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 No. 2 to Form S-1 176 824K
2: EX-1 Underwriting Agreement 37 167K
3: EX-3.1 Certificate of Incorporation 16 73K
4: EX-4 Common Stock Certificate 2 7K
5: EX-5 Legal Opinion 2 11K
6: EX-10.10 Alexander Julian License 19 78K
7: EX-10.11 Finova Factoring Agreement 22 94K
8: EX-10.12 Asset Purchase Agreement 69 237K
9: EX-21 List of Subsidiaries 1 6K
10: EX-23.1 Consent of Independent Auditors 1 7K
11: EX-23.2 Consent of Independent Auditors 1 7K
12: EX-23.3 Consent of Independent Auditors 1 7K
13: EX-23.4 Consent of Independent Auditors 1 7K
14: EX-27 Financial Data Schedule 1 10K
Page | (sequential) | | | | (alphabetic) | Top |
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| | |
- Alternative Formats (Word, et al.)
- Acquisition Strategy
- Additional Information
- Business
- Business Strategy
- Calculation of Registration Fee
- Capitalization
- Certain Relationships and Related Transactions
- Compensation of Executive Officers
- Components
- Cost of sales
- Description of Capital Stock
- Dilution
- Dividend Policy
- Due from related party
- Exhibits and Financial Statement Schedules
- Experts
- Failure by Third Party Manufacturers to Fulfill their Obligations could Adversely Affect our Ability to Deliver Products in a Timely Manner and could Reduce our Profitability
- Forward-Looking Statements
- General and administrative expenses
- Impact of the Year 2000 Issue
- Imports and Import Regulations
- Indemnification of Directors and Officers
- Index to Financial Statements
- Industry Overview
- Intellectual Property
- Interest expense
- Interests of our Controlling Stockholder may Conflict with the Interests of the Holders of our Class A Common Stock, The
- Inventories
- Legal Matters
- Liquidity and Capital Resources
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Msjp, L.P
- MS Pietrafesa, L.P
- Net income
- Notes to Financial Statements
- Notes to Quarterly Financial Statements
- Offering, The
- Other assets
- Other Expenses of Issuance and Distribution
- Our Foreign Sourcing of Products Exposes us to Delays in Production, which may Result in Increased Costs and Reduced Profitability
- Our International Sourcing of Products and Raw Materials may Subject us to Increased Costs and Unprofitable Transactions
- Overview
- Principal Stockholders
- Pro Forma Combined Financial Data
- Prospectus Summary
- Provision for income taxes
- Recent Sales of Unregistered Securities
- Reductions in our Future Net Income Caused by the Amortization of Goodwill may Adversely Affect the Market Price of our Common Stock
- Results of Operations
- Retained earnings
- Richard C. Pietrafesa, Jr
- Risk Factors
- Risks Relating To Our Acquisition Strategy And Future Acquisitions
- Royalties and Commissions
- Schedule of Allocation of Purchase Price of Acquisitions
- Seasonal Fluctuations in Revenue and Net Income may Affect our Cash Flow, Liquidity and Profitability
- Selected Historical Consolidated Financial Data
- Selling and distribution expenses
- Selling Stockholder
- Shares Eligible for Future Sale
- Significant Acquisitions
- Sterling B. Brinkley, Jr
- Stock Option Plan
- Summary Historical Consolidated and Pro Forma Combined Financial Data
- Table of Contents
- The Interests of our Controlling Stockholder may Conflict with the Interests of the Holders of our Class A Common Stock
- The offering
- Undertakings
- Underwriting
- Use of Proceeds
- We may be Unable to Compete Successfully in the Highly Competitive Apparel Industry
- Windsong
- Windsong, Inc
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1 | 1st Page - Filing Submission
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2 | Calculation of Registration Fee
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5 | Table of Contents
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7 | Prospectus Summary
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9 | Risk Factors
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10 | The offering
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11 | Summary Historical Consolidated and Pro Forma Combined Financial Data
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16 | Our Foreign Sourcing of Products Exposes us to Delays in Production, which may Result in Increased Costs and Reduced Profitability
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17 | Our International Sourcing of Products and Raw Materials may Subject us to Increased Costs and Unprofitable Transactions
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" | We may be Unable to Compete Successfully in the Highly Competitive Apparel Industry
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18 | Seasonal Fluctuations in Revenue and Net Income may Affect our Cash Flow, Liquidity and Profitability
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19 | Failure by Third Party Manufacturers to Fulfill their Obligations could Adversely Affect our Ability to Deliver Products in a Timely Manner and could Reduce our Profitability
|
" | Risks Relating To Our Acquisition Strategy And Future Acquisitions
|
20 | Reductions in our Future Net Income Caused by the Amortization of Goodwill may Adversely Affect the Market Price of our Common Stock
|
22 | The Interests of our Controlling Stockholder may Conflict with the Interests of the Holders of our Class A Common Stock
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23 | Forward-Looking Statements
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24 | Use of Proceeds
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25 | Capitalization
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26 | Dividend Policy
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" | Dilution
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28 | Selected Historical Consolidated Financial Data
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31 | Pro Forma Combined Financial Data
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" | Schedule of Allocation of Purchase Price of Acquisitions
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40 | Management's Discussion and Analysis of Financial Condition and Results of Operations
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" | Overview
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" | Significant Acquisitions
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41 | Results of Operations
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42 | Cost of sales
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43 | Interest expense
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" | Provision for income taxes
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" | Net income
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45 | Royalties and Commissions
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46 | Components
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47 | Windsong
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48 | Selling and distribution expenses
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" | General and administrative expenses
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50 | Liquidity and Capital Resources
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52 | Impact of the Year 2000 Issue
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54 | Business
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" | Industry Overview
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" | Business Strategy
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55 | Acquisition Strategy
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62 | Imports and Import Regulations
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63 | Intellectual Property
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65 | Management
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" | Richard C. Pietrafesa, Jr
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" | Sterling B. Brinkley, Jr
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68 | Compensation of Executive Officers
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" | Stock Option Plan
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69 | Certain Relationships and Related Transactions
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71 | Principal Stockholders
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" | Msjp, L.P
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73 | Description of Capital Stock
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76 | Shares Eligible for Future Sale
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" | MS Pietrafesa, L.P
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77 | Underwriting
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78 | Legal Matters
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" | Experts
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79 | Additional Information
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80 | Index to Financial Statements
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87 | Inventories
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88 | Other assets
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106 | Due from related party
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119 | Retained earnings
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121 | Notes to Quarterly Financial Statements
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123 | Windsong, Inc
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129 | Notes to Financial Statements
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156 | Selling Stockholder
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162 | Item 13. Other Expenses of Issuance and Distribution
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" | Item 14. Indemnification of Directors and Officers
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163 | Item 15. Recent Sales of Unregistered Securities
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164 | Item 16. Exhibits and Financial Statement Schedules
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165 | Item 17. Undertakings
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FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1999
REGISTRATION NO. 333-74439
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE PIETRAFESA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
[Enlarge/Download Table]
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 260 SOUTH BROAD 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. |_|
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.
