internal Revenue Code of 1986, as amended, or nonqualified stock
options.
The Stock Option Plan will be administered by our Compensation Committee. The
Compensation Committee will have the authority to establish the terms and
conditions of the options in any manner not inconsistent with the terms of the
Stock Option Plan, adopt any rules it considers appropriate for the
administration of the Stock Option Plan, make interpretations of the Stock
Option Plan that it deems consistent with its provisions, and take any other
action it considers appropriate in connection with the Stock Option Plan. Each
option granted under the Stock Option Plan will be evidenced by an agreement
between The Pietrafesa Corporation and the employee and/or director to whom the
option is granted.
Prior to the adoption of the Stock Option Plan, we have made no provision for
the grant of options to purchase equity interests in The Pietrafesa Corporation
and no executive officer named in the above table holds or has ever exercised
any stock appreciation rights.
At the time of the offering, no options will have been granted to our executive
officers, employees or directors under the Stock Option Plan.
RETIREMENT PLANS
Our 401(k) Retirement Plan, as restated and amended, is a qualified retirement
plan available to all of our eligible employees (together, the "Participants").
Annual contributions to employees, if any, are declared by the Board at the end
of each year. Pursuant to the Retirement Plan, employees may also make
non-matching contributions. The contribution amounts for the executive officers
named in the Summary Compensation Table are included under "All Other
Compensation."
Contributions to the Retirement Plan are made to a trust where the funds are
invested in available investment options selected by the Participant and managed
by the trustee. The trust may be invested and reinvested in common or preferred
stocks, bonds, mortgages, leases, notes, debentures, mutual funds, guaranteed
investment contracts and other contracts and funds of insurance companies, other
securities and other real or personal property. The account balances grow until
finally distributed. Employee contributions to the Retirement Plan are 100%
vested upon contribution, and employer contributions to the Retirement Plan vest
over five years. Upon the occurrence of a distributive event, a Participant may
elect to receive funds according to the respective plans' provisions. Pursuant
to these provisions, a Participant is also entitled to rollover eligible
distribution amounts into another eligible retirement plan.
We may amend the Retirement Plan and our associated trusts, retroactively or
prospectively, in our sole discretion, except where prohibited by the Internal
Revenue Code of 1986, as amended, or the Employee Retirement Income Security Act
of 1974, as amended, and so long as such amendment does not exclude a
Participant, reduce a Participant's account, reduce a Participant's vested
percentage or modify the vesting schedule for a Participant eligible under the
Retirement Plan prior to the effective date of the amendment. The Retirement
Plan may be merged or consolidated, or its assets and liabilities may be
transferred, in whole or in part, to another qualified retirement plan. We also
reserve the right to terminate the Retirement Plan and our associated trusts, or
to cease or suspend further contributions, upon which occurrence accounts of
Participants shall become nonforfeitable. The Retirement Plan is a qualified
retirement plan and trust under Section 401 of the Code, ERISA and all
regulations issued thereunder.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1998, MS Pietrafesa, L.P. transferred all of its assets and
liabilities to us in exchange for 100 shares of Class B Common Stock. To
establish our initial capital structure as a public company, immediately prior
to the consummation of the offering, we will issue an additional shares of Class
B Common Stock to MS Pietrafesa, L.P. in exchange for nominal consideration.
We are controlled by Phillip Ean Cohen through his sole ownership of MS
Pietrafesa Acquisition Corporation, the general partner of MS Pietrafesa, L.P.
(the "General Partner"). See "Risk Factors--The Interests Of Our Controlling
Stockholder May Conflict With The Interests Of The Holders Of The Class A Common
Stock." Morgan Schiff, which is owned by Mr. Cohen, is one of the managing
underwriters of the offering. We reimbursed Morgan Schiff for out-of-pocket
expenses, principally legal and accounting fees, in connection with our
formation and will continue to reimburse Morgan Schiff for ongoing
administrative expenses, principally legal and accounting services rendered to
us. We reimbursed Morgan Schiff $192,300 in 1998 for out-of-pocket expenses. In
the future, we may engage Morgan Schiff for business and financial advisory
services. Mr. Brinkley, a consultant to Morgan Schiff, is our Chairman of the
Board. Morgan Schiff is acting as one of the underwriters in the offering and,
in such capacity, will receive an underwriter's discount equal to __% of the
gross proceeds of the shares of Class A Common Stock allocated to it.
Mr. Brinkley, Richard C. Pietrafesa, Jr., Mr. Minkstein and Joseph J.
Pietrafesa, II own indirect limited partnership interests in MS Pietrafesa, L.P.
through their ownership of limited partnership interests in MSJP, L.P., a
limited partner of MS Pietrafesa, L.P. See "Principal Stockholders." In
addition, Messrs. Pietrafesa own indirect limited partnership interests in MS
Pietrafesa, L.P. through their ownership of limited partnership interests in RJP
Investment Assoc., L.P. ("RJP"), a limited partner of MS Pietrafesa, L.P. See
"Principal Stockholders." In the event that the limited partners of MS
Pietrafesa, L.P. receive a specified minimum investment return, RJP, and, as a
result Messrs. Pietrafesa, will be allocated by MS Pietrafesa, L.P. shares of
Class B Common Stock and/or other property that would otherwise be allocated to
the other limited partners. MS Pietrafesa, L.P.'s Partnership Agreement contains
similar provisions in favor of the General Partner, which is owned by Mr. Cohen.
None of the foregoing provisions require that we issue additional shares of
Class A or Class B Common Stock or other securities of any kind.
We lease a retail store facility in Syracuse, New York from Robert D. Pietrafesa
and Richard C. Pietrafesa, uncle and father, respectively, of our President and
Chief Executive Officer, under a 10-year lease expiring in 2007 requiring rental
payments totaling $145,000 per year. A portion of this retail store facility is
subleased to a third party. The sublease will expire in 2000 and provides
minimum rental income of $30,000 per year.
We source customer orders, including a substantial volume of the aggregate
orders for Jos.A.Bank, with an affiliate, SourceOne. SourceOne is owned by the
General Partner. SourceOne operates two manufacturing facilities in Baltimore,
Maryland of 54,000 and 125,000 square feet. SourceOne leases, directly and
through a sublease, these facilities from Jos.A.Bank. All production performed
for us by SourceOne is performed on a "cost" basis, without mark-up. None of our
employees receive compensation from SourceOne.
Morgan Schiff, an affiliate of the General Partner, provides financial advisory
and strategic consulting services to us under an agreement requiring monthly
retainer payments of $25,000. The agreement also requires us to pay specified
fees to Morgan Schiff when we consummate various acquisitions, capital raising
and financing transactions. The agreement may be terminated annually by either
party upon 30 days notice. Morgan Schiff has waived all retainer payments
otherwise payable to it for financial advisory services for 1996, 1997, 1998,
and 1999 as well as all fees associated with the Diversified Apparel, Global
Sourcing Network, Components and Windsong acquisitions, the PNC credit facility
and this offering.
In April 1998, MS Pietrafesa, L.P. made a distribution of $207,000 to its
partners in accordance with its Amended and Restated Agreement of Limited
Partnership dated January 1, 1996, for the payment of income taxes incurred by
such partners on the portion of partnership income attributable to their
respective interests during 1997. In May 1999, we paid $1.5 million to MS
Pietrafesa, L.P. from amounts borrowed under the PNC credit facility to cover
the tax distribution to be made by MS Pietrafesa, L.P. to its partners in
accordance with its Partnership Agreement for the payment of income taxes
incurred by such partners on the portion of partnership income attributable to
their respective interests during the period from January 1, 1998 through
September 30, 1998. A portion of the net proceeds of the offering will be
applied toward the repayment of the PNC credit facility.
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We reimburse, on a per-flight basis, operating expenses of an aircraft owned by
Twins Aviation, Inc., a corporation owned by our President and Chief Executive
Officer. We use this aircraft on a regularly scheduled, weekly basis to fly
staff to production meetings in New York City, as well as for customer and
contractor visits. Such reimbursements amounted to $225,000 for the year ended
December 31, 1996, $223,000 for the year ended December 31, 1997 and $454,000
for the year ended December 31, 1998.
We believe that each of the affiliate transactions described above are on terms
no less favorable than would be generally available to us from unaffiliated
third parties. After the closing of the offering, all related party transactions
will be approved by our independent, disinterested directors. See also
"Management," "Principal Stockholders" and "Underwriting."
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PRINCIPAL STOCKHOLDERS
The table below sets forth information as of May 1, 1999 regarding the
beneficial ownership of Class A Common Stock and Class B Common Stock, as well
as the percentage ownership of our Class A Common Stock and Class B Common
Stock. Shares of Class B Common Stock are convertible into Class A Common Stock
on a one-for-one basis, as described under "Description of Capital Stock."
Percentage ownership numbers are based on shares of Class A Common Stock and
shares of Class B Common Stock outstanding immediately following the offering
and, in the case of Class B Common Stock, immediately prior to the offering.
Information is provided as to each of our directors, the executive officers
named in the Summary Compensation Table under "Management--Compensation of
Executive Officers," each person we know to own beneficially more than 5% of the
outstanding shares of Class A Common Stock or Class B Common Stock and all of
our directors and executive officers as a group. Except as described below, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by them.
MS Pietrafesa Acquisition Corporation is the general partner of MS Pietrafesa,
L.P. and has the sole right to vote the shares of Class B Common Stock owned by
MS Pietrafesa, L.P. and to direct the disposition of such shares. Philip Ean
Cohen is the sole stockholder of MS Pietrafesa Acquisition Corporation. See
"Risk Factors--The Interests Of Our Controlling Stockholder May Conflict With
The Interests Of The Holders Of The Class A Common Stock."
MSJP, L.P. and RJP Investments Assoc., L.P. indirectly own shares of Class B
Common Stock through their respective ownership of limited partnership interests
in MS Pietrafesa, L.P. Neither MSJP nor RJP has any right to vote or to direct
the disposition of their respective shares. Shares of Class B Common Stock
indicated below as beneficially owned by MSJP and RJP exclude additional shares
of Class B Common Stock that MSJP and RJP are entitled to receive pursuant to MS
Pietrafesa, L.P.'s Partnership Agreement. See "Certain Relationship and Related
Transactions."
Shares of Class B Common Stock indicated below as beneficially owned by Sterling
B. Brinkley, Jr. and Thomas A. Minkstein are owned indirectly through their
ownership of limited partnership interests in MSJP, L.P. Such individuals have
no right to vote or to direct the disposition of these shares. Shares of Class B
Common Stock indicated below as beneficially owned by Richard C. Pietrafesa, Jr.
and Joseph J. Pietrafesa II are owned indirectly through their ownership of
limited partnership interests in MSJP, L.P. and RJP Investments Assoc., L.P.
Such individuals have no right to vote or to direct the disposition of these
shares.
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[Enlarge/Download Table]
Shares of Class A Shares of Class B Percentage of Class
Common Stock Common Stock A and
Name and Address ------------------------------------------------------------ Class B
of Beneficial Owner Number Percentage Number Percentage Common Stock
--------------------------------------- ------------------------------ ----------------------------- ---------------------
MS Pietrafesa, L.P................. 100%
MSJP, L.P..........................
MS Pietrafesa Acquisition 100%
Corporation.....................
Phillip Ean Cohen.................. 100%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr..........
Thomas A. Minkstein................
Joseph J. Pietrafesa II............
RJP Investments Assoc., L.P........
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. .........
350 Park Avenue, 8th Floor
New York, NY 10022
Mark C. Pickup.....................
6734 Corte Segunda
Martinez, CA 94553
Robert J. Bennett..................
M&T Bank Corp.
101 South Salina Street
Syracuse, NY 13202
Paul M. McNicol....................
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano....................
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. ....................
1599 Post Road East
Westport, CT 06880
All executive officers and
directors as a group (eight
persons)........................
SELLING STOCKHOLDER
The following table contains information concerning Windsong, Inc., on behalf of
which shares of Class A Common Stock are being registered for sale on a
continuous basis.
Percentage
Shares Owned Amount to Shares Owned Owned after
Prior to Offering be Offered after Offering Offering
----------------- ---------- -------------- ---------------
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary describes the material provisions of our capital stock and
is subject to, and qualified in its entirety by, our Certificate of
Incorporation and By-laws that are included as exhibits to the Registration
Statement of which this prospectus is a part and by the provisions of applicable
law.
We have filed our Certificate of Incorporation to (1) authorize 5,000,000 shares
of Class A Common Stock, 10,000,000 shares of Class B Common Stock and 5,000,000
shares of Preferred Stock; and (2) set forth the rights and privileges of the
Class A Common Stock, Class B Common Stock and Preferred Stock as described
below. Upon completion of the offering, shares of Class A Common Stock, shares
of Class B Common Stock and no shares of Preferred Stock will be issued and
outstanding. The discussion herein describes our capital stock, Certificate of
Incorporation and By-laws in effect upon effectiveness of the Registration
Statement of which this prospectus is a part.
CLASS A AND CLASS B COMMON STOCK
The holders of shares of Class A Common Stock and Class B Common Stock have
identical rights and privileges on a per share basis, except as set forth below.
The holders of shares of Common Stock have no preemptive rights to maintain
their respective percentage ownership interest in or other subscription rights
for our other securities. Shares of Common Stock are not redeemable or subject
to further calls or assessments. The shares of Common Stock to be outstanding
after the offering, including the shares of Class A Common Stock to be issued
hereby, when paid for and issued, will be fully paid and non-assessable. Holders
of shares of Common Stock are entitled to share pro rata in dividends, if any,
as may be declared by our Board of Directors out of funds legally available
therefor; provided, however, that any dividend upon the Common Stock that is
payable in Common Stock shall be paid only in Class A Common Stock to the
holders of Class A Common Stock, but is payable in Class A or Class B Common
Stock to the holders of Class B Common Stock. Upon our liquidation, dissolution
and winding up, holders of shares of Common Stock are entitled to share ratably
in the net assets available for distribution to such holders. The consent of the
holder or holders of a majority of the Class B Common Stock is required to
authorize the issuance of additional Class B Common Stock.
Limited Voting Rights. The holders of Class A Common Stock have the right as a
class to elect that minimum number of directors constituting 25% of the members
of the Board, which presently represents two of the six directors. The minimum
number of directors shall be rounded to the next highest whole number if such
percentage is not equal to a whole number of directors. Directors elected by the
holders of Class A Common Stock will first be elected at the annual meeting of
stockholders to be held in 1999.
Other than the right to elect directors and as otherwise required by Delaware
law, the holders of Class A Common Stock will have very limited voting rights
until all of the shares of Class B Common Stock are converted into shares of
Class A Common Stock or otherwise cease to be issued and outstanding. At such
time, the holders of Class A Common Stock will be entitled to vote on all
matters submitted to a vote of the stockholders and will be entitled to one vote
per share held. Generally, the vote of the majority of the shares represented at
a meeting of the stockholders and entitled to vote is sufficient for actions
that require a vote of the stockholders. Our Certificate of Incorporation does
not provide for cumulative voting. Because sole voting power has been granted to
the holders of Class B Common Stock, except as stated above and as otherwise
required by Delaware law, substantially all corporate actions can be taken
without any vote by the holders of the Class A Common Stock including, without
limitation:
o amending our Certificate of Incorporation or By-laws, including
authorizing the issuance of additional shares of Class A Common Stock;
o authorizing stock options, restricted stock and other compensation plans for
employees, executives and directors;
o authorizing a merger or disposition or change in control;
o approving indemnification of our directors, officers and eligible
employees; and
o approving conflict of interest transactions involving our affiliates which
are approved by our disinterested directors.
The holders of the outstanding shares of Class A Common Stock will be entitled,
however, to vote as a class upon any proposed amendment to our Certificate of
Incorporation which would increase or decrease the par value of the shares of
Class A Common Stock, or alter or change the powers, preferences or special
rights of the shares of the Class A Common Stock so as to affect them adversely.
See "Risk Factors--The Interests Of Our Controlling Stockholder May Conflict
With The Interests Of The Holders Of The Class A Common Stock."
71
All of the shares of the Class B Common Stock are owned by MS Pietrafesa, L.P.
and can be voted by the General Partner, which is wholly-owned by Mr. Cohen.
See "Principal Stockholders" and "Underwriting."
Conversion Rights. At the option of any holder of shares of Class B Common
Stock, such holder may, at any time and from time to time, convert all or part
of such holder's shares of Class B Common Stock into an equal number of shares
of Class A Common Stock. The shares of Class B Common Stock are also subject to
mandatory conversion into an equal number of shares of Class A Common Stock, in
whole or in part, at any time and from time to time, at the option of the holder
or holders of a majority of the outstanding shares of Class B Common Stock. If,
and only if, all the outstanding shares of Class B Common Stock converted into
Class A Common Stock or are otherwise no longer outstanding, the holders of the
Class A Common Stock will have general voting power in the election of all
members of the Board and in all other matters upon which our stockholders are
entitled to vote. Holders of shares of Class A Common Stock have no right to
convert Class A Common Stock into any of our other securities.
PREFERRED STOCK
Our Certificate of Incorporation authorizes 5,000,000 shares of Preferred Stock.
Upon the affirmative vote or the written consent of the holders of a majority of
the outstanding shares of Class B Common Stock, shares of Preferred Stock may be
issued in one or more series. Each such series will have such distinctive
designation as stated in resolutions adopted by the Board. Authority is
expressly vested in the Board to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series of the designation of such series,
without further vote or action by the stockholders. The Preferred Stock may be
granted voting powers provided, however that (1) so long as any Class B Common
Stock is outstanding, the holders of the Class B Common Stock will always have
the absolute right to elect a majority of the Board and (2) if voting powers are
granted, the holders of shares of Preferred Stock will be entitled to vote
together with the holders of the Class A Common Stock as a class on all matters
on which holders of Class A Common Stock are entitled to vote. At present, we
have no plans to issue any shares of the Preferred Stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law as currently or hereafter in effect.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duty as a director,
except for liability
(1) for breach of their duty of loyalty to the corporation or its
stockholders;
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the General Corporation Law of
the State of Delaware (the "DGCL"); or
(4) for any transaction from which the director derives an improper personal
benefit.