================================================================================
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
=========================================================================================================
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
------------------------------ --------------- ------------------- ---------------------- ---------------
Class A Common Stock ...... 4,658,333 $ 13.00 $60,600,000 $ 16,847(3)
============================== =============== =================== ====================== ===============
(1) Includes up to 600,000 shares that may be purchased from The Pietrafesa
Corporation at the option of the underwriters solely to cover
over-allotments, if any, and 58,333 shares being registered for resale 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) $14,095 of which has been previously paid.
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 JULY 15, 1999
4,000,000 SHARES
CLASS A COMMON STOCK
[LOGO]
$ PER SHARE
All of the shares of The Pietrafesa Corporation's Class A Common Stock
being offered in this prospectus are being offered by 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 $11.00 and $13.00 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.
PER SHARE TOTAL
----------- ------
Price to the public ...........................
Underwriting discounts and commissions ........
Proceeds to The Pietrafesa Corporation ........
The Pietrafesa Corporation has granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase up to
600,000 shares of Class A Common Stock from The Pietrafesa Corporation within 30
days following the date of this prospectus.
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.
FIRST SECURITY VAN KASPER
MORGAN SCHIFF & CO., INC.
Prospectus dated , 1999
[ARTWORK]
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ......................................................... 5
Risk Factors ............................................................... 14
Forward Looking Statements ................................................. 21
Use of Proceeds ............................................................ 22
Capitalization ............................................................. 23
Dividend Policy ............................................................ 24
Dilution ................................................................... 24
Selected Historical Consolidated Financial Data ............................ 26
Pro Forma Combined Financial Data .......................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations .............................................................. 38
Business ................................................................... 52
Management ................................................................. 63
Certain Relationships and Related Transactions ............................. 67
Principal Stockholders ..................................................... 69
Description of Capital Stock ............................................... 71
Shares Eligible for Future Sale ............................................ 74
Underwriting ............................................................... 75
Legal Matters .............................................................. 76
Experts .................................................................... 76
Additional Information ..................................................... 77
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.
[THIS PAGE INTENTIONALLY LEFT BLANK]
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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 $4.0 MILLION WORTH OF CLASS A COMMON STOCK VALUED AT THE INITIAL
PUBLIC 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 RETROACTIVELY TO THE ISSUANCE TO MS PIETRAFESA, L.P.,
OUR SOLE STOCKHOLDER IMMEDIATELY PRIOR TO THE OFFERING, OF A TOTAL
OF 3,775,567 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
Bloomingdale's Saks Fifth Avenue
Brooks Brothers Sam's Club
Dillards Sulka
Filene's Basement The Men's Wearhouse
Jos.A.Bank Today's Man
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In 1998, we generated 70% of our net revenues from our seven largest
customers, Brooks Brothers, Dillards, Jos.A.Bank, Nordstrom, Polo Retail, S&K
Famous Brands and Sam's Club. None of these customers individually accounted for
more than 20% of our net revenues in 1998. Sales to Polo Retail, which accounted
for 6% of our net revenues in 1998, terminated with the spring 1999 season, but
the loss of such revenues is not expected to have a material adverse effect on
our overall revenues because we anticipate that our revenues from other
customers will increase.
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 specialize in specific
products, price points or distribution channels. We believe that two important
trends among our customers benefit us:
o Retailers of private label apparel are experiencing increased 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 companies 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;
o design, merchandising, statistical quality control, inventory
management and other services;
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 include:
o achieving greater penetration among our existing customers and
developing new customer relationships;
o acquiring, developing and licensing brands in order to leverage our
merchandising and sourcing capabilities;
o expanding internationally by offering our merchandising/sourcing
services to foreign retailers; and
o growing 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 include:
o making, 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;
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6
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o operating each newly-acquired business as an independent unit and
holding it accountable for its utilization of capital and overhead;
and
o improving and standardizing the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating duplicative operational facilities.
RECENT ACQUISITIONS AND LICENSING ARRANGEMENTS. Upon the completion of
this offering, we will have completed four acquisitions and will have entered
into, or acquired as a result of these acquisitions, four new licensing
arrangements. These transactions expand our product offerings and customers.
The acquisitions are:
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.
Our licenses cover tailored and other categories of men's apparel bearing
the Alexander Julian, FUBU, Greg Norman Collection and DKNY trademarks. FUBU,
the Greg Norman Collection and DKNY are new licensing arrangements for us. Sales
of Alexander Julian licensed products constituted 27% of our 1998 pro forma
combined revenues. All four licenses require us to pay royalties to the
licensors at rates which we believe to be consistent with other license
arrangements in the industry.
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, the significance to our business of revenues from sales
of Alexander Julian licensed products, our reliance on third party
manufacturers, the unpredictability of our operating results, the challenges
raised by our acquisition strategy 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
Common Stock offered by The
Pietrafesa Corporation .......... 4,000,000 shares of Class A Common Stock
Common Stock to be outstanding
after our offering .............. 4,333,333 shares of Class A Common Stock(1)
3,775,667 shares of Class B Common Stock,
all of which are owned by MS Pietrafesa,
L.P., our sole stockholder prior to 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 pay the purchase price of the Components
and Windsong acquisitions, to fund the
escrow in connection with the Windsong
acquisition and to repay indebtedness in
connection with the Diversified Apparel and
Global Sourcing Network acquisitions and
under our revolving credit line.
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:
o shares of Class A Common Stock equal to 10% of our outstanding
shares after the offering which may be issued in the future under
our Stock Option Plan;
o shares of Class A Common Stock which may be issued as deferred
purchase price to the sellers of Diversified Apparel, Global
Sourcing Network, Components and Windsong; and
o up to 600,000 shares of Class A Common Stock which will be issued to
the underwriters if they exercise their over-allotment option.
See "Management," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions" and
"Underwriting."
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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 were 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 historical
and pro forma financial statements and the notes thereto, included elsewhere in
this prospectus.
Our pro forma combined financial data includes 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 had occurred on January 1, 1998, and also includes 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.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less
sale costs based on independent appraisals. In 1995, we discontinued
the low price point tailored clothing segment of our business and
closed the related manufacturing facilities located in Carrollton,
Georgia. Accordingly, in 1995 we reduced the net book value of plant
and equipment, as well as furniture and fixtures, located at the
Carrollton facility to their net realizable value and recorded an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former
Sturgis, Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement
of operations data prior to October 1998 because our predecessor, MS
Pietrafesa, L.P., was not subject to state or federal income taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996;
o The pro forma weighted average number of common shares outstanding,
basic and diluted, for 1998 and the first quarter of 1999 consists
of the 3,775,667 shares of Class B Common Stock owned by our sole
stockholder as of the date of the offering;
o Pro forma combined weighted average number of shares outstanding,
basic and diluted, consists of the 3,775,667 shares of Class B
Common Stock owned by our sole stockholder as of the date of the
offering, and the 333,333 shares of Class A Common Stock issued to
Windsong at the initial public offering price as part of our
acquisition of Windsong, based on an assumed offering price of
$12.00 per share; and
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9
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o Pro forma combined, as adjusted weighted average number of common
shares outstanding, basic and diluted, consists of the shares of
Class A Common Stock which will be issued in the offering, as part
of the initial purchase price in the Windsong acquisition, and the
3,775,667 shares of Class B Common Stock owned by our sole
stockholder as of the date of the offering.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and " -- Results of Operations" for a more
detailed explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs 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, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
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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)
STATEMENT OF OPERATIONS DATA:
Net revenues ............................. $54,859 $ 51,431 $44,000 $37,582 $ 56,763 $ 161,081 $ 161,081
Cost of sales ............................ 45,803 46,533 34,769 29,218 47,062 130,311 130,311
------- -------- ------- ------- ---------- ---------- ----------
Gross profit ............................. 9,056 4,898 9,231 8,364 9,701 30,770 30,770
Operating expenses:
Selling, general and administrative
expenses .............................. 7,250 10,080 7,427 6,150 5,536 19,048 19,048
Impairment loss on fixed assets ......... -- 2,324 170 -- -- -- --
Depreciation and amortization
expenses .............................. 99 102 165 151 222 1,982 1,982
------- -------- ------- ------- ---------- ---------- ----------
7,349 12,506 7,762 6,301 5,758 21,030 21,030
------- -------- ------- ------- ---------- ---------- ----------
Operating income (loss) .................. 1,707 (7,608) 1,469 2,063 3,943 9,740 9,740
Interest expense ......................... 1,648 1,914 1,962 1,507 1,209 3,321 2,385
Public offering costs .................... -- -- -- -- 823 823 823
------- -------- ------- ------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item .................. 59 (9,522) (493) 556 1,911 5,596 6,532
Provision for income taxes ............... -- -- -- -- 514 2,238 2,612
------- -------- ------- ------- ---------- ---------- ----------
Income (loss) before extraordinary
item .................................... 59 (9,522) (493) 556 1,397 3,358 3,920
Extraordinary item ....................... -- -- 3,150 -- -- -- --
------- -------- ------- ------- ---------- ---------- ----------
Net income (loss) ........................ $ 59 $ (9,522) $ 2,657 $ 556 $ 1,397 $ 3,358 $ 3,920
------- -------- ------- ------- ---------- ---------- ----------
PRO FORMA INCOME DATA:
Income before income taxes ............... $ 1,911 $ 5,596 $ 6,532
Pro forma provision for income taxes ..... 764 2,238 2,612
---------- ---------- ----------
Pro forma net income ..................... $ 1,147 $ 3,358 $ 3,920
========== ========== ==========
Pro forma basic and diluted net
income per common share ................. $ 0.30 $ 0.82 $ 0.48
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................. 3,775,667 4,109,000 8,109,000
[Enlarge/Download Table]
AS OF DECEMBER 31, 1998
--------------------------------------
PRO FORMA
PRO FORMA COMBINED,
ACTUAL COMBINED AS ADJUSTED
--------- ----------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ......................................... $ 9,239 $12,134 $13,710
Total assets ............................................ 29,375 86,913 86,913
Total long-term debt, net of current maturities ......... 12,561 16,517 5,838
Total stockholders' equity .............................. 2,383 6,383 49,583
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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)
OTHER DATA:
EBITDA plus public offering costs ......... $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $ 12,288 $ 12,288
Capital expenditures ...................... 1,103 368 105 59 592 895 895
Cash (used in) provided by operating
activities ............................... (3,022) 3,779 2,445 3,056 (1,395) (3,002) (2,440)
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
[Enlarge/Download Table]
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, 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
---------- ---------- ---------- ---------- ---------- ----------
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 4,311 4,433 4,311 4,433
Depreciation and amortization
expenses .............................. 64 68 504 507 504 507
---------- ---------- ---------- ---------- ---------- ----------
1,369 1,269 4,815 4,940 4,815 4,940
---------- ---------- ---------- ---------- ---------- ----------
Operating income ........................ 1,106 1,701 3,261 3,627 3,261 3,627