72
Our Certificate of Incorporation provides for the mandatory indemnification of,
and advancement of expenses to our directors and officers.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to Section 203 of the DGCL, which prevents an "interested
stockholder" from engaging in a "business combination" with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder, unless
(1) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
(2) upon consummation of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced; or
(3) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The DGCL defines an "interested stockholder" as a person owning 15% or more of a
corporation's outstanding voting stock. A "business combination" includes
mergers, stock or asset sales and other transactions resulting in a financial
benefit to the interested stockholder.
The disproportionate voting rights between the Class A Common Stock and the
Class B Common Stock and the provisions of Section 203 of the DGCL could have
the effect of delaying, deferring or preventing a change in control. See "Risk
Factors-- The Interests Of Our Controlling Stockholder May Conflict With The
Interests Of The Holders Of The Class A Common Stock."
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American Stock
Transfer & Trust Company.
73
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have a total of _____ shares of Class A
Common Stock and _____ shares of Class B Common Stock outstanding. All shares of
Class A Common Stock sold in the offering and the _____ shares of Class A Common
Stock being registered for sale, from time to time, by the selling stockholder
will be freely tradable by persons other than our "affiliates" without
restriction under the Securities Act. All other shares of Class A Common Stock
and all shares of Class B Common Stock, and any shares of Class A Common Stock
issued upon conversion of shares of Class B Common Stock, will be "restricted"
securities within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption provided by
Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after the
date of this prospectus, a person, or persons whose shares are aggregated, who
has beneficially owned "restricted" shares for at least one year, including a
person who may be deemed our affiliate, is entitled to sell within any
three-month period a number of shares of Class A Common Stock that does not
exceed the greater of 1% of the then-outstanding shares of our Class A Common
Stock or the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding such sale. Sales
under Rule 144 are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us. A person who is not
our affiliate and has not been such at any time during the 90 days preceding a
sale, and who has beneficially owned "restricted" shares for at least two years,
would be entitled to sell such shares immediately following the offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144 of the Securities Act. However, the transfer agent,
American Stock Transfer & Trust Company, may require an opinion of counsel that
a proposed sale of "restricted" shares comes within the terms of Rule 144 of the
Securities Act prior to effecting a transfer of such shares. Such opinion would
be provided by and at the cost of the transferor.
Our officers and directors and certain other stockholders, including the
principal officers of Diversified Apparel, Global Sourcing Network, Components
and Windsong, have agreed, pursuant to the underwriting agreement and lock-up
agreement, that they will not sell any shares of our capital stock owned by
them, either publicly or privately, without the prior consent of Janney
Montgomery Scott Inc., a representative of the underwriters, for a period of
days from the date of this prospectus. See "Underwriting."
MS Pietrafesa, L.P. has offered its limited partners the right to withdraw from
the partnership under its Partnership Agreement and receive a distribution of
Class A Common Stock. Such right to withdraw may be exercised by a limited
partner at any time between the consummation of the offering and 14 days before
the expiration of the Lock-Up Period. The withdrawal will be effective at the
end of the month in which the Lock-Up Period expires. The shares acquired
through a limited partner's withdrawal will be subject to the resale limitations
under Rule 144.
Limited partners electing to withdraw from MS Pietrafesa, L.P. will generally be
deemed to have held the shares of Class A Common Stock distributed to them from
the date they acquired their partnership interest. Accordingly, original
investors in MS Pietrafesa, L.P. will be entitled to sell such shares pursuant
to Rule 144 immediately upon distribution of such shares from MS Pietrafesa,
L.P., subject to volume, manner of sale and other limitations.
Prior to the offering, there has been no public market for either class of our
Common Stock and no predictions can be made of the effect, if any, that the sale
or availability for sale of additional shares of our Common Stock or our other
securities, or the development of a public trading market for the Class B Common
Stock, will have on the market price of the Class A Common Stock. Nevertheless,
sales of substantial amounts of shares of Class A Common Stock in the public
market, the perception that such sales could occur, the development of a public
trading market for the Class B Common Stock or the issuance of other securities,
could adversely affect the market price of the Class A Common Stock and could
impair our future ability to raise capital through an offering of our equity
securities.
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UNDERWRITING
Subject to the terms of an underwriting agreement among Janney Montgomery Scott
Inc., EVEREN Securities, Inc., First Security Van Kasper, Morgan Schiff & Co.,
Inc., as representatives of the underwriters and The Pietrafesa Corporation, the
underwriters have each severally agreed to purchase from us and we have agreed
to sell to the underwriters the number of shares of Class A Common Stock set
forth opposite their respective names below. The underwriters will not be
purchasing any of the shares which may be offered, from time to time, by the
selling stockholder. Pursuant to the terms of the underwriting agreement, the
commitments of non-defaulting underwriters may be increased.
Underwriter Number of Shares
----------- ----------------
Janney Montgomery Scott Inc. ..............................
EVEREN Securities, Inc. ...................................
First Security Van Kasper .................................
Morgan Schiff & Co., Inc. .................................
----------------
Total.............................................
================
The underwriting agreement provides that obligations of the underwriters to pay
for and accept delivery of the Class A Common Stock are subject to the approval
of specific conditions. The underwriters are obligated to take and pay for all
of the shares of the Class A Common Stock offered by this prospectus, other than
shares of Class A Common Stock covered by the over-allotment option described
below, if any shares are taken.
The underwriters propose to offer the shares of Class A Common Stock to the
public initially at the offering price per share shown on the cover page of this
prospectus and to dealers at such price, less a concession not in excess of $
per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to other dealers. After this offering of
the Class A Common Stock, the public offering price and the concessions may be
changed by the Representatives.
In addition to the discounts and commissions shown on the cover page of this
prospectus, we will pay to Janney Montgomery Scott Inc. a financial advisory fee
of $100,000 upon completion of the offering. In addition, we have agreed to pay
to Klehr, Harrison, Harvey, Branzburg & Ellers LLP, underwriters' counsel, legal
fees and expenses incurred in connection with (1) the preparation of a
preliminary Blue Sky memorandum and the qualification of the securities for sale
in any state and (2) securing any review or approvals by the National
Association of Securities Dealers.
We have granted to the underwriters an option for 30 days after the date of this
prospectus to purchase up to additional shares of Class A Common Stock, at the
same price per share as the public offering price, less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise the option only to cover over-allotments in the sale
of the shares of Class A Common Stock offered by this prospectus. To the extent
the underwriters exercise this option, each of the underwriters has a firm
commitment, subject to certain conditions, to purchase a number of the
additional shares of Class A Common Stock proportionate to such underwriter's
initial commitment as indicated in the preceding table.
In connection with this offering and in compliance with applicable securities
laws, the underwriters may over-allot, or sell more shares of Class A Common
Stock than is shown on the cover page of this prospectus, and may effect
transactions on the Nasdaq National Market which stabilize, maintain or
otherwise affect the market price of the Class A Common Stock at prices above
those which might otherwise prevail in the open market. Such transactions may
include placing bids for the Class A Common Stock or effecting purchases of the
Class A Common Stock for the purpose of pegging, fixing or maintaining the price
of the Class A Commons Stock or for the purpose of reducing a short position
created in connection with the offering. A short position may be covered by
exercise of the over-allotment option described above in place of or in addition
to open market purchases. The underwriters are not required to engage in any of
these activities and if the underwriters commence any of these activities, they
may discontinue them at any time.
We and the underwriters make no representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the
price of the Class A Common Stock. In addition, we and the underwriters make no
representation that the underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
75
The underwriters do not intend to confirm sales of the Class A Common Stock to
any accounts over which they exercise discretionary authority.
Our directors, executive officers and certain indirect owners of Class B Common
Stock have agreed that they will not, directly or indirectly, sell or otherwise
dispose of any Class A Common Stock or Class B Common Stock for a period of days
after the completion of this offering, without Janney Montgomery Scott Inc.'s
prior written consent. Together, this group indirectly owns, prior to the
offering, approximately % of the outstanding shares of the Class B Common
Stock.
We have agreed to indemnify the underwriters and persons who control the
underwriters against, or contribute to losses arising out of, some liabilities
that may be incurred in connection with this offering, including liabilities
under the Securities Act of 1933, as amended.
Morgan Schiff, one of the underwriters, is an affiliate of ours. Therefore, the
offering is being conducted in accordance with the provisions of Rule 2720 of
the National Association of Securities Dealers, Inc. Conduct Rules. Rule 2720
requires that the initial public offering price of the shares be no higher than
the price recommended by a "qualified independent underwriter" meeting specified
standards. In accordance with this requirement, Janney Montgomery Scott Inc. is
assuming the responsibilities of acting as a qualified independent underwriter
in pricing the offering and conducting due diligence. The price of the shares
will be no higher than the price recommended by Janney Montgomery Scott Inc.
There is no established trading market for the shares. The offering price for
the shares has been determined through negotiations between us and the
Representatives, based on the following factors:
o Prevailing market conditions.
o Our past and present operations.
o Market capitalizations and stages of development of other companies which
we and the Representatives believe to be comparable to us.
o An assessment of our management.
o The history of, and prospects for, our business and the industry in which
it competes.
o Our prospects for future earnings.
PLAN OF DISTRIBUTION OF SELLING STOCKHOLDER
The selling stockholder may, but is not required to, sell, directly or through
brokers, its shares of Class A Common Stock in negotiated transactions or in one
or more transactions in the market at the price prevailing at the time of sale,
subject to lock-up provisions contained in the Windsong acquisition agreement
and subject to a lock-up agreement with the underwriters. Under the Windsong
acquisition agreement the selling stockholder is subject to a staggered lock-up
for a period of 30 months following the closing of the windsong acquisition. The
selling stockholder and any broker-dealers that participate in the sale of the
Class A Common Stock may be deemed to be "underwriters" of the selling
stockholder's shares of Class A Common Stock within the meaning of the
Securities Act. It is anticipated that usual and customary brokerage fees will
be paid by the selling stockholder in all open market transactions. We will not
receive any of the proceeds from the sale of any Class A Common Stock sold by
the selling stockholder. We will bear all costs and expenses of the registration
under the Securities Act of the Class A Common Stock exclusive of any discounts
or commissions payable with respect to sales of such securities. The selling
stockholder may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the selling stockholder's Class
A Common Stock against certain liabilities, including liabilities arising under
the Securities Act.
At the time an offer for Class A Common Stock owned by the selling stockholder
is made by or on behalf of the selling stockholder, to the extent required, a
prospectus will be distributed by the selling stockholder which will set forth
the number of shares of Class A Common Stock being offered by the selling
stockholder and the terms on which shares of Class A Common Stock are offered by
the selling stockholder.
Except for its entry into the Windsong acquisition agreement, the selling
stockholder has not had any material relationship with us or any of our
affiliates within the past three years.
We will inform the selling stockholder that the anti-manipulation provisions of
Regulation M under the Exchange Act may apply to the sales of the shares of
Class A Common Stock being registered by the selling stockholder. We will advise
the selling stockholder of the requirement for delivery of this prospectus in
connection with any sale of the Class A Common Stock offered by the selling
stockholder.
76
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon by
Roberts, Sheridan & Kotel, a Professional Corporation, which firm provides legal
services from time to time for Morgan Schiff and its affiliates. The validity of
the shares of Class A Common Stock will be passed upon for the underwriters by
Klehr, Harrison, Harvey, Branzburg & Ellers LLP.
EXPERTS
The Consolidated Financial Statements and schedule of The Pietrafesa Corporation
at December 31, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998, appearing in this prospectus and the registration
statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The Financial Statements of Components at December 31, 1997 and 1998, and for
each of the two years in the period ended December 31, 1998 included elsewhere
in this prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Lawrence B. Goodman
& Co., P.A., independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and are included in reliance upon
such report given upon their authority of such firm as experts in accounting and
auditing.
The Financial Statements of Global Sourcing Network at December 31, 1997 and
1998, and for each of the two years in the period ended December 31, 1998
included elsewhere in this prospectus and the related financial statement
schedules included elsewhere in the registration statement have been audited by
Pasquale & Bowers, LLP, independent auditors, as stated in their reports
appearing herein and elsewhere in the Registration Statement, and are included
in reliance upon the reports of such firm, given upon their authority as experts
in accounting and auditing.
The Financial Statements of Windsong at December 31, 1997 and 1998, and for each
of the three years in the period ended December 31, 1998 included elsewhere in
this prospectus and the related financial statement schedules included elsewhere
in the registration statement have been audited by Weissbarth, Altman &
Michaelson LLP, independent auditors, as stated in their reports appearing
herein and elsewhere in the Registration Statement, and are included in reliance
upon the reports of such firm, given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a Registration Statement on Form S-1,
including all amendments, exhibits, annexes and schedules thereto, pursuant to
the Securities Act, and the rules and regulations promulgated thereunder, with
respect to the Class A Common Stock being offered in the offering. This
Prospectus does not contain all the information set forth in the Registration
Statement. For further information with respect to The Pietrafesa Corporation
and the securities offered hereby, reference is made to the Registration
Statement. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, may be inspected, without charge, and copies may be
obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Copies of the Registration Statement may also be
inspected, without charge, at the Commission's regional office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661. In addition, copies of the Registration
Statement may be obtained by mail at prescribed rates, from the Commission's
Public Reference Section at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web site
at www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
Upon completion of the offering, we will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will be required
to file periodic reports and other information with the Commission. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities, regional offices and
Web site referred to above.
We intend to furnish our stockholders with annual reports containing
consolidated financial statements audited by independent certified public
accountants.
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THE PIETRAFESA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
THE PIETRAFESA CORPORATION
Report of Independent Auditors............................................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1998.................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998................... F-5
Consolidated Statements of Changes in Partners' Capital and Shareholder's Equity for
the years ended December 31, 1996, 1997 and 1998......................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998................... F-7
Notes to Consolidated Financial Statements................................................................... F-8
Consolidated Balance Sheets at December 31, 1998 and at March 31, 1999 (unaudited)........................... F-16
Consolidated Statements of Operations for the three-month periods ended March 31, 1998 and 1999
(unaudited).............................................................................................. F-17
Consolidated Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited).. F-18
Notes to Quarterly Consolidated Financial Statements......................................................... F-19
COMPONENTS BY JOHN McCOY, INC.
Report of Independent Auditors............................................................................... F-21
Balance Sheets at December 31, 1997 and 1998................................................................. F-22
Statements of Income and Retained Earnings for the years ended December 31, 1997 and 1998.................... F-23
Statements of Cash Flows for the years ended December 31, 1997 and 1998...................................... F-24
Notes to Financial Statements................................................................................ F-25
Balance Sheets at December 31, 1998 and at March 31, 1999 (unaudited)........................................ F-28
Statements of Income and Retained Earnings for the three-month periods ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-29
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-30
Notes to Quarterly Financial Statements...................................................................... F-31
GLOBAL SOURCING NETWORK, LTD.
Independent Auditors' Report................................................................................. F-32
Balance Sheets as of December 31, 1997 and 1998.............................................................. F-33
Statements of Operations and Accumulated Deficit for the years ended December 31, 1997 and 1998.............. F-34
Statements of Cash Flows for the years ended December 31, 1997 and 1998...................................... F-35
Notes to Financial Statements................................................................................ F-36
Balance Sheets as of December 31, 1998 and at March 31, 1999 (unaudited)..................................... F-39
Statements of Operations and Accumulated Deficit for the three-month periods ended
March 31, 1998 and 1999 (unaudited)...................................................................... F-40
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-41
Notes to Quarterly Financial Statements...................................................................... F-42
[Enlarge/Download Table]
WINDSONG, INC.
Independent Auditors' Report................................................................................. F-43
Balance Sheets as of December 31, 1997 and 1998.............................................................. F-44
Statements of Income and Retained Earnings (Accumulated Deficit)
for the years ended December 31, 1997 and 1998........................................................... F-46
Statements of Cash Flows for the years ended December 31, 1997 and 1998...................................... F-47
Notes to Financial Statements................................................................................ F-50
Independent Auditors' Report................................................................................. F-60
Balance Sheets as of December 31, 1996....................................................................... F-61
Statements of Income and Retained Earnings (Accumulated Deficit)
for the year ended December 31, 1996..................................................................... F-62
Statements of Cash Flows for the year ended December 31, 1996................................................ F-63
Notes to Financial Statements................................................................................ F-65
Balance Sheets as of December 31, 1998 and at March 31, 1999 (unaudited)..................................... F-71
Statements of Income and Retained Earnings (Accumulated Deficit)
for the three-month periods ended March 31, 1998 and 1999 (unaudited).................................... F-72
Statements of Cash Flows for the three-month periods ended March 31, 1998 and 1999 (unaudited)............... F-73
Notes to Quarterly Financial Statements...................................................................... F-74
F-1
Report of Independent Auditors
Board of Directors
The Pietrafesa Corporation
We have audited the accompanying consolidated balance sheets of The Pietrafesa
Corporation (formerly MS Pietrafesa, L.P.) as of December 31, 1997 and 1998, and
the related consolidated statements of operations, changes in partners' capital
and shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Pietrafesa Corporation at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Syracuse, New York
February 12, 1999, except as to Note 13
as to which the date is ____________ , 1999
The foregoing report is in the form that will be signed upon the completion of
the acquisitions, offering and restatement of capital accounts described in Note
13 to the financial statements.