Interest expense ........................ 253 296 607 712 350 539
---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes .............. 853 1,405 2,654 2,915 2,911 3,088
Provision for income taxes .............. -- 565 1,061 1,169 1,164 1,235
---------- ---------- ---------- ---------- ---------- ----------
Net income .............................. $ 853 $ 840 $ 1,593 $ 1,746 $ 1,747 $ 1,853
========== ========== ========== ========== ========== ==========
PRO FORMA INCOME DATA:
Income before income taxes .............. $ 853 $ 1,405 $ 2,654 $ 2,915 $ 2,911 $ 3,088
Pro forma provision for income taxes..... 341 565 1,061 1,169 1,164 1,235
---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income .................... $ 512 $ 840 $ 1,593 $ 1,746 $ 1,747 $ 1,853
========== ========== ========== ========== ========== ==========
Pro forma basic and diluted net
income per common share ................ $ 0.14 $ 0.22 $ 0.39 $ 0.42 $ 0.22 $ 0.23
Pro forma basic and diluted weighted
average number of common shares
outstanding ............................ 3,775,667 3,775,667 4,109,000 4,109,000 8,109,000 8,109,000
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AS OF MARCH 31, 1999
---------------------------------------
PRO FORMA
PRO FORMA COMBINED,
ACTUAL COMBINED AS ADJUSTED
---------- ----------- ------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ......................................... $10,520 $14,392 $15,592
Total assets ............................................ 29,944 95,698 95,698
Total long-term debt, net of current maturities ......... 13,054 16,969 5,914
Total stockholders' equity .............................. 3,473 7,473 50,673
[Enlarge/Download Table]
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 plus public offering costs ............. $1,308 $1,886 $ 3,904 $ 4,253 $ 3,904 $ 4,253
Capital expenditures .......................... 90 109 186 313 186 313
Cash (used in) provided by operating
activities ................................... 28 (613) (9,223) (4,496) (11,471) (6,868)
Cash used in investing activities ............. (90) (109) (35,731) (35,858) (35,731) (35,858)
Cash provided by financing activities ......... 62 721 42,805 39,905 43,533 39,905
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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
OUR SIGNIFICANT RELIANCE ON A LIMITED NUMBER OF CUSTOMERS MAY SUBJECT US
TO A SIGNIFICANT DECREASE IN REVENUES IF WE LOSE ONE OR MORE CUSTOMERS
S&K Famous Brands, Sam's Club, Brooks Brothers, Dillards, Jos.A.Bank,
Nordstrom and Polo Retail, our seven most significant customers in 1998,
accounted for 70% of our net revenues in 1998. S&K Famous Brands, Sam's Club,
Brooks Brothers and Dillards each accounted for over 10% of our net revenues in
1998. Sales to our six largest customers in 1997 accounted for 68% of our net
revenues in 1997.
Our licensing agreement with Polo Corporation expired in June 1999 and
sales to Polo Retail under this agreement terminated with 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.
In addition, consolidations, restructurings and reorganizations involving our
customers could reduce the number of stores that carry our products and decrease
our revenues. Any increase in the ownership concentration within the retail
industry could make us more dependent on fewer customers and could increase the
effect of losing a customer. See "Business -- Industry Overview."
IF OUR ALEXANDER JULIAN LICENSE IS TERMINATED OUR REVENUES AND
PROFITABILITY WOULD DECREASE SIGNIFICANTLY
Approximately 27% of our pro forma combined revenues and approximately 28%
of our pro forma combined net income during 1998 were 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, as we do under our three new licenses which were
not in effect in 1998. If we fail to perform our obligations, Alexander Julian
and our other licensors could terminate the licenses 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, WHICH
MAY RESULT IN INCREASED COSTS AND REDUCED PROFITABILITY
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, 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,
14
tariffs or import restrictions could result in an increase in our cost of
products. We may not be able to pass these increased costs on to our customers,
which would reduce our profitability. See "Business -- Imports and Import
Regulations."
OUR INTERNATIONAL SOURCING OF PRODUCTS AND RAW MATERIALS MAY SUBJECT US TO
INCREASED COSTS AND UNPROFITABLE TRANSACTIONS
We currently source production and purchase raw materials from providers
located outside the United States. As a result, we are exposed to various risks,
including:
o currency exchange rate fluctuations when 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.
Any of these risks could increase the costs of doing business in the
affected countries or preclude us from transacting business in the affected
countries, either of which could reduce our profitability.
THE ADOPTION OF THE EURO MAY BE DISRUPTIVE TO OUR EUROPEAN SUPPLIERS,
IMPAIR THEIR ABILITY TO SATISFY THEIR OBLIGATIONS TO US AND DISRUPT OUR
DELIVERIES OF PRODUCTS
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.
In 1998, we purchased approximately 46% of our raw materials from
suppliers based in countries which are participating in the Euro in 1999. The
adoption of the Euro may be disruptive to the accounting and financial reporting
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 " -- Failure by Third Party Manufacturers to Perform their
Obligations could Adversely Affect our Ability to Deliver Products in a Timely
Manner."
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, we could lose our market
share, be required to reduce our prices or pay higher production costs.
A RECESSION IN THE APPAREL INDUSTRY COULD INCREASE OUR BAD DEBT EXPENSE
AND REDUCE OUR REVENUES AND PROFITABILITY
Apparel retailers have experienced significant financial difficulties over
the past several years, including restructurings, bankruptcies and liquidations.
These developments have increased our risk of extending credit to
15
our customers. If any of our customers were to suffer financial problems, it
could cause us to reduce or discontinue business with that customer, require us
to assume more credit risk relating to its receivables or result in excess
inventory requiring liquidation at discounted prices, each of which would reduce
our profitability.
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
revenues and net income have fluctuated and may continue to fluctuate on a
seasonal basis. A disproportionate amount of our net revenues and a majority of
our net income are typically realized during the third quarter. 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 the seasonality of net revenues, if our net revenues decrease
substantially in the third quarter it could have a material adverse effect on
our liquidity and on our profitability for the entire year.
WE WILL NOT BE ABLE TO FULFILL OUR EXPANSION PLANS IF WE ARE UNABLE TO
OBTAIN ADDITIONAL FINANCING AND MAINTAIN A STRONG INFRASTRUCTURE
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 develop successful 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.
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
operating income (loss) fluctuated between $(7.6) million and $3.9 million and
net income (loss) fluctuated between $(9.5) million and $1.4 million. See
"Summary Historical Consolidated and Pro Forma Combined Financial Data." Our
future financial performance depends on various factors, including successfully
implementing our growth strategy.
THE LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL COULD REDUCE OUR REVENUES
AND PROFITABILITY
Our ability to successfully implement our growth 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. The
termination of Mr. McCoy's, Mr. Nadel's or Mr. Sweedler's employment with us
would likely reduce revenues and profitability of our Components, Diversified
Apparel and Windsong divisions. In addition, these managers, as well as other
members of our senior management, have only recently been assembled and
management controls are still in their formative stages. We cannot assure you
that this 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, it would become more
difficult for us to pursue our growth strategy, which could reduce our revenues
and profitability.
If Richard Pietrafesa ceases to be our Chief Executive Officer, or if
Philip Ean Cohen ceases to control The Pietrafesa Corporation other than by
reason of death or disability, our deferred purchase price obligations under the
Components and Windsong acquisition agreements may be accelerated. The
accelerated payment of these deferred purchase price obligations could deplete
our capital resources. In addition, the Alexander Julian
16
license terminates if Mr. Cohen transfers control of the Pietrafesa Corporation
without Alexander Julian's consent. See " -- Some of our Acquisition Agreements
Contain Terms that could Prevent a Change of Control or a Change in Management
and may Discourage Transactions which would Benefit our Shareholders."
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 Richard 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 SIGNIFICANT RELIANCE ON TWO FABRIC MANUFACTURERS COULD CAUSE OUR COST
OF SALES TO INCREASE, IMPAIR OUR ABILITY TO MEET OUR CUSTOMERS' DEMANDS AND
REDUCE OUR REVENUES AND PROFITABILITY
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 either of 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,
each of which would reduce our revenues and profitability.
FAILURE BY THIRD PARTY MANUFACTURERS TO FULFILL THEIR OBLIGATIONS COULD
ADVERSELY AFFECT OUR ABILITY TO DELIVER PRODUCTS IN A TIMELY MANNER AND COULD
REDUCE OUR PROFITABILITY
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 fulfill 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, each
of which could reduce our profitability.
IF OUR OR OUR CUSTOMERS' OR SUPPLIERS' YEAR 2000 COMPLIANCE EFFORTS ARE
NOT SUCCESSFUL, OUR OPERATIONS MAY BE DISRUPTED AND OUR REVENUES AND
PROFITABILITY COULD BE REDUCED
We are highly dependent upon the proper function of our computer systems
as well as those of our suppliers and customers. 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, we may
experience a disruption to our operations which could adversely affect our
ability to process or fulfill orders from our customers, deliver products in a
timely manner, send invoices or engage in normal business activities for an
indefinite period of time. Such a disruption to our operations could result in a
loss of revenues and a reduction of our profitability. 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
17
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 team has only recently been assembled and 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.
OUR INABILITY TO IMPLEMENT OUR GROWTH STRATEGY COULD REDUCE OUR REVENUES
AND PROFITABILITY
Our growth strategy depends heavily on the identification, acquisition and
successful management of additional businesses. Pursuit of this growth strategy
will divert our management's attention from other business concerns. It is also
possible that our management, including the respective managers of our
Diversified Apparel, Global Sourcing Network, Components and Windsong divisions,
will not have the skills necessary to manage an aggressive acquisition program.
Although we may recruit additional managers to supplement the existing
management of any acquired businesses, 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 cause our growth strategy to fail and reduce
our revenues and profitability.
UNFORESEEN, UNKNOWN LIABILITIES IN CONNECTION WITH THE OPERATION OF
ACQUIRED BUSINESSES MAY ADVERSELY AFFECT OUR WORKING CAPITAL AND LIQUIDITY AND
REDUCE OUR PROFITABILITY
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 and reduce our
profitability.
FUTURE PERFORMANCE OF THE ACQUIRED BUSINESSES MAY NOT BE COMMENSURATE WITH
THEIR 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 among 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. Independent valuations of
Diversified Apparel, Global Sourcing Network, Components and Windsong may have
been less than the consideration paid or to be paid by us for the acquisition of
any of 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 31%, of our pro forma combined, as adjusted
total assets as of March 31, 1999 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
18
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.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. 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. We plan to evaluate
continually whether events or circumstances have occurred that could result in
an acceleration of the amount to be amortized. Such acceleration would reduce
our net income by a corresponding amount.
Further, each of the above-referenced acquisitions involves a deferred
purchase price which we will pay if the acquired business achieves specified
earnings targets. This deferred purchase price may result in additional goodwill
of up to $29.7 million that will be amortized over a period of time to be
determined at the date any deferred purchase price payments are made. The
initial goodwill plus the additional goodwill, if any, resulting from such
deferred purchase price provisions would result in an aggregate maximum goodwill
amortization of $2.1 million for the year ending December 31, 2000, $2.3 million
for the year ending December 31, 2001, $2.5 million for the year ending December
31, 2002, $2.9 million for the year ending December 31, 2003, $3.3 million for
the year ending December 31, 2004 and $3.7 million for the year ending December
31, 2005. In addition, we will also 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.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OR REALIZE COST SAVINGS CREATED
BY OUR ACQUISITIONS, OUR OPERATING RESULTS MAY BE REDUCED
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 reduce our income or
cause us to sustain a loss.
SOME OF OUR AGREEMENTS CONTAIN TERMS THAT COULD IMPEDE A CHANGE IN CONTROL
OR A CHANGE IN MANAGEMENT AND MAY DISCOURAGE TRANSACTIONS WHICH WOULD BENEFIT
OUR SHAREHOLDERS
If Philip Ean Cohen ceases to control The Pietrafesa Corporation, other
than by reason of death or disability, we will immediately be required to pay
Windsong, Inc. up to $17.8 million, representing the net present value of all
unpaid amounts of the $22.0 million deferred portion of the purchase price for
the assets of Windsong, Inc. The Alexander Julian license terminates if Mr.