/s/ Ernst & Young LLP
----------------------
Syracuse, New York
February 12, 1999
F-2
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
[Enlarge/Download Table]
December 31
-----------------------------
1997 1998
-----------------------------
(In thousands)
Assets
Current assets:
Cash .................................................................... $3 $14
Accounts receivable, less allowance for doubtful accounts
of $35 in 1997 and 1998 .............................................. 4,066 7,967
Inventories:
Finished goods ....................................................... 3,510 4,273
Work-in-process ...................................................... 1,902 3,865
Raw materials ........................................................ 3,319 4,979
------- -------
8,731 13,117
Prepaid expenses ........................................................ 143 193
Deferred taxes .......................................................... -- 938
------- -------
Total current assets ........................................................ 12,943 22,229
Property, plant, and equipment, at cost:
Land .................................................................... 297 297
Buildings and improvements .............................................. 3,157 3,215
Machinery and equipment ................................................. 6,199 6,485
Furniture and fixtures .................................................. 699 708
Construction in progress -- 290
------- -------
10,352 10,995
Accumulated depreciation ................................................ 3,806 4,409
------- -------
6,546 6,586
Other assets ................................................................ 184 560
------- -------
$19,673 $29,375
======= =======
F-3
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
[Enlarge/Download Table]
December 31
-----------------------------
1997 1998
-----------------------------
(In thousands)
Liabilities, partners' capital and shareholder's equity
Current liabilities:
Accounts payable ......................................................... $ 6,610 $ 7,893
Other current liabilities ................................................ 1,204 3,054
Tax distribution payable to partners ..................................... -- 1,516
Current maturities of long-term debt ..................................... 487 527
------- -------
Total current liabilities .................................................... 8,301 12,990
Deferred tax liability ....................................................... -- 1,441
Long-term debt, net of current maturities .................................... 8,663 12,561
Partners' capital and shareholder's equity:
Partners' capital:
General partner ....................................................... 27 --
Limited partners ...................................................... 2,682 --
------- -------
Total partners' capital ............................................. 2,709 --
Shareholder's equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued shares - none
Common stock, $.001 par value:
Authorized shares - 5,000,000 Class A
- 10,000,000 Class B
Issued shares - 100 Class B .......................................... -- --
Additional paid-in capital ............................................... -- 2,941
Retained earnings (accumulated deficit) .................................. -- (558)
------- -------
Total shareholder's equity .......................................... 2,383
------- -------
$19,673 $29,375
======= =======
See notes to consolidated financial statements.
F-4
THE PIETRAFESA CORPORATION
Consolidated Statements of Operations
[Enlarge/Download Table]
Year ended December 31
-------------------------------------------
1996 1997 1998
-------------------------------------------
(In thousands, except
per share data)
Net revenues $ 44,000 $ 37,582 $ 56,763
Cost of sales 34,769 29,218 47,062
-------------------------------------------
Gross profit 9,231 8,364 9,701
Operating expenses:
Selling, general, and administrative expenses 7,348 6,118 5,536
Impairment loss on fixed assets 170 -- --
Depreciation and amortization expense (excludes amounts in
cost of sales) 165 151 222
-------------------------------------------
7,683 6,269 5,758
-------------------------------------------
Operating income 1,548 2,095 3,943
Interest expense 1,720 1,446 1,209
Public offering costs -- -- 823
-------------------------------------------
Income (loss) from continuing operations before income taxes (172) 649 1,911
Provision for income taxes -- -- 514
-------------------------------------------
Income (loss) from continuing operations (172) 649 1,397
Loss on disposal of discontinued operations (321) (93) --
-------------------------------------------
Income (loss) before extraordinary item (493) 556 1,397
Extraordinary item 3,350 -- --
-------------------------------------------
Net income $ 2,857 $ 556 $ 1,397
===========================================
Pro forma net income data (Note 2):
Income from operations before income
taxes, as reported above $ 1,911
Pro forma provision for income taxes 764
--------------
Pro forma net income $ 1,147
==============
Pro forma basic and diluted earnings per share (Notes 2 and 13) $
Pro forma weighted average number of common shares outstanding
See notes to consolidated financial statements.
F-5
THE PIETRAFESA CORPORATION
Consolidated Statements of Changes in Partners' Capital
and Shareholder's Equity
Years ended December 31, 1996, 1997 and 1998
[Enlarge/Download Table]
Additional
General Limited Common Paid-in Retained
Partner Partners Stock Capital Earnings Total
------------------------------------------------------------------------
(In thousands)
Balance at December 31, 1995 $ (6) $(698) $ (704)
Year ended December 31, 1996
Net income 28 2,829 2,857
----------------------- --------------
Balance at December 31, 1996 22 2,131 2,153
Year ended December 31, 1997
Net income 5 551 556
----------------------- --------------
Balance at December 31, 1997 27 2,682 2,709
Year ended December 31, 1998
Net income (loss) 19 1,936 $(558) 1,397
Distributions to partners for income taxes (17) (1,706) (1,723)
Incorporation of the Company (29) (2,912) $ 2,941 --
------------------------------------------------------------------------
Balance at December 31, 1998 $ -- $ -- $ -- $ 2,941 $(558) $2,383
========================================================================
See notes to consolidated financial statements.
F-6
THE PIETRAFESA CORPORATION
Consolidated Statements of Cash Flows
[Enlarge/Download Table]
Year ended December 31,
-------------------------------------------
1996 1997 1998
-------------------------------------------
(In thousands)
Operating activities
Net income $ 2,857 $ 556 $ 1,397
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Extraordinary item (3,350) -- --
Depreciation and amortization 946 802 788
Provision for doubtful accounts (179) - 10
Impairment loss on fixed assets 170 -- --
Loss on fixed asset disposals 24 149 16
Deferred taxes -- -- 503
Changes in operating assets and liabilities:
Accounts receivable (392) 1,549 (3,911)
Inventories, prepaid expenses and other assets 3,267 1,533 (4,847)
Accounts payable and accrued expenses (898) (1,533) 4,649
-------------------------------------------
Net cash provided by (used in) operating activities 2,445 3,056 (1,395)
Investing activities
Purchases of property, plant, and equipment (105) (59) (592)
Proceeds from disposal of fixed assets 524 2,244 29
-------------------------------------------
Net cash provided by (used in) investing activities 419 2,185 (563)
Financing activities
Borrowings under credit line 51,854 39,981 46,639
Repayments of credit line (52,419) (42,516) (43,348)
Proceeds from long-term debt 2,530 - 1,115
Principal payments on long-term debt (4,581) (2,666) (596)
Payment of debt issuance costs (250) (41) (77)
Principal payments under capital lease obligations -- -- (41)
Distributions payable to partners for income taxes -- -- (1,723)
-------------------------------------------
Net cash (used in) provided by financing activities (2,866) (5,242) 1,969
-------------------------------------------
(Decrease) increase in cash (2) (1) 11
Cash at beginning of period 6 4 3
===========================================
Cash at end of period $ 4 $ 3 $ 14
===========================================
See notes to consolidated financial statements.
F-7
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands, except share data)
1. The Company and Basis of Presentation
The Pietrafesa Corporation (the "Company") was formed on October 1, 1998 through
the issuance of 100 shares of Class B common stock in exchange for the net
assets of MS Pietrafesa, L.P. (the "Partnership"). The exchange was recorded at
the Partnership's historical cost basis as both entities were under common
control.
The accompanying financial statements include the financial position and
operations of the Partnership for 1996 and 1997 and the Company and the
Partnership combined for 1998.
The Company operates principally in one business segment, the sourcing of
proprietary brands of men's and women's clothing for major domestic retailers.
Sourced products are manufactured by the Company and third parties.
Approximately 77% of the Company's work force is represented under collective
bargaining agreements. The Company also has one retail outlet whose operations
are not significant.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions are
eliminated.
Revenue Recognition
Revenue is recognized when products are shipped or services have been provided
and is net of returns and allowances.
Cash
Cash consists of demand deposits at banks.
Inventories
Inventories are stated at the lower of standard costs (which approximate cost
determined on a first in, first out basis) or market.
Property, Plant, and Equipment
Depreciation is provided using the straight line method over the estimated
useful lives of the respective assets (buildings and improvements - 25 years;
machinery and equipment - 15 years; and furniture and fixtures - 10 years).
Long-Lived Assets
The Company accounts for long-lived assets pursuant to Statement of Financial
Standards (SFAS) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires impairment losses to be
recorded on long-lived assets used in operations when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management reviews long-lived assets and the related intangible
assets for impairment whenever events or changes in circumstances indicate the
assets may be impaired. The Company, based on current circumstances, has
recorded an impairment loss of $170 as of December 31, 1996 related to machinery
and equipment to be disposed.
F-8
2. Summary of Significant Accounting Policies (Continued)
Other Assets
Other assets include debt issuance costs which are amortized over the terms of
the related debt using the interest method.
Income Taxes and Tax Distributions
Prior to October 1, 1998, the Company operated as a limited partnership and
income or loss of the Partnership was included in the taxable income of the
individual partners. The Company is required under the Partnership Agreement to
distribute cash to the partners which approximates the tax on taxable income
reported by the Partnership through September 30, 1998. The Company has accrued
a liability of $1,516 related to distributions for taxable income for the nine
month period ended September 30, 1998.
As of October 1, 1998, effective with the net asset transfer discussed in Note
1, the Company is subject to federal and state corporate income taxes. The
Company accounts for income taxes using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred tax assets and liabilities are determined
based on differences between the tax basis of assets and liabilities and are
measured using currently enacted tax laws and rates.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions. Those
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates and such differences could be material.
Pro Forma Net Income and Earnings Per Share
Pro forma net income and earnings per share for 1998 reflect adjustments for
federal and state income taxes as if the Company were subject to these taxes for
the entire year.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
F-9
3. Borrowing Arrangements
Long-term debt consisted of the following:
[Enlarge/Download Table]
December 31,
1997 1998
--------------------------
Revolving credit agreements due June 30, 2001 $ 6,147 $ 9,439
Equipment notes with monthly principal and interest payments
ranging from $7 to $13 through December of 2002 762 612
Capital equipment leases with monthly principal and interest
payments ranging from $1 to $4 through July 2002 107 234
Term notes with monthly principal payments of $16 and $10
through June 2005 2,134 2,803
--------------------------
9,150 13,088
Less current maturities 487 527
--------------------------
$ 8,663 $ 12,561
==========================
Substantially all of the Company's debt bears interest at variable rates which
range between prime plus .5% and prime plus 1% (8.25% and 8.75% at December 31,
1998).
Under terms of a revolving credit agreement with a bank, the Company may borrow
up to $12,500, limited by levels of accounts receivable and inventory. The
unused credit line totaled approximately $2,311 at December 31, 1998. Interest
on the line is based on prime plus .5% or LIBOR plus 2.75% (8.25% at December
31, 1998). The weighted average borrowing rate on the credit lines was 9.91% and
9.26% at December 31, 1997 and 1998, respectively. During the year ended
December 31, 1996, 1997 and 1998, the highest outstanding balance on the credit
line was $12,283, $10,787 and $11,782, respectively, and the average outstanding
balance was $10,344, $8,338 and $8,701, respectively. The credit line is subject
to renewal in 2001 and has been classified as long-term.
On June 19, 1998, the Company refinanced certain mortgage, equipment and term
loans with principal balances of $2,134 at December 31, 1997. The refinanced
loans are payable over 5 and 7 years with interest ranging from prime plus 1% to
prime plus .75%.
The Company's borrowing arrangements include certain restrictive covenants which
limit, among other things, additional indebtedness, capital expenditures and
dividends, and require that the Company maintain specified levels of working
capital, tangible net worth, debt-to-equity, debt service coverage and net
income. Amounts outstanding under these arrangements, including the working
capital facility, are secured by substantially all of the Company's assets.
Aggregate principal payments on long-term debt for each of the next five years
and thereafter are as follows as of December 31, 1998:
1999 $ 527
2000 539
2001 9,987
2002 497
2003 660
Thereafter 878
-------------
$ 13,088
=============
F-10
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
3. Borrowing Arrangements (continued)
As further discussed in Note 10, certain subordinated indebtedness were forgiven
in June 1996.
Interest paid for the years ended December 31, 1996, 1997 and 1998 amounted to
$1,343, $1,126 and $1,156, respectively.
The Company acquired $109 and $169 in assets under capital lease obligations in
1997 and 1998, respectively.
4. Shareholder's Equity
The Company is authorized to issue two classes of common stock designated Class
A and Class B. The Class B elects 75% of the Board of Directors, has voting
rights on all corporate matters and is convertible, at any time, at the option
of the holder, into an equal number of Class A shares. The shares of Class B
common stock are also subject to mandatory conversion into an equal number of
Class A common stock at the option of the majority of the holder or holders of
Class B common stock. In connection with the incorporation of the Company, .1
Class B shares were issued to the Partnership. Except in limited instances,
Class A shares will be non-voting except as to the election of 25% of the Board
of Directors. No Class A shares have been issued.
The Company is also authorized to issue up to, in one or more series, 5,000
shares of preferred stock upon the consent of the holders of a majority of the
outstanding shares of Class B common stock. The Board is authorized to fix the
rights, preferences, privileges and restrictions of each series, without further
vote or action by the stockholders. The preferred stock may be granted voting
powers provided that the Class B common stock will always have the right to
elect a majority of the Board and the preferred stock will be entitled to vote
with the Class A common stock as a class on any matters on which holders of
Class A common stock are entitled to vote.
5. Retirement Plans
The Company sponsors contributory defined contribution plans for employees not
covered by multi-employer plans. Employer contributions to the plans range from
no contribution to 50% of each participant's elective deferral for the plan
year, subject to certain restrictions as defined in the Plan documents.
Contributions for the years ended December 31, 1996, 1997 and 1998 were $97,
$125 and $141, respectively. The Company also contributes to two multi-employer
pension funds which cover certain union employees under a collective bargaining
agreement. Contributions for the years ended December 31, 1996, 1997, and 1998
were approximately $323, $173 and $156, respectively. Provisions of the
Multi-Employer Pension Plan Amendments Act of 1980 require participating
employers to assume a proportionate share of a multi-employer plan's unfunded
vested benefit in the event of withdrawal from or termination of the Plan.
6. Related Party Transactions
The Company leases a retail store facility from a related party under a ten-year
lease ending June 30, 2000 requiring rental payments totaling $146 per year. A
portion of this facility is subleased and provides minimum rental income of $30
per year.
Beginning in 1998, the Company sources certain customer orders through
SourceOne, L.L.C, an affiliate of the General Partner of the Partnership.
SourceOne has no significant assets or liabilities and neither the Company nor
its employees receive any compensation from SourceOne. The Company purchased
approximately $10,614 of services from SourceOne during 1998 and has a net
payable to SourceOne of $591 at December 31, 1998.
F-11
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
6. Related Party Transactions (continued)
An affiliate of the General Partner provides financial advisory and strategic
consulting under an agreement requiring monthly payments of $25. The agreement
may be terminated annually by either party upon 30 days notice. The affiliate
waived all payments due under this agreement for 1996, 1997 and 1998.
The Company reimburses on a per-flight basis certain operating expenses of an
aircraft owned by a corporation owned by the Company's President and Chief
Executive Officer. Payments amounted to $225, $223 and $454 for the years ended
December 31, 1996, 1997 and 1998, respectively.
7. Revenue and Supplier Concentrations
The Company grants credit without collateral to customers and performs periodic
credit evaluations of their financial condition. The Company's products are
primarily sold to specialty retail stores. The Company makes substantial sales
to a relatively few, large customers. The following table presents the
percentage of net sales concentrated with certain customers:
Year Ended December 31,
---------------------------------------------
1996 1997 1998
---------------------------------------------
Customer A 27% 22% 26%
Customer B 24 24 16
Customer C 15 22 9
Customer D -- -- 25
---------------------------------------------
66% 68% 76%
=============================================
In April 1998, the Company entered into a five-year sourcing agreement with a
domestic clothing retailer and became the retailer's primary source for tailored
clothing. The Company's affiliate, SourceOne, manages the retailer's
manufacturing operations. The Company will receive an annual management fee for
the first three years of the agreement and purchased certain inventory owned by
the retailer at market value ($2,140), payable in installments. The agreement
requires the retailer to purchase a minimum number of units during the 5-year
term of the agreement.
The Company purchases a significant volume of fabric from two suppliers. In
1996, 1997 and 1998, 51%, 54% and 62% of total purchases were purchased from
these two suppliers, respectively.
8. Income Taxes
On October 1, 1998, the Company recorded deferred income taxes due to its
incorporation. The recording of the deferred tax liability at October 1, 1998
resulted in additional tax expense of $516 in 1998.
The provision for income taxes is as follows:
Year ended December 31,
------------------------------------
1996 1997 1998
------------------------------------
Current
Federal $ -- $ -- $ 8
State -- -- 3
------------------------------------
Total current -- -- 11
F-12
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
8. Income Taxes (continued)
[Download Table]
Year ended December 31,
1996 1997 1998
------------------------------------
Balance brought forward $ -- $ -- $ 11
Deferred:
Federal -- -- 428
State -- -- 75
------------------------------------
Total deferred -- -- 503
====================================
Total tax expense $ -- $ -- $ 514
====================================
The difference between the United States federal statutory income tax rate and
the Company's effective tax rate were as follows:
[Enlarge/Download Table]
Year ended December 31,
1996 1997 1998
------------------------------------
U.S. federal statutory rate 34.0% 34.0% 34.0%
Income attributed to period the Company was a partnership that is not
subject to federal or state corporate income tax (34.0%) (34.0%) (34.0%)
Deferred taxes related to the change to a taxable entity 27.0%
====================================
Effective tax rate 0.0% 0.0% 27.0%
====================================
Deferred tax assets and liabilities are comprised of the following:
[Download Table]
December 31,
1996 1997 1998
-------------------------------
Deferred tax assets:
Bad debt and chargeback reserves $ -- $ -- $ 131
Inventory related reserves -- -- 292
Employee benefits -- -- 236
Other -- -- 279
-------------------------------
Total deferred tax assets -- -- 938
Deferred tax liability:
Depreciation -- -- 1,441
-------------------------------
Net deferred tax liability $ -- $ -- $ 503
===============================
F-13
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
9. Discontinued Operations
In 1995, the Company discontinued its low price point tailored clothing
manufacturing business.
All equipment related to this operation was either sold to third parties or
transferred to the Company's primary factory during 1996. In April 1997, the
Company concluded the sale of the remaining assets at their carrying value.
Interest expense included in the loss on disposal of discontinued operations was
$243, $61 and $0 for 1996, 1997, and 1998, respectively, representing the
interest on building and equipment loans attributable to the discontinued
operations and a portion of the interest on the working capital facility
determined based upon average accounts receivable and average inventory
balances.
10. Forgiveness of Debt
In June 1996, the Company completed a transaction under which subordinated notes
with an outstanding principal and interest balance of $3,350 were forgiven in
exchange for a greater partnership interest in MSJP, L.P., a limited partner of
the Partnership.
11. Fair Value of Financial Instruments
The carrying amounts of the Company's short-term borrowings and variable rate
long-term debt approximate their fair value. The difference between carrying
value and fair value on fixed rate long-term debt is not material.
12. Public Offering Costs
In 1998 the Company incurred costs related to a public offering that was delayed
due to adverse market conditions. Costs amounting to $823 related to this
offering have been charged off due to the extended delay of the offering.
13. Acquisitions and Public Offering
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3,500 in a transaction to be
accounted for as a purchase. Diversified Apparel merchandises and sources
apparel, including lower to mid-priced suits and dress shirts, to value-priced
apparel retailers. On April 15, 1999, the Company acquired all of the common
stock of Global Sourcing Network, Ltd. for $3,700 in a transaction to be
accounted for as purchase. Global Sourcing Network designs and imports men's
suits. Concurrent with the public offering, the Company will also acquire the
assets and assume certain liabilities of Components by John McCoy, Inc. for
$11,100 in a transaction to be accounted for as a purchase. Components
merchandises and sources tailored clothing, as well as sportswear, dress shirts,
neckwear, topcoats and casual slacks in Italy.
The Company has entered an agreement to acquire the assets and assume certain
liabilities of Windsong, Inc. for $43,300 in a transaction to be accounted for
as a purchase. Windsong is a supplier of designer and private label sportswear
to department store, specialty store and mass merchandising chains.
The portion of the consideration assigned to goodwill in each transaction will
represent the excess of the cost over the estimated fair value of the net assets
acquired. The Company will amortize goodwill using the straight line method over
a period ranging from 10 to 20 years.
In each of the purchase agreements, there are specific contingent payments based
upon achieving specified earning levels. These payments will be recognized as an
adjustment to the purchase price when made.
F-14
THE PIETRAFESA CORPORATION
Notes to Consolidated Financial Statements
Three years ended December 31, 1998
(In thousands)
13. Acquisitions and Public Offering (cont')
In connection with the offering, the Company's Class B common stock has been
adjusted through issuance of _______ additional shares of Class B common stock
for the nominal consideration of the stock's par value. Shareholder's equity,
earnings per share and other share information has been restated to reflect the
additional shares of Class B common stock.
F-15
THE PIETRAFESA CORPORATION
Consolidated Balance Sheets
[Enlarge/Download Table]
March 31, December 31,
1999 1998
(Unaudited)
----------------------------------
(In thousands)
Assets
Current assets:
Cash $ 13 $ 14
Accounts receivable, net 8,488 7,967
Inventories:
Finished goods 4,862 4,273
Work-in-process 3,224 3,865
Raw materials 4,596 4,979
------------- -------------
12,682 13,117
Prepaid expenses 375 193
Deferred Taxes 938 938
------------- -------------
Total current assets 22,496 22,229
Property, plant, and equipment, at cost:
Land 297 297
Buildings and improvements 3,216 3,215
Machinery and equipment 6,883 6,485
Furniture and fixtures 709 708
Construction in progress -- 290
------------- -------------
11,105 10,995
Accumulated depreciation 4,582 4,409
------------- -------------
6,523 6,586
Other assets 925 560
------------- -------------
$ 29,944 $ 29,375
============= =============
Liabilities, partners' capital and shareholder's equity
Current liabilities:
Accounts payable $ 7,166 $ 7,893
Other current liabilities 2,767 3,054
Tax distribution payable to partners 1,516 1,516
Current maturities of long-term debt 527 527
------------- ------------
Total current liabilities 11,976 12,990
Deferred tax liability 1,441 1,441
Long-term debt, net of current maturities 13,054 12,561
Shareholder's equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000,000
Issued shares - none
Common stock, $.001 par value:
Authorized shares - 5,000,000 Class A
- 10,000,000 Class B
Issued shares - 100 Class B -- --
Additional paid-in capital 3,191 2,941
Retained earnings (accumulated deficit) 282 (558)
------------- -----------
Total shareholder's equity 3,473 2,383
------------- -----------
$ 29,944 $ 29,375
============= ===========
See notes to consolidated financial statements.
F-16
THE PIETRAFESA CORPORATION
Consolidated Statements of Operations (Unaudited)
[Enlarge/Download Table]
Three Months ended
March 31,
---------------------------
1999 1998
---------------------------
(In thousands, except
per share data)
Net revenues $ 17,803 $ 9,503
Cost of sales 14,833 7,028
---------- --------
Gross profit 2,970 2,475
Operating expenses:
Selling, general, and administrative expenses 1,201 1,305
Depreciation and amortization expense 68 64
---------- --------
1,269 1,369
---------- --------
Operating income 1,701 1,106
Interest expense 296 253
---------- --------
Income before taxes 1,405 853
Provision for income taxes 565 --
---------- --------
Net income $ 840 $ 853
========== ========
Pro forma net income data:
Income before income taxes, as reported above $ 1,405 $ 853
Pro forma provision for income taxes 565 341
---------- --------
Pro forma net income $ 840 $ 512
========== =========
Pro forma basic and diluted earnings per share ========== =========
Pro forma weighted average number of common share outstanding ========== =========
See notes to consolidated financial statements.
F-17
THE PIETRAFESA CORPORATION
Consolidated Statements of Cash Flows (Unaudited)
[Enlarge/Download Table]
Three Months Ended
March 31,
1999 1998
-----------------------
(In thousands)
Operating activities
Net income $ 840 $ 853
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 185 202
Loss on sale of fixed assets -- 12
Changes in operating assets and liabilities:
Accounts receivable (521) (269)
Inventories, prepaid expenses and other assets (103) (2,018)
Accounts payable and accrued expenses (1,014) 1,248
-------- -------
Net cash (used in) provided by operating activities (613) 28
Investing activities
Purchases of property, plant, and equipment (109) (90)
-------- -------
Net cash used in investing activities (109) (90)
Financing activities
Borrowings under credit line 19,302 10,496
Repayments of credit line (18,679) (10,329)
Principal payments on long-term debt (117) (105)
Payment of debt issuance costs (20) --
Principle payments under capital lease obligations (15) --
Capital contribution 250 --
-------- -------
Net cash provided by financing activities 721 62
-------- -------
(Decrease) increase in cash (1) --
Cash at beginning of period 14 3
-------- -------
Cash at end of period $ 13 $ 3
======== =======
See notes to consolidated financial statements.
F-18
The Pietrafesa Corporation
Notes to Quarterly Consolidated Financial Statements (Unaudited)
March 31, 1999
1. Organization and Basis of Presentation
The accompanying financial statements include the accounts of the Company and
its consolidated subsidiary. All significant intercompany transactions and
balances have been eliminated.
2. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results of
operations for the periods presented have been included.
The consolidated financial data at December 31, 1998 is derived from audited
financial statements at that date but does not include all of the information
and footnotes required by GAAP for complete financial statements and should be
read in conjunction with the audited financial statements and notes thereto.
Interim results are not necessarily indicative of results to be expected for the
full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statement and accompanying notes.
Actual results could differ from those estimates.
Pro forma net income and earnings per share reflect adjustments for federal and
state income taxes as if the Company were subject to these taxes for the entire
period.
3. Subsequent Events
On April 15, 1999, the Company acquired the assets and assumed certain
liabilities of Diversified Apparel Group, Ltd. for $3.5 million in a transaction
to be accounted for as a purchase. Diversified Apparel merchandises and sources
apparel, including lower to mid-priced suits and dress shirts, to value-priced
apparel retailers. On April 15, 1999, the Company acquired all of the common
stock of Global Sourcing Network, Ltd. for $3.7 million in a transaction to be
accounted for as purchase. Global Sourcing Network designs and imports men's
suits. Concurrent with the public offering, the Company will also acquire the
assets and assume certain liabilities of Components by John McCoy, Inc. for
$11.1 million in a transaction to be accounted for as a purchase. Components
merchandises and sources tailored clothing, as well as sportswear, dress shirts,
neckwear, topcoats and casual slacks in Italy.
On May 12, 1999, the Company entered into an agreement to purchase the assets
and assume certain liabilities of Windsong, Inc. for $43.3 million in a
transaction to be accounted for as a purchase. Windsong is a supplier of
designer and private label sportswear to department store, specialty store and
mass merchandising chains.
The portion of the consideration assigned to goodwill in each transaction will
represent the excess of the cost over the estimated fair value of the net assets
acquired. The Company will amortize goodwill using the straight line method over
a period ranging from 10 to 20 years.
In each of the purchase agreements, there are specific contingent payments based
upon achieving specified earning levels. These payments will be recognized as an
adjustment to the purchase price when made.
F-19
On April 15, 1999, we entered into a senior secured credit facility with PNC
Bank, National Association. This facility replaced the Company's current $12.5
million revolving credit facility. The PNC Bank credit facility consists of (1)
an $18.0 million revolving credit line, $1.0 million of which can be utilized
for the issuance of letters of credit, and (2) a $7.0 million term note. The
amount available for borrowing under the revolving credit line at any given time
is determined pursuant to a formula based upon the levels of qualifying accounts
receivable and eligible inventory and the credit balance owed us under our
factoring agreement, subject to the $18.0 million maximum. The term note is
payable in 33 monthly payments of $116,667 commencing on May 1, 1999, with a
final payment of all unpaid principal on April 15, 2002. The new credit facility
was used to repay amounts due under the Company's former credit facility which
had a balance of $12.8 million at March 31, 1999. Amounts outstanding under the
credit facility are secured by a senior lien on substantially all of our assets.
We have also pledged all of the stock of our subsidiaries as collateral.
Borrowings under the PNC Bank credit facility bear interest, at our option,
based upon either domestic interest rates or Euro interest rates. Under the
revolving credit line, the domestic interest rate is 0.5% per annum above the
higher of (a) PNC Bank's base commercial lending rate and (b) 0.5% per annum
above the Fed Funds rate. Under the revolving credit line, the Euro interest
rate is a multiple of 2.75% above LIBOR, where the multiple is equal to 1.00
minus the Federal Reserve's reserve requirement percentage. Under the term note,
the domestic interest rate is 1.00% higher than the domestic interest rate
calculated under the revolving credit line, and the Euro interest rate is 0.75%
higher than the Euro interest rate calculated under the revolving credit line.
Upon consummation of the offering, all of the foregoing domestic and Euro
interest rates shall decrease by 0.25%, provided that we receive net proceeds of
at least $20 million from the offering. The PNC Bank credit facility includes
significant financial and operating covenants, including requirements that we
maintain a minimum fixed charge coverage ratio, prohibitions on our ability to
incur additional indebtedness or to pay dividends and restrictions on our
ability to make capital expenditures and acquisitions. We are currently in
compliance with all covenants under the PNC Bank credit facility. The PNC Bank
credit facility contains customary events of default, including a cross-default
to our obligations under the Diversified Apparel and Global Sourcing Network
acquisition agreements.
F-20
To the Board of Directors of
Components by John McCoy, Inc.
6040 Boulevard East - Apt. 2G
West New York, New Jersey 07093
We have audited the accompanying balance sheets of Components by John McCoy,
Inc., a New Jersey corporation, as of December 31, 1998 and 1997, and the
related statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Components by John McCoy, Inc.,
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 4, 1999
F-21
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
December 31, 1998 and 1997
[Enlarge/Download Table]
ASSETS
1998 1997
----------- -----------
Current Assets
Cash $ 45,358 $ 10,335
Accounts Receivable - net 4,462,931 3,711,586
Inventory 2,311,177 829,833
Employee Loan -- 1,600
----------- -----------
Total current assets 6,819,466 4,553,354
----------- -----------
Property & Equipment
Furniture and fixtures 3,616 3,616
Leasehold improvements 178,167 --
----------- -----------
181,783 3,616
Less: Accumulated depreciation (1,086) (362)
----------- -----------
Net property and equipment 180,697 3,254
----------- -----------
Other Assets
Security deposit 28,032 28,032
----------- -----------
Total Assets $ 7,028,195 $ 4,584,640
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
----------- -----------
Current Liabilities
Accounts payable and accrued expenses $ 2,459,127 $ 1,671,965
Loan payable 2,462,451 2,070,731
Taxes payable 48,868 66,890
----------- -----------
Total current liabilities 4,970,446 3,809,586
----------- -----------
Stockholders' Equity
Common Stock, no par value (authorized 200 shares, 300,000 300,000
issued and outstanding 100 shares)
Retained earnings 1,757,749 475,054
----------- -----------
Total stockholders' equity 2,057,749 775,054
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,028,195 $ 4,584,640
=========== ===========
See notes to financial statements and auditor's report.
F-22
COMPONENTS BY JOHN McCOY, INC.
Statements of Income and Retained Earnings
Years Ended December 31, 1998 and 1997
[Download Table]
1998 1997
--------------------------------
Revenues
Net Sales $19,993,484 $14,916,695
--------------------------------
Cost of Sales
Beginning inventory 829,833 740,408
Purchases 13,854,070 9,733,368
Freight-in 681,339 505,506
Customs charges 1,953,422 1,606,554
--------------------------------
17,318,664 12,585,836
Less: Ending inventory 2,311,177 829,833
--------------------------------
Total cost of sales 15,007,487 11,756,003
--------------------------------
Gross Profit 4,985,997 3,160,692
General and Administrative Expenses
Advertising 177,635 28,740
Bad debt expense 253,565 113,856
Commissions 588,879 675,204
Insurance 27,881 34,130
Interest 292,676 241,225
Professional services 66,404 24,729
Office supplies 166,449 155,159
Outside services 212,392 131,951
Payroll taxes 41,983 24,106
Postage 102,386 95,383
Profit sharing 45,030 38,517
Rent 166,951 110,792
Repairs and maintenance 521 11,615
Salaries -- Officer 606,154 180,000
Salaries and wages -- other 287,532 185,138
Storage 108,694 64,092
Telephone and utilities 50,674 43,077
Travel and entertainment 134,910 161,884
Miscellaneous 69,865 25,141
--------------------------------
Total general and administrative expenses 3,400,581 2,344,739
--------------------------------
Income from operations 1,585,416 815,953
Other Income and (Expenses)
State and local income taxes (157,711) (81,595)
--------------------------------
Net income 1,427,705 734,358
Retained earnings -- beginning 475,054 118,854
Distributions of undistributed taxable income (145,010) (378,158)
--------------------------------
Retained earnings -- ending $1,757,749 $475,054
================================
See notes to financial statements and auditor's report.
F-23
COMPONENTS BY JOHN McCOY, INC.
Statements of Cash Flows
Years Ended December 31, 1998 and 1997
[Enlarge/Download Table]
1998 1997
----------------- ---------------
Cash flows from operating activities:
Net income $ 1,427,705 $ 734,358
----------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 724 362
Changes in assets and liabilities:
Increase in accounts receivable (751,345) (1,264,338)
Increase in inventory (1,481,344) (89,425)
Increase in employee loan -- (1,600)
Increase in security deposit -- (28,032)
Increase in accounts payable 787,162 179,879
Increase/(Decrease) in taxes payable (18,022) 54,923
----------------- ---------------
Total adjustments (1,462,825) (1,148,231)
----------------- --------------
Net cash used by operating activities (35,120) (413,873)
----------------- --------------
Cash flows from investing activities:
Purchase of furniture and fixtures (178,167) (3,616)
----------------- --------------
Cash flows from financing activities:
Borrowing on loan payable 19,494,135 10,120,000
Repayments on loan payable (19,102,415) (9,359,340)
Distributions to shareholder (143,410) (382,468)
----------------- --------------
Net cash provided by financing activities 248,310 378,192
----------------- --------------
Net increase (decrease) in cash 35,023 (39,297)
Cash -- beginning of year 10,335 49,632
----------------- --------------
Cash -- end of year $ 45,358 $ 10,335
================= ==============
Supplemental information
Interest paid $ 292,676 241,225
Taxes paid $ 176,133 29,889
See notes to financial statements and auditor's report.
F-24
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
DESCRIPTION OF BUSINESS
Components by John McCoy, Inc. is a distributor of men's clothing. The
Company was incorporated and commenced business on January 6, 1995. Its
principal place of business is located at 20 West 55th Street, New
York, New York.
Note 1: ACCOUNTING POLICIES
a) Accounts Receivable
In the normal course of business, the Company discounts or sells trade
accounts receivable without recourse to Heller Financial, Inc. At
December 31, 1998 and 1997, the amount of such receivables was
$3,239,184 and $3,162,716, respectively.
b) Uncollectible Accounts
Uncollectible accounts receivable are estimated to be 4% for 1998 and
10% for 1997 of non-factored receivables, based upon management's
evaluation of outstanding accounts receivable. At December 31, 1998 and
1997, uncollectible accounts are estimated to be $56,779 and $60,986,
respectively.
c) Inventory
Inventory is stated at the lower of cost determined by the first-in,
first-out method, or market.
d) Income Taxes
The shareholders have elected to be treated as a small business
corporation (Sub-Chapter "S" of the Internal Revenue Code) for Federal
income tax purposes as of January 6, 1995. Similarly, the shareholders
have elected to be treated as a small business corporation for New York
and New Jersey State income tax purposes. Accordingly, no provision has
been made for Federal income taxes, a provision has been made for the
State income taxes for New York and for New Jersey at the prevailing
rates for 1998. Income will be reported by the shareholder in his
individual income tax returns.