Cohen transfers control of The Pietrafesa Corporation without Alexander Julian's
prior consent. If Richard Pietrafesa is no longer our chief executive officer,
all unpaid amounts of the $4.7 million deferred portion of the purchase price
under the Components acquisition agreement will be accelerated. These and other
provisions included in the Components and Windsong acquisition agreements may
entrench management or discourage transactions in which we are assigned an
attractive valuation that would otherwise benefit our shareholders because a
change in control is involved.
RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE
HOLDERS OF CLASS A COMMON STOCK WILL HAVE LIMITED VOTING RIGHTS
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 our 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
generally have no voting rights except
19
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 OUR CONTROLLING STOCKHOLDER MAY CONFLICT WITH THE
INTERESTS OF THE HOLDERS OF OUR CLASS A COMMON 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 such proposals are supported by holders of Class A Common Stock. In
addition, Mr. Cohen's voting power permits him to implement policies not favored
by, or in the best interests of, the holders of the Class A Common Stock. In
addition, as long as any Class B Common Stock is outstanding, Mr. Cohen 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 46.6% of the outstanding shares of Class A Common Stock following
the full conversion.
FAILURE TO COMPLY WITH SIGNIFICANT COVENANT RESTRICTIONS IN OUR AGREEMENTS
WITH OUR LENDERS COULD RESULT IN ACCELERATION OF OUR REPAYMENT OBLIGATIONS
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 may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination of
our license or other agreements and our bankruptcy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up to
600,000 shares if the underwriters exercise their over-allotment option. Of
these shares, the 4,000,000 shares of Class A Common Stock sold in this offering
and, commencing six months after the completion of this offering, 58,333 shares
of Class A Common Stock registered for resale, from time to time, by Windsong,
Inc. will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion of the 3,775,667 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, subject,
in the case of the shares issued to Windsong, Inc., to the resale restrictions
in the Windsong acquisition agreement. See "Shares Eligible for Future Sale."
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.
20
ABSENCE OF CURRENT PUBLIC MARKET, 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.
PURCHASERS 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 March 31, 1999,
purchasers of Class A Common Stock in the offering will experience an immediate
dilution of $9.37 in the pro forma net tangible book value per share of Class A
Common Stock from the initial public offering price of $12.00 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 under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
21
USE OF PROCEEDS
Our net proceeds from the sale of 4,000,000 shares of Class A Common Stock
in this offering, after payment of expenses of this offering, are estimated to
be approximately $43.2 million, or $49.9 million if the underwriters'
over-allotment option is exercised in full, assuming an initial public offering
price of $12.00 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 .......................... 4,695
Repay indebtedness .............................. 11,055(3)
-------
$43,200
=======
----------
(1) Indicates the amount that we will deposit in escrow prior to the closing
of the Windsong acquisition to secure the payment of a performance-based
portion of the purchase price of the Windsong acquisition. These funds
will be released from escrow to Windsong, no later than March 31, 2000 if
Windsong achieves targeted performance results. If these results are not
achieved, the funds will be released to us and used for general corporate
purposes.
(2) These notes bear interest at a rate of 10% per annum and mature in May
2002.
(3) Indicates the amount of proceeds that will be used to repay indebtedness
under our revolving credit line with PNC Bank, National Association, which
matures April 15, 2002. Borrowings under the PNC Bank revolving credit
line bear interest, at our option, at a rate based on either the bank's
commercial lending rate plus 0.5% or LIBOR plus 2.75%. In addition to the
funding of our working capital requirements, borrowings under the PNC Bank
revolving credit line were used to fund a $1.56 million tax distribution,
the $1.4 million initial cash portion of the purchase price for Global
Sourcing Network and the $800,000 initial cash portion of the Diversified
Apparel purchase price. See "Certain Relationships and Related
Transactions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Significant Acquisitions." As of
June 30, 1999, $11.8 million was outstanding under the revolving credit
line.
22
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the
issuances of Class B Common Stock to our sole stockholder which have
occurred or will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, including the issuance of 333,333 shares of
Class A Common Stock to Windsong, based on an assumed initial
offering price of $12.00 per share, as part of our acquisition of
Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A
Common Stock pursuant to the offering, assuming an initial public
offering price of $12.00 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
COMBINED,
ACTUAL PRO FORMA COMBINED AS ADJUSTED
---------- -------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Long term debt, net of current maturities .............. $13,054 $16,969 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued and
outstanding, 333,333 shares issued and outstanding
pro forma combined and 4,333,333 shares issued and
outstanding pro forma combined, as adjusted ......... -- -- 4
Class B Common Stock, par value $.0002 per share;
10,000,000 shares authorized, 3,775,667 shares
issued and outstanding actual, pro forma combined
and pro forma combined, as adjusted ................. -- -- --
Additional paid-in capital ............................. 3,191 7,191 50,387
Retained earnings ...................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization ................................... $16,527 $24,442 $56,587
======= ======= =======
23
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
Our net tangible book value as of March 31, 1999, was $3.3 million, or
$0.88 per share of Common Stock. 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 and our obligation to issue to Windsong,
Inc. as part of our acquisition of Windsong, $4.0 million worth of Class A
Common Stock at our initial public offering price, which would result in the
issuance of 333,333 shares of Class A Common Stock, our net tangible book value
as of March 31, 1999 would have been $(21.9) million or $(5.33) per share. After
giving effect to the sale of 4,000,000 shares of Class A Common Stock offered
hereby at an assumed initial public offering price of $12.00 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 $21.3 million, or $2.63 per
share. This represents an immediate increase in net tangible book value of $7.96
per share to the holder of our Class B Common Stock and an immediate dilution in
net tangible book value of $9.37 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 ....................................... $ 12.00
Net tangible book value per share of Common Stock as of March 31,1999 ................ $ 0.88
Decrease in net tangible book value per share of Common Stock attributable to the
Diversified Apparel, Global Sourcing Network, Components and Windsong
acquisitions ....................................................................... (6.21)
-------
Pro forma net tangible book value per share of Common Stock after the acquisitions ... (5.33)
Increase in pro forma net tangible book value per share of Common Stock
attributable to new investors ...................................................... 7.96
-------
Pro forma net tangible book value per share of Common Stock after the acquisitions
and the offering ................................................................... 2.63
--------
Dilution per share of Class A Common Stock to new investors .......................... $ 9.37
========
24
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
stockholder 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 $12.00 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:
[Enlarge/Download Table]
SHARES TOTAL CONSIDERATION
------------------------------ -------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------------ --------- ------------- --------- --------------
Existing stockholder ......... 3,775,667 46.6% $ 8,184,454 13.6% $ 2.17
Windsong, Inc. ............... 333,333(1) 4.1 4,000,000 6.6 12.00
New investors ................ 4,000,000 49.3 48,000,000 79.8 12.00
--------- ----- ----------- -----
8,109,000(2) 100.0% $60,184,454 100.0%
========= ===== =========== =====
----------
(1) Represents shares issued as part of the purchase price of the Windsong
acquisition.