New York City does not recognize Sub-Chapter "S" status, therefore, a
tax provision has been made based upon the income tax rates in effect
for 1998.
There are no material differences in the calculation of net income for
book and income tax purposes, therefore, deferred income taxes have not
been recorded.
e) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-25
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
f) Revenue Recognition
Revenue is recognized when products are shipped or services have been
provided and is net of returns and allowances.
Note 2: LOAN PAYABLE
Loan payable represents amounts owed to Heller Financial, Inc. as
advances upon collections of factored accounts receivable. Interest on
these advances is computed daily at a rate of 2% over the current prime
rate and is paid monthly using the current prime rate as a base. Rates
in effect were as follows:
01/01/96 through 03/26/97 10.25%
03/27/97 through 01/01/98 10.25%
02/02/98 through 09/29/98 10.00%
09/30/98 through 10/16/98 9.75%
10/17/98 through 11/17/98 9.50%
11/18/98 through 12/31/98 9.25%
Average outstanding loan balances for the years ended December 31, 1998
and 1997 were approximately $2.6 million and $1.9 million,
respectively. The high outstanding balances for those years were $4.0
million and $3.2 million, respectively.
Note 3: STATE AND LOCAL INCOME TAXES
Taxes consist of the following:
1998 1997
-------- -------
New York State income taxes $ 15,841 $ 8,183
New Jersey State income taxes 3,182 2,735
New York City income taxes 138,688 70,677
-------- -------
$157,711 $81,595
======== =======
Note 4: NET SALES
Net sales consists of the following:
1998 1997
-------- -----------
Sales $20,340,045 $16,039,672
Less: Sales, returns and discounts 346,561 1,122,977
----------- -----------
$19,993,484 $14,916,695
=========== ===========
Note 5: INTEREST
Interest expense for 1998 and 1997 was $292,676 and $241,225,
respectively, all of which was charged to operations.
F-26
COMPONENTS BY JOHN McCOY, INC.
Notes to Financial Statements
December 31, 1998 and 1997
Note 6: RENT
The Company leases office space under a five-year operating lease which
expires January 31, 2007. Future minimum rentals are as follows:
1999 $ 126,000
2000 126,000
2001 126,000
2002 132,417
2003 133,000
Thereafter 410,083
-------------------------
$1,053,500
=========================
Note 7: PROFIT SHARING PLAN
The Company has a defined contribution Profit-Sharing Plan beginning
January 1, 1997, covering substantially all of its employees. Employees
qualify based on age and hours of service. The amount of the
contribution is determined by the Board of Directors. The profit
sharing plan contributions for 1998 and 1997 were $45,030 and $38,517,
respectively.
F-27
COMPONENTS BY JOHN McCOY, INC.
Balance Sheets
March 31, 1999 and December 31, 1998
(In thousands)
[Enlarge/Download Table]
ASSETS
March 31, December 31,
1999 1998
------------------ -----------------
(unaudited)
Current Assets
Cash $ 187 $ 45
Accounts Receivable - net 5,199 4,463
Inventory 2,454 2,311
------------------ -----------------
Total current assets 7,840 6,819
------------------ -----------------
Net property and equipment 312 181
Other assets 508 28
------------------ -----------------
Total Assets $ 8,660 $ 7,028
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Current Liabilities
Accounts payable $ 2,494 $ 2,459
Loan payable 3,369 2,462
Other current liabilities 158 49
----------------- ----------------
Total current liabilities 6,021 4,970
----------------- ----------------
Stockholders' Equity
Common Stock, no par value (authorized 200 shares,
issued and outstanding 100 shares) 300 300
Retained earnings 2,339 1,758
----------------- ----------------
Total stockholders' equity 2,639 2,058
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 8,660 $ 7,028
================= ================
See notes to financial statements.
F-28
COMPONENTS BY JOHN McCOY, INC.
Statements of Income and Retained Earnings (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
(In thousands)
[Download Table]
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
--------------------------------
Net Sales $ 5,384 $ 4,868
Cost of Sales 4,123 3,596
--------------------------------
Gross Profit 1,261 1,272
Selling, general and administrative expenses 604 509
--------------------------------
Income from operations 657 763
Interest expense 76 67
--------------------------------
Income before provision for income taxes 581 696
Provision for income taxes -- 16
--------------------------------
Net income 581 680
Retained earnings
Beginning of period 1,758 475
Shareholders distributions -- (50)
--------------------------------
Retained earnings -- end of period $ 2,339 $ 1,105
================================
See notes to financial statements.
F-29
COMPONENTS BY JOHN McCOY, INC.
Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
(In thousands)
[Enlarge/Download Table]
Three Months Three Months
Ended Ended
March 31, 1999 March 31, 1998
--------------------------------------
Cash flows from operating activities:
Net income $ 581 $ 680
Adjustments to reconcile net income to net cash
provided by operating activities:
Accounts receivable (736) (228)
Inventory and prepaid assets (143) (579)
Accounts payable and accrued expenses 144 15
------------------- ------------------
Net cash used by operating activities (154) (112)
Cash flows from investing activities:
Purchases of furniture and fixtures (131) --
Cash flows from financing activities:
Borrowing on loan payable 5,330 4,000
Repayments on loan payable (4,423) (3,809)
Distributions to shareholder (480) (50)
------------------- ------------------
Net cash provided by financing activities 427 141
Net increase in cash 142 29
Cash -- beginning of period 45 10
------------------- ------------------
Cash -- end of period $ 187 $ 39
=================== ==================
See notes to financial statements.
F-30
COMPONENTS BY JOHN McCOY, INC.
Notes to Quarterly Financial Statements
Three Months Ended March 31, 1999 and March 31, 1998
1. ORGANIZATION AND BASIS OF CONSOLIDATION
The accompanying financial statements include the accounts of the
Company and its consolidated subsidiary. All significant inter-company
transactions and balance have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of the results of operations for the
periods presented have been included.
The financial data at December 31, 1998 is derived from audited
financial statements for the year ended December 31, 1998, and should
be read in conjunction with the audited financial statements and notes
thereto. Interim results are not necessarily indicative of results for
the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
3. SUBSEQUENT EVENTS
The Company has entered a definitive agreement to be purchased by The
Pietrafesa Corporation as more fully described in this prospectus.
F-31
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS AND SHAREHOLDER
GLOBAL SOURCING NETWORK, LTD.
We have audited the accompanying balance sheets of GLOBAL SOURCING NETWORK, LTD.
as of December 31, 1998 and 1997, and the related statements of operations and
accumulated deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GLOBAL SOURCING NETWORK, LTD.
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Pasquale & Bowers LLP
Syracuse, New York
February 2, 1999
F-32
GLOBAL SOURCING NETWORK, LTD.
Balance Sheets
December 31, 1998 and 1997
[Enlarge/Download Table]
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 153,598 $ 84,348
Accounts receivable 19,148 338,304
Note receivable, net of allowance of $90,000 0 0
Due from related party (Note 7) 0 55,000
Inventories 907,500 0
Deferred taxes (Note 5) 57,600 0
------------- -------------
TOTAL CURRENT ASSETS 1,137,846 477,652
------------- -------------
PROPERTY AND EQUIPMENT-NET (Note 3) 10,204 10,161
------------- -------------
OTHER ASSETS
Due from shareholder (Note 7) 0 116,397
Deferred taxes (Note 5) 0 10,700
Other 0 5,142
------------- -------------
0 132,239
------------- -------------
$ 1,148,050 $ 620,052
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Accounts payable $ 1,026,265 $ 275,828
Royalty fees payable (Note 4) 229,085 397,215
------------- -------------
TOTAL CURRENT LIABILITIES 1,255,350 673,043
------------- -------------
SHAREHOLDER'S DEFICIT
Common stock
No par value
Authorized - 200 Shares
Issued and outstanding - 50 Shares 1,000 1,000
Accumulated deficit (108,300) (53,991)
------------- -------------
(107,300) (52,991)
------------- -------------
$ 1,148,050 $ 620,052
============= =============
See accompanying notes to the financial statements.
F-33
GLOBAL SOURCING NETWORK, LTD.
Statements Of Operations and Accumulated Deficit
Years Ended December 31, 1998 and 1997
[Download Table]
1998 1997
------------- -------------
SALES $ 18,062,322 $ 19,043,296
COST OF SALES 16,767,880 17,781,789
------------- -------------
GROSS PROFIT 1,294,442 1,261,507
GENERAL AND ADMINISTRATIVE EXPENSES 298,798 295,385
ROYALTIES AND COMMISSIONS 1,095,873 985,975
------------- -------------
LOSS FROM OPERATIONS (100,229) (19,853)
PROVISION FOR INCOME TAXES (Note 5) (45,920) (8,019)
------------- -------------
NET LOSS (54,309) (11,834)
ACCUMULATED DEFICIT - BEGINNING OF YEAR (53,991) (42,157)
------------- -------------
ACCUMULATED DEFICIT - END OF YEAR $ (108,300) $ (53,991)
============= =============
See accompanying notes to the financial statements.
F-34
GLOBAL SOURCING NETWORK, LTD.
Statements Of Cash Flows
Years Ended December 31, 1998 and 1997
Increase (Decrease) in Cash and Cash Equivalents
[Enlarge/Download Table]
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (54,309) $ (11,834)
------------- -------------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 4,421 3,574
Bad debts 149,017 102,000
Deferred tax benefit (46,900) (10,700)
Offset of amounts due from shareholder 116,397 0
Changes in assets and liabilities affecting cash flows from operating
activities:
Accounts receivable 260,139 (225,022)
Inventories (907,500) 0
Other assets 5,142 2,134
Accounts payable 750,437 267,909
Royalty fees payable (168,130) 5,772
Accrued expenses 0 (7,474)
------------- -------------
Total adjustments 163,023 138,193
------------- -------------
Net cash provided by operating activities 108,714 126,359
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,464) (6,004)
Advances on note receivable (90,000) 0
Repayments on notes receivable 0 144,000
------------- -------------
Net cash provided by (used in) investing activities (94,464) 137,996
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party 55,000 0
Payments to related party 0 (313,200)
------------- -------------
Net cash provided by (used in) financing activities 55,000 (313,200)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 69,250 (48,845)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 84,348 133,193
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 153,598 $ 84,348
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION-
Cash paid during the period for:
Income taxes: $ 680 $ 2,957
============= =============
See accompanying notes to the financial statements.
F-35
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
1. Organization
Global Sourcing Network, Ltd. (the "Company") imports men's apparel for
distribution to retail apparel companies located principally throughout
the United States. Substantially all of the Company's sales in 1997 and
1998 are to one customer.
2. Summary of Significant Accounting Policies
Revenue Recognition
-------------------
Revenue is recognized when products are received by the customer. The
Company estimates accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is recorded.
Inventories
-----------
Inventories are valued at the lower of cost, determined on the specific
identification method, or market.
Property and Equipment
----------------------
Property and equipment is recorded at cost. Depreciation is provided using
accelerated methods over the estimated useful lives of the related assets.
Income Taxes
------------
Income taxes have been provided using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets are
the result primarily of net operating loss carryforwards the Company has
available to offset future taxable income and reserves for bad debts.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
----------------
The Company considers all highly liquid debt instruments with an original
maturity of three months or less to be cash equivalents.
Business Concentrations
-----------------------
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. At
times, balances may be in excess of the FDIC insurance limit.
Substantially all of the Company's sales are to one customer. Essentially
all accounts receivable at December 31, 1998 and 1997 are from this
customer.
F-36
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years ended December 31, 1998 and 1997
3. Property and Equipment
Property and equipment, net of accumulated depreciation as of December 31,
1998 and 1997, consists of the following:
1998 1997
----------- -----------
Office equipment $ 19,347 $ 16,641
Furniture and fixtures 7,496 5,738
----------- -----------
26,843 22,379
Less: Accumulated depreciation (16,639) (12,218)
----------- -----------
$ 10,204 $ 10,161
=========== ===========
4. Royalty Fees Payable
The Company has a license agreement with Emerald Rise Trading, Ltd. (ERT),
for technical knowledge and expertise in association with the sourcing,
production and delivery of apparel. The Company pays royalties equal to 3%
of gross sales. Royalty fees, included in general and administrative
expenses, for the years ended December 31, 1998 and 1997, were
approximately $542,000 and $571,000, respectively.
5. Provision For Income Taxes
Income taxes for the years ended December 31, 1998 and 1997 are summarized
as follows:
1998 1997
----------- -----------
Current:
State and city $ 980 $ 2,681
----------- -----------
Deferred:
Federal (39,900) (7,400)
State (7,000) (3,300)
----------- -----------
(46,900) (10,700)
----------- -----------
$ (45,920) $ (8,019)
=========== ===========
The Company has unused net operating loss carryforwards available to
offset against future taxable income of approximately $54,000 at December
31, 1998, which expire from 2010 through 2018.
The components of the deferred tax asset as of December 31, 1998 and 1997
are as follows:
1998 1997
----------- -----------
Current deferred tax asset:
Net operating losses $ 21,600 $ 0
Allowance for bad debts 36,000 0
----------- -----------
$ 57,600 $ 0
=========== ===========
Noncurrent deferred tax asset:
Net operating losses $ 0 $ 10,700
=========== ===========
F-37
GLOBAL SOURCING NETWORK, LTD.
Notes to Financial Statements
Years Ended December 31, 1998 and 1997
5. Provision For Income Taxes (continued)
The reconciliation of the effective income tax rate is as follows:
1998 1997
----------- -----------
Federal income tax rate (34)% (34)%
State taxes, net of federal income
tax benefit (6) (6)
Adjustment to deferred tax rate (6) (0)
----------- -----------
(46)% (40)%
=========== ===========
6. Commitments
The Company leases office space under an agreement accounted for as an
operating lease expiring July 31, 1999. The Company sublet a portion of
its office to a related entity. Rent expense for the years ended December
31, 1998 and 1997, net of sublease income was approximately $22,000 and
$38,000, respectively.
7. Related Parties
Due from Related Party
----------------------
The Company provides management services and subleases office space to
Global Sourcing International (GSI), which is related through family
attribution. Management fees, sublease income and amounts due from GSI are
summarized as follows:
1998 1997
----------- -----------
Management fees $ 36,000 $ 24,000
Sublease income $ 26,700 $ 4,700
Due from related party $ 0 $ 55,000
Due from Shareholder
--------------------
The Company periodically makes advances to its president and sole
shareholder. Approximately $116,000 in advances outstanding at December
31, 1997 has been written off as commission expense in 1998. No interest
has been imputed on outstanding advances.
8. Financial Statement Presentation
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
F-38
GLOBAL SOURCING NETWORK, LTD.
Balance Sheets
March 31, 1999 and December 31, 1998
[Enlarge/Download Table]
March 31, December 31,
1999 1998
--------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 200 $ 153,598
Accounts receivable 588,962 19,148
Note receivable, net of allowance of $90,000 0 0
Inventories 433,918 907,500
Prepaid expenses 81,385 0
Deferred taxes 57,600 57,600
---------- ----------
TOTAL CURRENT ASSETS 1,162,065 1,137,846
---------- ----------
PROPERTY AND EQUIPMENT-NET 8,859 10,204
---------- ----------
$1,170,924 $1,148,050
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 898,573 $1,026,265
Royalty fees payable 222,660 229,085
---------- ----------
TOTAL CURRENT LIABILITIES 1,121,233 1,255,350
---------- ----------
SHAREHOLDER'S EQUITY (DEFICIT)
Common stock
No par value
Authorized - 200 Shares
Issued and outstanding - 50 Shares 1,000 1,000
RETAINED EARNINGS (ACCUMULATED DEFICIT) 48,691 (108,300)
---------- ----------
49,691 (107,300)
---------- ----------
$1,170,924 $1,148,050
========== ==========
See accompanying notes to the financial statements.
F-39
GLOBAL SOURCING NETWORK, LTD.
Statements Of Operations and Accumulated Deficit (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
[Download Table]
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
---------------- ----------------
SALES $ 6,039,754 $ 5,831,482
COST OF SALES 5,622,094 5,371,979
----------- -----------
GROSS PROFIT 417,660 459,503
GENERAL AND ADMINISTRATIVE EXPENSES 54,119 45,882
ROYALTIES AND COMMISSIONS 206,550 277,944
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 156,991 135,677
PROVISION FOR INCOME TAXES 0 2,288
----------- -----------
NET INCOME 156,991 133,389
ACCUMULATED DEFICIT - BEGINNING OF PERIOD (108,300) (53,792)
----------- -----------
ACCUMULATED DEFICIT - END OF PERIOD $ 48,691 $ 79,597
=========== ===========
See accompanying notes to the financial statements.
F-40
GLOBAL SOURCING NETWORK, LTD.
Statements Of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
Increase (Decrease) in Cash and Cash Equivalents
[Enlarge/Download Table]
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 156,991 $ 133,389
--------- ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 1,345 199
Changes in assets and liabilities affecting cash flows from
operating activities:
Accounts receivable (569,814) 261
Inventories 473,582 0
Prepaid expenses (81,385) (8,500)
Other assets 0 594
Accounts payable (127,692) (31,298)
Royalty fees payable (6,425) (100,000)
--------- ---------
Total adjustments (310,389) (138,744)
--------- ---------
Net cash used in operating activities (153,398) (5,355)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment 0 (1,758)
Advances to related party 0 (18,000)
--------- ---------
Net cash used in investing activities 0 (19,758)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to shareholder 0 (46,451)
--------- ---------
Net cash used in financing activities 0 (46,451)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (153,398) (71,564)
CASH AND CASH EQUIVALENTS - END OF PERIOD 153,598 84,348
--------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 200 $ 12,784
========= =========
See accompanying notes to the financial statements.
F-41
GLOBAL SOURCING NETWORK, LTD.
Notes to Quarterly Financial Statements (Unaudited)
Three Months Ended March 31, 1999 and March 31, 1998
1. Summary of Significant Accounting Policies
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the results of operations for the periods
presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements for the year ended December 31, 1998, and should be read in
conjunction with the audited financial statements and notes thereto.
Interim results are not necessarily indicative of results for the full
year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Subsequent Events
On April 15, 1999, the Company was acquired by The Pietrafesa Corporation,
as more fully set forth in the prospectus.
F-42
INDEPENDENT AUDITOR'S REPORT
Stockholders
Windsong, Inc.
We have audited the accompanying balance sheets of Windsong, Inc. as of
December 31, 1998 and 1997, and the related statements of income and retained
earnings (accumulated deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Windsong, Inc. as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
February 15, 1999
F-43
WINDSONG, INC.
Balance Sheets
December 31, 1998 and 1997
ASSETS
1998 1997
------ ------
Current assets
Cash (Note 2) $ 126,179 $ 700
Accounts receivable (Note 1,2,3) 5,643,217 5,573,629
Insurance claim receivable -- 37,229
Inventories (Note 1,2,3,5,14) 6,584,546 5,308,870
Other (Note 6) 729,941 223,748
----------- -----------
Total current assets 13,083,883 11,144,176
----------- -----------
Property and equipment, net (Note 2,7,10) 565,902 256,621
----------- -----------
Other assets
Note receivable-officer/
stockholder (Note 4,6,15) -- 1,036,436
Loan receivable-affiliated
company (Note 8) 437,429 --
Organization costs, net of
accumulated amortization
of $-0- and $814 (Note 2) -- 623
Security deposits and other 71,268 82,329
----------- -----------
Total other assets 508,697 1,119,388
----------- -----------
$14,158,482 $12,520,185
=========== ===========
See accompanying notes to financial statements
F-44
LIABILITIES and STOCKHOLDERS' EQUITY
1998 1997
------ ------
Current liabilities
Current portion of obligations
under capital leases (Note 2,7,10,15) $ 124,685 $ --
Accounts payable and accrued
expenses (Note 1,2,9,11,13,14,15) 4,143,299 7,517,193
Advances from factor (Note 3,15) 7,301,274 3,082,608
Due to affiliated company -- 118,043
State income taxes payable (Note 2) 25,341 32,090
---------- ----------
Total current liabilities 11,594,599 10,749,934
Obligations under capital leases (Note 2,7,10,15) 227,628 --
Deferred rent expense (Note 2,10) 8,225 13,901
Accounts payable-subordinated (Note 9,15) 1,379,568 1,379,568
----------- -----------
Total liabilities 13,210,020 12,143,403
----------- -----------
Commitments and contingencies
(Note 1,3,10,11,12,13,14)
Stockholders' equity
Common stock-no par value
- Class A (voting) -
1,000 shares authorized,
200 shares issued and out-
standing 200 200
- Class B (non-voting) -
1,000 shares authorized,
800 shares issued and out-
standing 800 800
Additional paid-in capital 6,000 6,000
Retained earnings 941,462 369,782
----------- -----------
Total stockholders' equity 948,462 376,782
----------- -----------
$14,158,482 $12,520,185
=========== ===========
See accompanying notes to financial statements.
F-45
WINDSONG, INC.
Statements of Income and Retained Earnings (Accumulated Deficit)
For the Years Ended December 31, 1998 and 1997
[Download Table]
1998 1997
------------ ------------
Net sales $ 63,630,094 $ 30,330,207
Cost of goods sold 49,884,050 23,861,570
------------ ------------
Gross profit 13,746,044 6,468,637
Operating expenses 11,073,999 5,741,573
------------ ------------
Income from operations 2,672,045 727,064
Interest expense, net 1,661,405 317,214
------------ ------------
Income before provision for income taxes 1,010,640 409,850
Provision for income taxes 46,000 35,000
------------ ------------
Net income 964,640 374,850
Retained earning (accumulated deficit)-
beginning of year 369,782 (5,068)
Distributions to stockholders (392,960) --
------------ ------------
Retained earnings-end of year $ 941,462 $ 369,782
============ ============
See accompanying notes to financial statements.
F-46
WINDSONG, INC.
Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
Increase (decrease) in cash
[Download Table]
1998 1997
------------ ------------
Cash flows from operating activities
Net income $ 964,640 $ 374,850
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 156,882 45,629
Effect of straight-lining minimum lease payments (5,676) 13,901
Loss on disposal of property and equipment -- 15,294
Net basis adjustment of property and equipment (3,831) --
Provision for doubtful accounts 20,000 --
Computer training expense incurred in connection
with property and equipment acquired under
capital lease 67,840 --
Note receivable-officer/stockholder
converted into salary 1,036,436 --
Changes in operating assets and liabilities
Accounts receivable (89,588) (4,220,872)
Insurance claim receivable 37,229 10,667
Inventories (1,275,676) (3,122,119)
Other current assets (506,193) (138,274)
Security deposits and other 11,061 (70,244)
Accounts payable and accrued expenses (3,373,894) 5,011,137
Advances from factor 4,218,666 2,640,551
State income taxes payable (6,749) 32,090
------------ ------------
Total adjustments 286,507 217,760
------------ ------------
Net cash provided by operating
activities, carried forward $ 1,251,147 $ 592,610
------------ ------------
See accompanying notes to financial statements.
F-47
WINDSONG, INC.
Statements of Cash Flows-continued
For the Years Ended December 31, 1998 and 1997
Increase (decrease) in cash
[Download Table]
1998 1997
------------ ------------
Net cash provided by operating
activities, brought forward $ 1,251,147 $ 592,610
------------ ------------
Cash flows from investing activities
Increase in note receivable-
officer/stockholder, net -- (74,321)
Payments to affiliated company (555,472) (284,904)
Payments for property and equipment (101,416) (232,785)
------------ ------------
Net cash used in investing activities (656,888) (592,010)
------------ ------------
Cash flows from financing activities
Distributions to shareholders (392,960) --
Payments on obligations under capital lease,
net of certain adjustments by lessor (75,820) --
------------ ------------
Net cash used in financing activities (468,780) --
------------ ------------
Net increase in cash 125,479 600
Cash-beginning of year 700 100
------------ ------------
Cash-end of year $ 126,179 $ 700
============ ============
Supplemental disclosure of cash flow information:
Cash was paid for
Income taxes $ 64,745 $ 4,901
============ ============
Interest, net of interest received from factor $ 1,638,830 $ 381,530
============ ============
See accompanying notes to financial statements.
F-48
WINDSONG, INC.
Statement of Cash Flows-continued
For the Years Ended December 31, 1998 and 1997
[Enlarge/Download Table]
1998 1997
------------ ------------
Supplemental schedules of non-cash operating,
investing and financing activities:
Acquisition of property and equipment and
$67,840 in training under capital leases,
net of certain adjustments by lessor $ 428,133 $ --
============= ============
Reclassification of amount from property and
equipment, net, to organization costs, net $ 120 $ --
============= ============
Reclassification of accounts payable to
accounts payable-subordinated $ -- $ 399,899
============= ============
Issuance of 800 shares of newly-authorized
Class B (non-voting) common stock and a
corresponding increase in other current
assets. (The Company's voting common
stock has been designated as Class A.) $ -- $ 800
============= ============
Acquisition of the following net assets of an affiliated company, at their
book value in exchange for (a) satisfaction of the Company's receivable from
the affiliated company, in the amount of $897,860, and (b) a payable to the
affiliated company, in the amount of $118,043:
Note receivable-officer/stockholder $ -- $ 962,115
Property and equipment, net -- 51,770
Security deposits and other -- 2,018
------------ ------------
$ -- $ 1,015,903
============= ============
See accompanying notes to financial statements.
F-49
WINDSONG, INC.
Notes to Financial Statements
December 31, 1998 and 1997
Note 1 - Description of business
Windsong, Inc. (the Company) is engaged in developing, designing and sourcing
private-label knit and woven shirts for distribution to a relatively small
number of retail customers located throughout the United States.
Additionally, the Company has entered into a long-term licensing agreement
with a certain designer to source and distribute knit and woven shirts and
sweaters throughout the United States (Note 13).
A substantial portion of the Company's inventories is acquired from a
relatively small number of suppliers.
Note 2 - Summary of significant accounting policies
a) Use of estimates
The preparation of financial statements requires the Company's management to
estimate the current effects of transactions and events whose ultimate
outcomes may not be determinable until future years. Consequently, the
estimated current effects could differ from the effects of the ultimate
outcomes.
b) Cash
Cash includes cash on hand and demand deposits with a financial institution
located in Connecticut. As of December 31, 1998, deposits with that financial
institution in the amount of approximately $194,000 are not covered by
federal deposit insurance.
c) Inventories
Inventories are valued at the lower of cost (principally the specific
identification method) or market.
d) Property and equipment and depreciation
Property and equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the assets, utilizing principally the straight-line
method. Expenditures for maintenance, repairs and renewals, which neither
materially add to the value of the property nor appreciably extend its useful
life, are charged to operations as incurred. When depreciable assets are sold
or otherwise retired from service, their cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the results of operations.
During 1998, the Company entered into non-cancellable capital leases for
computer software and equipment, as well as office and warehouse equipment.
Under the terms of the leases, (a) the lessors retain a security interest in
the leased assets and (b) the Company is obligated for the payment of taxes,
insurance and maintenance costs, which are included in the results of
operations.
F-50
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 2 - Summary of significant accounting policies-continued
d) Property and equipment and depreciation-continued
The asset values related to capital leases are included in property and
equipment at the present value of the minimum lease payments at inception
plus any additional costs incurred or fair value, if lower. The capital lease
obligations are reflected as part of current and non-current liabilities, and
the associated interest is charged to expense over the related lease terms.
e) Organization costs and amortization
Organization costs were originally stated at cost and amortized over five
years, utilizing the straight-line method. At December 31, 1998, these costs
have been fully amortized. Amortization, included in the results of
operations, amounted to $743 and $407 for 1998 and 1997, respectively.
f) Deferred rent expense
Deferred rent expense represents the cumulative effect of straight-lining
minimum lease payments which, for financial statement purposes, are required
to be recognized as rent expense on a straight-line basis over the lease
term.
g) Advertising costs
The costs of cooperative advertising are charged to expense when related
sales are recognized. All other costs of advertising are charged to expense
as incurred. Total advertising costs amounted to approximately $372,000 and
$126,000 for 1998 and 1997, respectively, of which approximately $238,000 and
$62,000, respectively, related to cooperative advertising.
h) Income taxes
The Company is treated as an S Corporation for federal income tax purposes.
As an S Corporation, the taxable income or loss and tax credits of the
Company are allocated to its stockholder. State income taxes are provided to
the extent that S Corporation status is not recognized for such purposes.
i) Reclassifications
Certain items included in the 1997 financial statements, as originally
issued, have been reclassified to conform to the 1998 presentation.
F-51
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 3 - Accounts receivable
Accounts receivable consist of the following:
[Download Table]
1998 1997
------------ ------------
Accounts assigned to factor (a) $ 5,654,907 $ 5,443,921
Accounts not assigned to factor 8,310 129,708
------------ ------------
5,663,217 5,573,629
Less: allowance for doubtful accounts 20,000 --
------------ ------------
Total accounts receivable $ 5,643,217 $ 5,573,629
============ ============
(a) The Company has an arrangement with a commercial factor that includes
the terms and conditions discussed below.
o The Company receives advances from the factor in accordance with a
formula that is based upon -
(1) the "net face amount", as defined, of assigned receivables
(less a factoring commission) plus
(2) eligible inventories, as defined, less
(3) certain amounts held by the factor for letters of credit
opened and liabilities owed to the factor.
o The aforementioned advances are repaid as the assigned receivables
are collected.
o Interest is charged or credited on outstanding balances due to or
from the factor at a specified percentage (the percentage) above
the prime rate of a certain bank, as quoted from time to time. The
percentage was 2% through September 30, 1997. Effective October 1,
1997, the percentage was 1.5% (decreased to .5% as of October 1,
1998), except for "overadvances", in which case the percentage was
4.5% (decreased to 1% as of October 1, 1998).
o Factor commissions are charged in an amount equal to a specified
percentage of assigned receivables. That percentage was 1% through
September 30, 1997. Effective October 1, 1997, that percentage was
.75% (decreased to .5% for the period from October 1, 1998 until
September 30, 1999, then .6% thereafter).
F-52
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 3 - Accounts receivable-continued
o Customary charges are made by the factor in connection with (a)
letters of credit that are issued for the Company's account to its
suppliers and (b) the servicing of assigned receivables.
o Amounts due to the factor, as well as any outstanding letters of
credit, are secured by the Company's trade receivables and
inventories.
o Amounts due to the factor are also guaranteed by a Company officer/
stockholder.
Amounts were due (to)/from the factor as follows:
1998 1997
---- ----
Accounts receivable assigned to factor $ 5,654,907 $ 5,443,921
Less: advances from the factor 7,301,274 3,082,608
------------ ------------
$ (1,646,367) $ 2,361,313
============ ============
Factor commissions and interest expense, net, included in the results of
operations, amounted to $484,757 and $1,298,176, respectively, for 1998, and
$322,155 and $367,884, respectively, for 1997.
Note 4 - Note receivable-officer/stockholder
A note receivable-officer/stockholder, which bore interest at the short-term
federal rate, as published by the Internal Revenue Service from time to time,
was converted into salary during 1998. Interest income, included in the
results of operations, amounted to $62,573 and $64,316, for 1998 and 1997,
respectively.
Note 5 - Inventories
Inventories consist of the following:
1998 1997
---- ----
Raw materials $ 85,904 $ 367,122
Work-in-process - 278,336
Finished goods 6,498,642 4,663,412
------------ ------------
$ 6,584,546 $ 5,308,870
============ ============
F-53
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 6 - Other current assets
Other current assets consist of the following:
1998 1997
------ ------
Prepaid sales allowances $ 445,598 $ -
Interest receivable on note receivable-
officer/stockholder 126,889 64,316
Advances to officers/stockholders 105,273 -
Deposit on inventory purchase - 100,000
Prepaid expenses and other 52,181 59,432
--------- --------
$ 729,941 $223,748
========= ========
Note 7 - Property and equipment, net
Property and equipment, net, consists of the following:
Estimated
Useful Lives
in Years 1998 1997
------------ ------ ------
Furniture and equipment 5 - 7 $ 254,724 $ 232,522
Automobiles 5 146,881 202,195
Computer software 3 70,981 51,036
Property and equipment under
capital leases (Note 10) 3 - 5 360,293 -
--------- ----------
832,879 485,753
Less accumulated depreciation
and amortization 266,977 229,132
--------- ----------
$ 565,902 $ 256,621
========= ==========
Included in property and equipment are assets acquired from an affiliated
company during 1997. As of January 1, 1998, the cost basis and related
accumulated depreciation of certain of those assets were adjusted to
better reflect net book value at the time of acquisition. The foregoing
resulted in the recognition of a net basis adjustment credit of $3,831,
which is included in other income.
F-54
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 7 - Property and equipment, net-continued
Property and equipment under capital leases consist of the following:
1998
------
Computer software $ 128,790
Computer and office equipment 180,210
Warehouse equipment 51,293
----------
$ 360,293
==========
Depreciation and amortization on property and equipment, included in the
results of operations, amounted to $156,139 and $45,222 for 1998 and 1997,
respectively.
Included in accumulated depreciation and amortization is accumulated
depreciation related to capital leases in the amount of $68,060 as of
December 31, 1998.
Note 8 - Loan receivable-affiliated company
The loan receivable-affiliated company is due on demand and bears interest
at the short-term federal rate, as published by the Internal Revenue
Service from time to time, commencing January 1, 1999 (extended from
October 1, 1998). The Company has expressed its intent not to demand
payment on this loan prior to January 1, 2000 (extended from October 1,
1999).
Note 9 - Accounts payable
One of the Company's largest suppliers has agreed that approximately $1.4
million of its accounts payable shall be subordinated to all other
liabilities of the Company.
Additionally, effective January 1, 1998, accounts payable to that supplier
bear interest as follows:
-- for the subordinated portion, 8-1/2% per annum, retroactive to
May 15, 1996.
-- for the remaining portion, a rate equal to the prime rate of the
supplier's bank, as quoted from time to time.
Interest expense, included in the results of operations, amounted to
$405,595 for 1998.
F-55
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 10 - Leases
a) Capital leases
As of December 31, 1998, the future minimum payments under capital leases
are as follows:
Total Interest Net
Payments Portion (1) Payments
-------- ----------- --------
1999 $ 159,332 $ 34,647 $ 124,685
2000 155,082 19,774 135,308
2001 96,584 4,264 92,320
--------- --------- ---------
$ 410,998 $ 58,685 $ 352,313
========= ========= =========
(1) Interest rates range from approximately 9% to approximately 17% per
annum. Interest expense, included in the results of operations,
amounted to $19,907.
b) Operating leases
The Company is obligated under non-cancellable operating leases for
office, showroom and warehouse space. The leases, which expire on various
dates through November, 2002 provide for minimum annual payments.
Additional information about the leases is as follows:
-- Payments under the lease for office space are guaranteed by an
officer/ stockholder of the Company. This lease contains a two-year
renewal option.
-- The lease for showroom space provides for contingent rental
payments, consisting of a proportionate share of any increases in
real estate taxes and operating expenses.