(2) Excludes shares of Class A Common Stock to be reserved for issuance upon
the exercise of options which may be issued under our Stock Option Plan,
under which 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."
25
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 were 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.
Our statement of operations, balance sheet and other data include a number
of items that require further explanation. These items include:
o Impairment loss on fixed assets, which relates to the reduction of
property, plant, and equipment to their net realizable value less
sale costs based on independent appraisals. In 1995, we discontinued
the low price point tailored clothing segment of our business and
closed the related manufacturing facilities located in Carrollton,
Georgia. Accordingly, in 1995 we reduced the net book value of plant
and equipment, as well as furniture and fixtures, located at the
Carrollton facility, to their net realizable value and realized an
impairment loss of $2.3 million. The impairment loss of $170,000 in
1996 related to equipment which we disposed of at our former
Sturgis, Kentucky facility;
o Public offering costs, which relate to the abandonment of our public
offering in 1998 due to adverse market conditions;
o Provision for income taxes, which was not included in our statement
of operations data prior to October, 1998 because our predecessor,
MS Pietrafesa, L.P., was not subject to state or federal income
taxes;
o Extraordinary item, which relates to the forgiveness of all of our
outstanding subordinated debt in 1996; and
o Pro forma weighted average number of common shares outstanding,
basic and diluted, for 1998 and the first quarter of 1999, which
consists of the 3,775,667 shares of Class B Common Stock owned by
our sole stockholder as of the date of the offering.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and " -- Results of Operations" for a more detailed
explanation of these items.
In addition, we have included under "Other Data" below and in our Selected
Historical Consolidated Financial Data, the line item "EBITDA plus public
offering costs," which represents income (loss) before provision (benefit) for
income taxes plus depreciation and amortization plus interest expense plus
public offering costs. EBITDA plus public offering costs 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, as modified to exclude
our public offering costs, it has been disclosed in this prospectus to permit a
more complete description of our performance relative to other companies in the
apparel industry. Our definition of EBITDA may not be identical to the
definitions used by other companies and, therefore, may not necessarily provide
an accurate basis for comparison.
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.
26
[Enlarge/Download Table]
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------------- --------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ------------- ----------- ----------- ------------ ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues ......................... $54,859 $ 51,431 $ 44,000 $ 37,582 $ 56,763 $ 9,503 $ 17,803
Cost of sales ........................ 45,803 46,533 34,769 29,218 47,062 7,028 14,833
------- --------- -------- -------- ---------- ---------- ----------
Gross profit ......................... 9,056 4,898 9,231 8,364 9,701 2,475 2,970
Operating expenses:
Selling, general and
administrative expenses ........... 7,250 10,080 7,427 6,150 5,536 1,305 1,201
Impairment loss on fixed assets ..... -- 2,324 170 -- -- -- --
Depreciation and amortization
expense ........................... 99 102 165 151 222 64 68
------- --------- -------- -------- ---------- ---------- ----------
7,349 12,506 7,762 6,301 5,758 1,369 1,269
------- --------- -------- -------- ---------- ---------- ----------
Operating income (loss) .............. 1,707 (7,608) 1,469 2,063 3,943 1,106 1,701
Interest expense ..................... 1,648 1,914 1,962 1,507 1,209 253 296
Public offering costs ................ -- -- -- -- 823 -- --
------- --------- -------- -------- ---------- ---------- ----------
Income (loss) before income taxes
and extraordinary item .............. 59 (9,522) (493) 556 1,911 853 1,405
Provision for income taxes ........... -- -- -- -- 514 -- 565
------- --------- -------- -------- ---------- ---------- ----------
Income (loss) before
extraordinary item .................. 59 (9,522) (493) 556 1,397 853 840
------- --------- -------- -------- ---------- ---------- ----------
Extraordinary item ................... -- -- 3,150 -- -- -- --
------- --------- -------- -------- ---------- ---------- ----------
Net income (loss) .................... $ 59 $ (9,522) $ 2,657 $ 556 $ 1,397 $ 853 $ 840
======= ========= ======== ======== ========== ========== ==========
PRO FORMA INCOME DATA:
Income before income taxes ........... $ 1,911 $ 853 $ 1,405
Pro forma provision for income
taxes ............................... 764 341 565
---------- ---------- ----------
Pro forma net income ................. $ 1,147 $ 512 $ 840
========== ========== ==========
Pro forma basic and diluted net
income per common share ............. $ 0.30 $ 0.14 $ 0.22
Pro forma basic and diluted
weighted average number of
common shares outstanding ........... 3,775,667 3,775,667 3,775,667
27
[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 3,562 3,473
[Enlarge/Download Table]
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
----------- ------------- ----------- ---------- ----------- --------- ---------
(IN THOUSANDS)
OTHER DATA:
EBITDA plus public offering costs $ 2,719 $ (6,411) $ 2,415 $ 2,865 $ 4,731 $1,308 $1,886
Capital expenditures ............ 1,103 368 105 59 592 90 109
Cash (used in) provided by
operating activities ........... (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
28
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes 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 also includes 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 March 31, 1999. The acquisitions
of Diversified Apparel and Global Sourcing Network were consummated on April 15,
1999. We have entered into definitive agreements to purchase the Components and
Windsong businesses. Our acquisition of Components and Windsong will occur
simultaneously with this offering. 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 Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial purchase price of Components
will be paid entirely in cash. The initial purchase prices of Global Sourcing
Network and Diversified Apparel were paid in cash and by the issuance of notes.