-- One of the Company's two leases for warehouse space expired during
August 1998. The remaining lease contains a five-year renewal
option and provides for contingent rentals consisting of a
proportionate share of real estate taxes, insurance and operating
expenses.
Future minimum lease payments are as follows:
Office and
Showroom Warehouse
Total Space Space
------- ----------- ----------
1999 $ 327,713 $ 80,616 $ 247,097
2000 288,897 41,800 247,097
2001 247,097 - 247,097
2002 226,503 - 226,503
---------- --------- ---------
$1,090,210 $ 122,416 $ 967,794
========== ========= =========
F-56
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 10 - Leases-continued
b) Operating leases-continued
Rent expense, included in the results of operations, amounted to $419,036
and $134,283 for 1998 and 1997, respectively, of which $38,794 and $7,209,
respectively consisted of contingent rentals.
Additionally, the Company makes payments under various short-term leases for
equipment. Such payments are not significant to the Company's operations.
Note 11 - Employee benefit plan
The Company sponsors a defined benefit pension plan for all eligible
employees. The plan provides for retirement benefits based on employees'
length of service and earnings. Pension cost is actuarially determined and
annual contributions to the plan are made in amounts that meet the minimum
funding standards of the Employee Retirement Income Security Act (ERISA) and
the Internal Revenue Code.
Pension Benefits
1998 1997
---------- -----------
Change in benefit obligation:
Benefit obligation at beginning of year $2,290,708 $ 967,290
Service cost 429,801 402,653
Interest cost 160,350 118,447
Amendments -- 1,006,833
Actuarial gain/(loss) 73,718 (127,377)
Benefits paid -- (77,138)
---------- ------------
Benefit obligation at end of year 2,954,577 2,290,708
---------- ------------
Changes in plan assets:
Fair value of plan assets at beginning
of year 1,229,381 1,227,394
Actual return on plan assets 13,614 79,125
Employer contributions 871,000 --
Benefit paid -- (77,138)
---------- ------------
Fair value of plan assets at end of year 2,113,995 1,229,381
---------- ------------
Funded status (840,582) (1,061,327)
Unrecognized actuarial gain (185,877) (356,793)
Unrecognized prior service cost 469,335 488,891
Unrecognized net obligation 71,761 75,178
Unrecognized intangible asset (15,908) (17,066)
---------- ------------
Net amount recognized $ (501,271) $ (871,117)
========== ============
F-57
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 11 - Employee benefit plan-continued
Amount recognized in the statement of financial position consists of:
1998 1997
--------- ---------
Accrued benefit liability $(501,271) $(871,117)
========= =========
Weight average assumptions as
of December 31:
Discount rate 7.00% 7.00%
Expected return on plan assets 7.00 7.00
Rate of compensation increase 4.00 4.00
Components of net periodic cost consist of:
1998 1997
--------- --------
Service cost $ 429,801 $402,653
Interest cost 160,350 118,447
Expected return on plan assets (105,006) (83,481)
Amortization of prior service cost 19,556 517,942
Amortization of net obligation 3,417 3,417
Amortization of actuarial gain (5,806) (4,828)
Underaccrual of prior service cost (1,041) (83,033)
--------- ---------
Net periodic cost $501,271 $871,117
========= =========
The projected benefit obligation, accumulated benefit obligation and fair value
plan assets were $2,955,000, $2,615,000 and $2,114,000, respectively, as of
December 31, 1998 and $2,291,000, $2,100,000 and $1,229,000, respectively, as of
December 31, 1997.
As of December 31, 1998, plan assets consisted primarily of investments in
money market and mutual funds and common stocks under discretionary
management in accordance with ERISA.
Note 12 - Purchase orders
As of December 31, 1998, the Company is contingently liable on outstanding
letters of credit of approximately $4.5 million, against open purchase
orders of approximately $13.7 million.
Note 13 - Licensing agreement
The Company's licensing agreement with a certain designer (a) expires on
December 31, 2001, or sooner if the Company is unable to achieve certain
sales volumes before that date, (b) contains an option that allows the
Company to renew the licensing agreement for an additional five years under
substantially the same terms, except for varying minimum annual payments as
set forth in the licensing agreement, and (c) provides for the payment of
the following:
a) Specified percentages of annual net sales (as defined in the agreement,
as amended) of the designer's products, with minimum annual payments
totaling 75% of the prior year's percentage payments, for each of the
calendar years from January 1, 1998 through December 31, 2001.
Percentage payments, included in the results of operations, amounted to
approximately $1,747,000 and $778,000 for 1998 and 1997, respectively,
and exceed the minimum annual payments for 1998 and 1997, respectively.
The foregoing includes amounts accrued, but unpaid as of December 31,
1998 and 1997.
F-58
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1998 and 1997
Note 13 - Licensing agreement-continued
b) A specified percentage of annual net sales of the designer's products
or an agreed upon amount, to be used for advertising, commencing
January 1, 1998. (The amount of such advertising expense, included in
the results of operations, amounted to approximately $132,000 and
$50,000 for 1998 and 1997, respectively.)
c) Reimbursements for certain travel and other expenses incurred by the
designer.
Note 14 - Other Agreements
The Company has agreements with (a) an independent sales representative for
the payment of commissions on licensed products sold to certain significant
customers and (b) a purchasing agent for the payment of commissions on
certain products acquired by the Company for resale.
Additionally, the Company provides members of management with bonuses that
are payable if certain Company goals are attained. The total of such
bonuses, included in the results of operations, amounted to approximately
$1,578,000 and $612,000 for 1998 and 1997, respectively.
Note 15 - Interest expense, net
Interest expense, net, consists of the following:
1998 1997
------ ------
Interest on -
Advances from factor, net (Note 3) $ 1,298,176 $ 367,884
Accounts payable (Note 9) 405,595 12,814
Obligations under capital lease (Note 10) 19,907 -
Other, net 300 832
----------- ----------
1,723,978 381,530
Interest income from note receivable-
officer/stockholder (Note 4) (62,573) (64,316)
---------- ---------
$ 1,661,405 $ 317,214
=========== =========
F-59
INDEPENDENT AUDITOR'S REPORT
Stockholder
Windsong, Inc.
We have audited the accompanying balance sheet of Windsong, Inc. as of
December 31, 1996, and the related statements of income and accumulated deficit
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Windsong, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
F-60
WINDSONG, INC.
Balance Sheet
December 31, 1996
ASSETS
Current assets
Cash (Note 2) $ 100
Accounts receivable (Note 1,3) 1,352,757
Due from affiliated company (Note 1,8,11) 612,956
Insurance claim receivable 47,896
Inventories (Note 1,2,3,4) 2,186,751
Prepaid commissions and other 84,674
----------
Total current assets 4,285,134
Property and equipment, net (Note 2,5,11) 32,582
Organization costs, net (Note 2) 1,030
Other assets 10,067
----------
$4,328,813
==========
LIABILITIES and STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued
expenses (Note 1,11) $2,905,955
Due to factor (Note 3,10) 442,057
----------
Total current liabilities 3,348,012
Accounts payable-subordinated (Note 1,11) 979,669
----------
Total liabilities 4,327,681
----------
Commitments and contingencies (Note 3,6,7,8,9)
Stockholder's equity (Note 1)
Common stock-no par value,
-authorized 1,000 shares
-issued and outstanding,
200 shares 200
Additional paid-in capital 6,000
Accumulated deficit (5,068)
----------
Total stockholder's equity 1,132
----------
$4,328,813
==========
See accompanying notes to financial statements.
F-61
WINDSONG, INC.
Statement of Income and Accumulated Deficit
For the Year Ended December 31, 1996
Net sales $6,202,405
Cost of goods sold 5,444,006
----------
Gross profit 758,399
Operating expenses 741,231
----------
Income from operations 17,168
Interest expense, net 13,937
----------
Income before provision for income taxes 3,231
Provision for income taxes 2,500
----------
Net income 731
Accumulated deficit-beginning of year (5,799)
----------
Accumulated deficit-end of year $ (5,068)
==========
See accompanying notes to financial statements.
F-62
WINDSONG, INC.
Statement of Cash Flows
For the Year Ended December 31, 1996
(Decrease) increase in cash
Cash flows from operating activities
Net income $ 731
----------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 24,895
Changes in operating assets and liabilities
Accounts receivable (1,352,757)
Insurance claim receivable (47,796)
Inventories (1,202,185)
Prepaid commissions and other (84,674)
Other assets (10,067)
Accounts payable and accrued expenses 2,905,955
Due to factor 442,057
----------
Total adjustments 675,428
----------
Net cash provided by operating activities 676,159
----------
Cash flows from investing activities
Payments to affiliated company, net (686,127)
Payments for property and equipment (54,293)
Payment for organization costs (1,000)
----------
Net cash used in investing activities (741,420)
----------
Net decrease in cash (65,261)
Cash-beginning of year 65,361
----------
Cash-end of year $ 100
==========
Supplemental disclosure of cash flow information:
Income taxes paid $ 750
==========
Interest paid $ 15,810
==========
See accompanying notes to financial statements.
F-63
WINDSONG, INC.
Statement of Cash Flows-Continued
For the Year Ended December 31, 1996
Supplemental schedule of non-cash operating, investing
and financing activities:
Inventories acquired for accounts payable-subordinated $979,669
========
Property and equipment acquired for decrease in due
from affiliated company $ 2,777
========
See accompanying notes to financial statements.
F-64
WINDSONG, INC.
Notes to Financial Statements
December 31, 1996
Note 1 - Description of business
Windsong, Inc. (the Company) was incorporated on August 3, 1995 and commenced
substantive operations on January 1, 1996.
The Company is engaged in developing, designing and sourcing private-label
knit and woven shirts for distribution to a relatively small number of retail
customers located throughout the United States. Additionally, the Company has
entered into a long-term licensing agreement with a certain designer to
source and distribute knit and woven shirts and sweaters throughout the
United States (Note 7).
The Company's stockholder and another individual who controls the Company's
major supplier have an agreement to provide financing to the Company. During
1996, in connection with that agreement, (a) a substantial portion of Company
expenses was paid for by a company controlled by the stockholder (hereafter
referred to as affiliated company) and (b) a substantial portion of the
Company's inventories was acquired from the major supplier.
Also during 1996, (a) the Company reimbursed the affiliated company for
amounts incurred on its behalf and (b) the aforementioned individual had
subscribed to shares of the Company's common stock and, accordingly, was
previously identified as a Company stockholder; however, that subscription
expired prior to December 31, 1996, whereupon those subscribed shares were
issued, instead, to the Company's sole stockholder.
Note 2 - Summary of significant accounting policies
a) Use of estimates
The preparation of financial statements requires the Company's management to
estimate the current effects of transactions and events whose ultimate
outcomes may not be determinable until future years. Consequently, the
estimated current effects could differ from the effects of the ultimate
outcomes.
b) Cash
Cash includes cash on hand and demand deposits with a financial institution
located in Connecticut.
c) Inventories
Inventories are valued at the lower of cost (principally the specific
identification method) or market.
F-65
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 2 - Summary of significant accounting policies-continued
d) Property and equipment and depreciation
Property and equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the assets, utilizing principally the straight-line
method. Expenditures for maintenance, repairs and renewals, which neither
materially add to the value of the property nor appreciably extend its useful
life, are charged to operations as incurred. When depreciable assets are sold
or otherwise retired from service, their cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in the results of operations.
e) Organization costs and amortization
Organization costs are stated at cost. Amortization is provided over five
years, utilizing the straight-line method. Amortization, included in the
results of operations, amounted to $407.
f) Income taxes
The Company is treated as an S Corporation for federal income tax purposes.
As an S Corporation, the taxable income or loss and tax credits of the
Company are allocated to its stockholder. State income taxes are provided to
the extent that S Corporation status is not recognized for such purposes.
Note 3 - Accounts receivable
Accounts receivable consist of the following:
Accounts assigned to factor (a) $ 1,311,710
Accounts not assigned to factor 41,047
------------
$ 1,352,757
============
(a) The Company has an arrangement with a commercial factor, in which:
o The Company receives advances from the factor in accordance with a
formula that is based upon (1) the "net face amount", as defined, of
assigned receivables (less a factoring commission) and (2) eligible
inventories, as defined and (3) certain amounts held by the factor for
letters of credit opened and liabilities owed to the factor.
F-66
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 3 - Accounts receivable-continued
o The aforementioned advances are repaid as the assigned receivables are
collected.
o Interest is charged or credited on outstanding balances due to or from
the factor at 2% above the prime rate of a certain bank, as quoted from
time to time except for "overadvances" in which case the percentage is
5% above the prime rate. Also, customary charges are made by the factor
in connection with (a) letters of credit that are issued for the
Company's account to its suppliers and (b) the servicing of assigned
receivables. Factor commissions are charged in an amount equal to 1% of
assigned receivable.
o Amounts due to the factor, as well as any outstanding letters of
credit, are secured by the Company's trade receivables and inventories.
o Amounts due to the factor also are guaranteed by the Company's
stockholder, who has pledged certain personal assets in connection
therewith.
Amounts were due from the factor as follows:
Accounts receivable assigned to factor $ 1,311,710
Less: advances from the factor 442,057
------------
$ 869,653
============
Factor commissions and interest expense, net, included in the results of
operations, amounted to $35,670 and $14,908, respectively.
Note 4 - Inventories
Inventories consist of the following:
Raw materials $ 378,891
Work in process 406,134
Finished goods 1,401,726
------------
$ 2,186,751
============
F-67
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 5 - Property and equipment, net
Property and equipment, net, consists of the following:
Estimated
Useful Lives
in Years
Furniture and equipment 5 - 7 $ 37,140
Computer software fee 1 1,494
Automobile 5 19,930
------------
58,564
Less accumulated depreciation 25,982
------------
$ 32,582
============
Depreciation, included in the results of operations, amounted to $24,488.
Note 6 - Commitments
As of December 31, 1996, the Company is contingently liable on outstanding
letters of credit of approximately $2.7 million against open purchase orders
of approximately $7.4 million.
Note 7 - Licensing agreement
The Company's licensing agreement with a certain designer (a) expires on
December 31, 2001, or sooner if the Company is unable to achieve certain
sales volumes before that date, and (b) provides for the payment of the
following:
a) Specified percentages of annual net sales (as defined in the agreement)
of the designer's products, with
(1) a minimum payment of $75,000 for the 24-month period ending
December 31, 1997 (initial period), which will be applied
against the amount of specified percentage payments due during
the initial period. Of this minimum payment, $37,500 was paid
during 1996 and is included in operating expenses.
F-68
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 7 - Licensing agreement-continued
(2) a minimum annual payment thereafter at 75% of the prior
year's or initial period's percentage payments, as
applicable, through December 31, 2001 and
(3) two additional minimum payments for design and marketing costs
totalling $37,500, which are included in operating expenses.
b) A specified percentage of annual net sales of the designer's products or
an agreed upon amount to be used for advertising.
c) Reimbursements for certain travel and other expenses incurred by the
designer.
Furthermore, the agreement contains an option that allows the Company to
renew the licensing agreement for an additional five years under
substantially the same terms, except for varying minimum annual payments, as
set forth in the licensing agreement.
Note 8 - Rent and other allocable expenses
The Company rents office space from an affiliated company on a month-to-month
basis and reimburses the affiliated company for other expenses necessary for
the Company's operations.
A summary of the reimbursed expenses follows:
Total Rent Other
----- ---- -----
For the eight months
ended August 31, 1996,
as previously reported $ 155,273 $ 9,059 $ 146,214
For the period from
September 1 through
December 31, 1996 (a) (130,737) 4,055 (134,792)
---------- --------- ----------
Total for the year
ended December 31,
1996 $ 24,536 $ 13,114 $ 11,422
========== ========= ==========
(a) After giving effect to a credit resulting from a refinement in the way
in which expenses are allocated between the Company and the affiliated
company.
F-69
WINDSONG, INC.
Notes to Financial Statements-continued
December 31, 1996
Note 9 - Agreement with other
The Company has an agreement with an independent sales representative for the
payment of commissions on licensed products sold to certain signficant
customers.
Note 10 - Interest expense, net
Interest expense, net, consists of the following:
Interest expense, net, on amounts due to and
from factor (Note 3) $ 14,908
Other (971)
----------
$ 13,937
==========
Note 11 - Related party and other transactions
a) Accounts payable to major supplier
Accounts payable to the Company's major supplier as of December 31, 1996
consists of (a) $979,669 of accounts payable-subordinated and (b) $2,265,443,
which is included in accounts payable and accrued expenses.
b) Payments to affiliated company
During 1996, the Company made payments, net, to its affiliated company, in
the amount of $686,127, which consisted of reimbursements for expenses, as
discussed in Note 1, and certain property and equipment and advances for
future expenses.
F-70
WINDSONG, INC.
Balance Sheets
March 31, 1999 and December 31, 1998
[Download Table]
MARCH 31 DECEMBER 31
1999 1998
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,717 $ 126,179
Accounts receivable, net 8,527,200 5,643,217
Due from affiliates 720,136 437,429
Due from officers 166,139 232,162
Inventory 9,472,703 6,584,546
Prepaid expenses and other current assets 422,279 497,779
----------- -----------
Total current assets 19,329,174 13,521,312
----------- -----------
Property and equipment, net 597,791 565,902
Other assets 71,268 71,268
----------- -----------
Total assets $19,998,233 $14,158,482
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital lease $ 125,000 $ 124,685
Advances from factor 10,707,226 7,301,274
Accounts payable 4,985,354 1,881,303
Accounts payable - subordinated 1,379,568 1,379,568
Accrued expenses 854,032 2,270,221
Income taxes 4,551 25,341
----------- -----------
Total current liabilities 18,055,731 12,982,392
----------- -----------
Obligations under capital lease 186,621 227,628
----------- -----------
Shareholders' equity:
Common stock - no par value
- Class A (voting)
1000 shares authorized
200 shares issued and outstanding 200 200
- Class B (non-voting)
1000 shares authorized
800 shares issued and outstanding 800 800
Contributed capital 6,000 6,000
Retained earnings 1,748,881 941,462
----------- -----------
Total shareholders' equity 1,755,881 948,462
----------- -----------
Total liabilities and shareholders' equity $19,998,233 $14,158,482
=========== ===========
See accompanying notes.
F-71
WINDSONG, INC.
Statements of Income and Retained Earnings
Three Months Ended March 31, 1999 and March 31, 1998
Three Months Ended March 31,
1999 1998
------------ -------------
(Unaudited)
Net sales $14,552,336 $17,311,703
Cost of sales 11,169,978 13,683,331
----------- -----------
Gross profit 3,382,358 3,628,372
Selling and distribution expenses 864,247 1,010,437
General and administrative expenses 1,205,933 1,120,800
----------- -----------
Income from operations 1,312,178 1,497,135
Interest expense (334,132) (447,939)
Interest income 263 110
----------- -----------
Income before provision for income taxes 978,309 1,049,306
Provision for income taxes 44,000 47,000
----------- -----------
Net income $ 934,309 $ 1,002,306
=========== ===========
See accompanying notes
F-72
WINDSONG, INC.
Statements Of Cash Flows
Three Months Ended March 31, 1999 and March 31, 1998
Increase (Decrease) in Cash and Cash Equivalents
[Enlarge/Download Table]
Three Months Ended March 31
1999 1998
---------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 934,309 $ 1,002,306
Adjustments to reconcile net income to net
cash
provided by (used in) operating activities:
Depreciation and amortization 40,000 41,152
Changes in operating assets and liabilities:
Accounts receivable (2,883,983) (7,701,394)
Due from affiliates and officers (343,573) (126,575)
Inventory (2,888,157) (439,109)
Prepaid expenses 202,389 (319,892)
Accounts payable 2,011,409 (805,644)
Accrued expenses (344,337) (398,718)
Advances from factor 3,405,952 8,846,243
Other assets (9,146)
---------- -----------
Net cash provided by operating activities 134,009 89,223
---------- -----------
INVESTING ACTIVITIES
Purchase of fixed assets (71,889) (88,425)
Distributions to shareholders (126,890)
---------- -----------
Net cash used in investing activities (198,779) (88,425)
---------- -----------
FINANCING ACTIVITIES
Payments on obligations under capital lease (40,692)
---------- -----------
Net cash used in financing activities
(40,692) -
---------- -----------
(Decrease) increase in cash and cash equivalents (105,462) 798
Cash and cash equivalents at beginning of period 126,179 700
---------- -----------
Cash and cash equivalents at end of period $ 20,717 $ 1,498
========== ===========
See accompanying notes.
F-73
WINDSONG, INC.
Notes to Quarterly Financial Statements
Three Months Ended March 31, 1999
1. ORGANIZATION
Windsong, Inc. ("Windsong") is engaged in developing, designing and
sourcing private-label knit and woven shirts for distribution to a
relatively small number of retail customers located throughout the United
States. Additionally, Windsong has entered into a long-term licensing
agreement with a certain designer to source and distribute knit and woven
shirts and sweaters throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of Windsong's management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the results of operations for the periods
presented have been included.
The financial data at December 31, 1998 is derived from audited financial
statements and should be read in conjunction with the audited financial
statements and notes thereto. Interim results are not necessarily
indicative of results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires Windsong's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
[Enlarge/Download Table]
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
U.S. trade accounts receivable.............................. $ 8,617,200 $ 5,663,217
Allowance for returns and discounts......................... (90,000) (20,000)
----------- -----------
$ 8,527,200 $ 5,643,217
=========== ===========
Windsong has entered into a factoring arrangement on its accounts
receivable. Amounts due (owed) to the factor are $8.5 million and $5.6
million of unmatured accounts receivable assigned to the factor, less $10.7
million and $7.3 million of advances received from the factor, at March 31,
1999 and December 31, 1998 respectively.
F-74
4. INVENTORY
Inventory consists of the following:
[Download Table]
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
(Unaudited) (Audited)
Raw materials........................................ $ 41,343 $ 85,904
Finished goods shipments-in-transit.................. 2,079,973 1,550,292
Finished goods....................................... 7,351,387 4,948,350
----------- -----------
$ 9,472,703 $ 6,584,546
=========== ===========
F-75
Shares
[GRAPHIC OMITTED]
Class A Common Stock
JANNEY MONTGOMERY SCOTT INC.
EVEREN SECURITIES, INC.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Until ____________, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or expected
to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions. All amounts are estimated except for the SEC
registration fee and the NASD filing fee.
Item Amount
---- ------
SEC registration fee................................................. $ 14,095
NASD filing fee...................................................... 5,500
Nasdaq National Market listing fee................................... 55,000
Blue sky fees and expenses........................................... 10,000
Printing and engraving costs......................................... 140,000
Transfer agent fees.................................................. 3,500
Legal fees and expenses.............................................. 320,000
Accounting fees and expenses......................................... 265,000
Miscellaneous........................................................ 175,895
-----------
Total................................................................ $988,990
===========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are incorporated under the laws of the State of Delaware. Section 145 of the
General Corporation Law of the State of Delaware provides that a Delaware
corporation may indemnify any person who is, or is threatened to be made, a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation), by reason of the fact that such person
was an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any person who is, or is threatened to be made, a party to any threatened,
pending or completed action or suit by or in the right of the corporation by
reason of the fact that such person was a director, officer, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses, including attorneys' fees, actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests except that no indemnification is permitted without judicial approval
if the officer or director is adjudged to be liable to the corporation. Where an
officer or director is successful on the merits or otherwise in the defense of
any action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
Our Certificate of Incorporation provides for the indemnification of our
directors and officers to the fullest extent permitted by Section 145. In that
regard, our Certificate of Incorporation provides that we shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director or
officer of such corporation, or is or was serving at the request of such
corporation as a director, officer or member of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed
II-1
to the best interests of such corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Indemnification in connection with an action or suit by or in the
right of such corporation to procure a judgment in its favor is limited to
payment of settlement of such an action or suit except that no such
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable for negligence or misconduct
in the performance of his duty to the indemnifying corporation unless and only
to the extent that the Court of Chancery of Delaware or the court in which such
action or suit was brought shall determine that, despite the adjudication of
liability but in consideration of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper.
In addition, our By-laws provide that we shall indemnify to the full extent
authorized by law any person made or threatened to be made a party to an action,
suit or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he, his testator or intestate is or was our director,
officer, employee or agent or is or was serving, at our request, as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
We have purchased an insurance policy effective upon consummation of the
offering covering indemnification of directors and officers of the Registrant
against liabilities arising under the Securities Act that might be incurred by
them in such capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities:
[Enlarge/Download Table]
PURCHASER NO. DATE CLASS/TYPE PAR VALUE
--------- --- ---- ---------- ---------
MS Pietrafesa, L.P. 100 Shares October 1, 1998 Class B Common Stock $.001 per share
Thomas M. Minkstein 2.5 Units January 27, 1999 Partnership Units of not applicable
MSJP, L.P., representing
an indirect 2.9% beneficial
interest in the shares of Class
B Common Stock owned by
MS Pietrafesa, L.P.
Windsong, Inc. Shares , 1999 Class A Common Stock $.001 per share
Each of the issuances cited above was exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act because the
issuances did not involve a public offering. In addition, each recipient
represented its intention to acquire the securities for investment only and not
with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificates issued in such
transactions. Such recipients had adequate access to information about the
Company and were sophisticated and expert in financial matters.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
[Enlarge/Download Table]
NUMBER DESCRIPTION
------ -----------
*1 Form of Underwriting Agreement
*2.1 Asset Purchase Agreement, between Registrant and Windsong, Inc.
**3.1 Certificate of Incorporation of Registrant
**3.2 By-Laws of Registrant
*4 Form of Common Stock Certificate
5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant, Components Acquisition Corp., John McCoy and
Components by John McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG Acquisition Corp., Jarrod Nadel and Diversified
Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant, Peter Lister and Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of Canada and MS Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P. and Onondaga County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994 between Onondaga County Industrial Development Agency
and MS Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban Development Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and Leases dated as of October 1, 1998, between MS
Pietrafesa, L.P. and The Pietrafesa Corporation.
10.9 Revolving Credit, Term Loan and Security Agreement dated April 15, 1999, between Registrant and PNC Bank, National
Association.
+10.10 License Agreement dated as of January 1, 1996, between Alexander Julian, Inc. and Windsong, Inc.
*11 Statement regarding computation of per share earnings
**21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation (included in its opinion filed as Exhibit 5 hereto)
24 Power of Attorney (reference is made to the signature pages to the Registration Statement)
27 Financial Data Schedule
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the other
information is included in the financial statements.
II-3
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide the underwriters
at the closing of the offering specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
that matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Syracuse, New York on
this 28th day of May, 1999.
THE PIETRAFESA CORPORATION
By: /s/ Richard C. Pietrafesa, Jr.
---------------------------------
Name: Richard C. Pietrafesa, Jr.
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard C. Pietrafesa, Jr. * President and Chief Executive Officer May 28, 1999
--------------------------------------------
and Director
(Principal Executive Officer)
/s/ Thomas A. Minkstein * Chief Operating Officer May 28, 1999
-------------------------------------------- and Director
/s/ Eugene R. Sunderhaft * Vice President - Finance, Chief Financial May 28, 1999
-------------------------------------------- Officer, Secretary, Treasurer
(Principal Financial and Accounting Officer)
/s/ Sterling B. Brinkley, Jr. * Chairman of the Board May 28, 1999
--------------------------------------------
/s/ Mark C. Pickup * Director May 28, 1999
--------------------------------------------
/s/ Robert J. Bennett * Director May 28, 1999
--------------------------------------------
/s/ Paul M. McNicol Director May 28, 1999
--------------------------------------------
Paul M. McNicol
*By: /s/ Richard C. Pietrafesa, Jr.
------------------------------
Richard C. Pietrafesa, Jr.
Attorney-in-Fact
II-5
We have audited the Consolidated Financial Statements of The Pietrafesa
Corporation as of December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, and have issued our report thereon dated
February 12, 1999 (except for Note 13 as to which the date is ________, 1999);
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule pertaining to Pietrafesa listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of
Pietrafesa'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
Syracuse, New York
February 12, 1999
The foregoing report is in the form that will be signed upon the completion of
the acquisitions, public offering and restatement of capital accounts described
in Note 13 to the financial statements.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999
S-1
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
The Pietrafesa Corporation
Years Ended December 31, 1996, 1997 and 1998
(in thousands)
[Enlarge/Download Table]
Balance at Charged Balance at
Description Beginning of Year to Expense Deductions End of Year
----------- ----------------- ---------- ---------- -----------
Year Ended December 31, 1996:
Reserve for bad debts.................... $ 187 $ (179) (1) (27)(2) $ 35
Inventory reserve........................ 435 -- 100 (3) 335
Year Ended December 31, 1997:
Reserve for bad debts.................... 35 -- -- 35
Inventory reserve........................ 335 -- -- 335
Year Ended December 31, 1998:
Reserve for bad debts.................... 35 10 (1) 10 (3) 35
Inventory reserve........................ 335 459 (1) 39 (3) 755
------------------------
(1) Reduction/Addition of reserve based on analysis of related assets.
(2) Write-off of accounts receivable, net of recoveries. Writes-offs totaled
$27 in 1996 and recoveries totaled $54 in 1996.
(3) Write-off of accounts receivable or inventory.
S-2
We have audited the Financial Statements of Components by John McCoy, Inc.
("Components") as of December 31, 1997 and 1998, and for the years then ended,
and have issued our report thereon dated March 4, 1999 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule pertaining to Components listed in Item 16(b) of this Registration
Statement. This schedule is the responsibility of Components 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.
/s/ Lawrence B. Goodman & Co., P.A.
Certified Public Accountants
Fair Lawn, New Jersey
March 7, 1999
S-3
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
COMPONENTS BY JOHN McCOY, INC.
Years Ended December 31, 1997 and 1998
(in thousands)
[Enlarge/Download Table]
Col. A Col. B Col. C Col. D Col. E
Balance at Charged Balance at
Description Beginning of Year to Expense Deductions(1) End of Year
----------- ----------------- ---------- ------------- -----------
Year Ended December 31, 1997:
Reserve for bad debts.................... $ 11 $ 51 $ -- $ 62
Year Ended December 31, 1998:
Reserve for bad debts.................... $ 62 $ 114 $ 115 $ 61
---------------------
(1) Represents write-offs of account receivables.
S-4
We have audited the Financial Statements of Global Sourcing Network, Ltd. (GSN)
as of December 31, 1997 and 1998 and for the years then ended, and have issued
our reports thereon dated February 2, 1999 (included elsewhere in this
Registration Statement). Our audits also included the financial statement
schedule pertaining to GSN listed in Item 16(b) of this Registration Statement.
This schedule is the responsibility of GSN'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.
/s/ Pasquale & Bowers, LLP
Certified Public Accountants
Syracuse, New York
May 28, 1999
S-5
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
GLOBAL SOURCING NETWORK, LTD.
December 31, 1997 and 1998
(in thousands)
[Enlarge/Download Table]
Col. B
Col. A Balance at Col. C Col. D Col. E
Beginning of Charged Balance at
Description Year to Expense Deductions End of Year
--------------------------------------------- ------------------- ---------------- ----------------- -----------------
Year Ended December 31, 1997:
Reserve for bad debts.................... $ 0 $ 102,000 $ (102,000) (1) $ 0
Year Ended December 31, 1998:
Reserve for bad debts.................... $ 0 $ 149,017 $ (59,017) (1) $ 90,000
-----------------------
(1) Represents write-off of accounts receivable.
S-6
We have audited the Financial Statements of Windsong, Inc. as of December 31,
1996 and for the year then ended, and have issued our report thereon dated May
7, 1999 (included elsewhere in this Registration Statement). We have also
audited the Financial Statements of Windsong, Inc. as of December 31, 1998 and
1997 and have issued our report thereon dated February 15, 1999 (included
elsewhere in this Registration Statement).
Our audits also included the financial statement schedule pertaining to
Windsong, Inc. listed in item 16(b) of this Registration Statement. This
schedule is the responsibility of Windsong'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.
/s/ Weissbarth, Altman & Michaelson LLP
---------------------------------------
New York, New York
May 7, 1999
S-7
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
WINDSONG, INC.
Year Ended December 31, 1996, 1997 and 1998
(in thousands)
[Enlarge/Download Table]
Balance at Charged Balance at
Description Beginning of Year to Expense Deduction End of Year
----------- ----------------- ---------- --------- -----------
Year Ended December 31, 1996:
Reserve for bad debts................. $ -- $ -- $ -- $ --
Inventory reserve..................... 35 -- -- 35
Year Ended December 31, 1997:
Reserve for bad debts................. -- -- -- --
Inventory reserve..................... 35 -- 35 (1) --
Year Ended December 31, 1998:
Reserve for bad debts................. -- 20 -- 20
Inventory reserve..................... -- -- -- --
------------------
(1) Reduction/Addition of reserve based on analysis of related assets.
S-8
------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
THE PIETRAFESA CORPORATION
--------------------------------------------------------------------------------
EXHIBIT INDEX
[Enlarge/Download Table]
NUMBER DESCRIPTION
------ -----------
*1 Form of Underwriting Agreement
*2.1 Asset Purchase Agreement, between Registrant and Windsong, Inc.
**3.1 Certificate of Incorporation of Registrant
**3.2 By-Laws of Registrant
*4 Form of Common Stock Certificate
5 Opinion of Roberts, Sheridan & Kotel, a Professional Corporation
**10.1 Asset Purchase Agreement dated March 11, 1999, among Registrant,
Components Acquisition Corp., John McCoy and Components by John
McCoy, Inc.
**10.2 Asset Purchase Agreement dated March 11, 1999, among Registrant, DAG Acquisition Corp., Jarrod Nadel and
Diversified Apparel Group, Ltd.
**10.3 Stock Purchase Agreement dated March 11, 1999, among Registrant, Peter Lister and Global Sourcing Network, Ltd.
**10.4 Credit Agreement dated June 19, 1998, between National Bank of Canada and MS Pietrafesa, L.P.
**10.5 Lease Agreement dated October 1, 1994, between MS Pietrafesa, L.P. and Onondaga County Industrial Development Agency
**10.6 Payment in Lieu of Tax Agreement dated as of October, 1, 1994 between Onondaga County Industrial Development Agency
and MS Pietrafesa, L.P.
**10.7 Loan Agreement dated November 22, 1995, with New York State Urban Development Corporation and MS Pietrafesa, L.P.
**10.8 Transfer of Assets and Assignment and Assumption of Contracts and Leases dated as of October 1, 1998, between MS
Pietrafesa, L.P. and The Pietrafesa Corporation.
10.9 Revolving Credit, Term Loan and Security Agreement dated April 15, 1999, between Registrant and PNC Bank, National
Association.
+10.10 License Agreement dated as of January 1, 1996, between Alexander Julian, Inc. and Windsong, Inc.
*11 Statement regarding computation of per share earnings
**21 List of Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Lawrence B. Goodman & Co., P.A.
23.3 Consent of Pasquale & Bowers, LLP
23.4 Consent of Weissbarth, Altman & Michaelson LLP
23.5 Consent of Roberts, Sheridan & Kotel, a Professional Corporation (included in its opinion filed as Exhibit 5 hereto)
24 Power of Attorney (reference is made to the signature pages to the Registration Statement)
27 Financial Data Schedule
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested. Omitted portions have been filed
separately with the Commission.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted as they are inapplicable, or the other
information is included in the financial statements.
Dates Referenced Herein and Documents Incorporated by Reference
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