The initial purchase price of Windsong will be paid in cash and $4.0 million
worth of Class A Common Stock valued at the initial public offering price,
assumed to be $12.00 per share, or 333,333 shares. A summary of the purchase
price of the acquisitions and allocation of each such price to the fair value of
assets acquired and liabilities assumed is shown below:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE OF ACQUISITIONS
[Enlarge/Download Table]
GLOBAL
DIVERSIFIED SOURCING TOTAL
APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
PURCHASE PRICE:
Cash portion ............................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ............................. -- -- -- 4,000 4,000
Sellers' notes ............................. 400 800 -- -- 1,200
Costs directly associated with the
acquisition ............................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ....................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
ALLOCATION OF PURCHASE PRICE:
Fair value of assets acquired .............. $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .................. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired .......................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ............. $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter ......... $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
29
Goodwill will be amortized over a period ranging from 10 to 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 the assets 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. In addition, a
portion of the purchase price for each of the above-referenced acquisitions will
be deferred, which we will pay upon the achievement by the acquired business of
specified performance targets. These deferred purchase price provisions may
result in additional goodwill of $29.7 million that will be amortized over a
period ranging from nine to 19 years. The initial goodwill plus the additional
goodwill, if any, resulting from such deferred purchase price provisions would
result in aggregate goodwill amortization of $2.1 million for the year ending
December 31, 2000, $2.3 million for the year ending December 31, 2001, $2.5
million for the year ending December 31, 2002, $2.9 million for the year ending
December 31, 2003, $3.3 million for the year ending December 31, 2004 and $3.7
million for the year ending December 31, 2005.
The statement of operations data reflects the following pro forma
adjustments:
o A reduction of selling, general and administrative expenses totaling
$2.7 million in 1998 representing the excess of actual 1998
compensation expense and benefits over the compensation and benefits
to be paid to the former owners of Diversified Apparel, Global
Sourcing Network, Components and Windsong, under their respective
employment agreements. This pro forma information is shown solely to
demonstrate the changed circumstances that will exist following the
consummation of the acquisitions. Although the administrative
expenses of the acquired businesses will decline after the offering
as a result of the reduced compensation payable to the former owners
of these businesses, the roles and responsibilities and the
administrative function of these individuals will not be diminished
as a result of the acquisitions. We do not expect to incur any
additional administrative expense beyond those reflected in the
adjustments going forward. We believe this information is necessary
for investors to realistically assess the impact of these
acquisitions;
o The amortization of goodwill resulting from the Diversified Apparel,
Global Sourcing Network, Components and Windsong acquisitions as if
the acquisitions occurred on January 1, 1998. The calculation of
this adjustment is shown in the table above entitled, "Schedule of
Allocation of Purchase Price of Acquisitions";
o The reduction of interest expense incurred during 1998, the first
quarter of 1999 and the first quarter of 1998 on interest-bearing
subordinated accounts payable of Windsong that we will not assume as
part of the Windsong acquisition;
o The reduction of interest expense resulting from repayment of debt
with the proceeds of the offering, net of a fee for unused
availability under the PNC Bank credit facility that will result
from the repayment of the PNC Bank credit facility with the proceeds
of this offering;
o 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%.
See footnote 1 to the Pro Forma Statement of Operations for further
information;
o Pro forma combined weighted average number of shares outstanding,
basic and diluted, includes, in addition to the 3,775,667 shares of
Class B Common Stock owned by our sole stockholder as of the date of
the offering, 333,333 shares of Class A Common Stock issued to
Windsong at the initial public offering price as part of our
acquisition of Windsong, based on an assumed offering price of
$12.00 per share; and
o Pro forma combined, as adjusted weighted average number of common
shares outstanding, basic and diluted, which includes, in addition
to all shares of Class A Common Stock to be issued in the offering
30
and the initial portion of the Windsong acquisition price, 3,775,667
shares of Class B Common Stock owned by our sole stockholder as of
the date of the offering.
The balance sheet data reflects the following pro forma adjustments:
o Goodwill as a result of the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions as calculated in the
table above entitled, "Schedule of Allocation of Purchase Price of
Acquisitions";
o Deposit of $4.25 million cash in escrow which will be paid to the
sellers of Windsong if Windsong achieves specified earnings targets
during 1999;
o Elimination of certain liabilities that are not being assumed as
part of the acquisition of Windsong;
o For purposes of the acquisition pro forma adjustments, we have
assumed an acquisitions payable amount, which represents the initial
purchase price owed for the Components and Windsong acquisitions and
the Windsong escrow amount. No interest expense has been provided
for the Windsong and Components acquisitions as those acquisitions
will be funded by the proceeds of the offering. See "Use of
Proceeds";
o Elimination of common stock and retained earnings of the
acquisitions;
o Elimination of the additional paid-in capital of the acquisitions;
o Issuance of $4.0 million worth of Class A Common Stock associated
with the acquisition of Windsong at an assumed price of $12.00 per
share;
o Assumed net proceeds of approximately $43.2 million from this
offering; and
o Our use of the net proceeds of the offering. See "Use of Proceeds."
In addition to the adjustments included in the pro forma combined
financial data, our acquisition and integration of the acquired businesses may
affect their operations in other ways. We expect the acquired businesses to be
able to use our existing merchandising, sourcing, sales and accounting staff to
perform certain functions performed for the acquired businesses historically by
third party consultants. For example, as a condition to our acquisition of
Global Sourcing Network, it agreed to stop paying royalties and commissions to
third party consultants who assisted in the development, merchandising and
international sourcing of apparel programs for S&K Famous Brands. These
terminated commissions and royalties totaled $870,000 in 1998. We expect that
our existing staff will perform these services for Global Sourcing Network at no
additional cost to us and without any loss of revenues. We also expect to incur
additional costs associated with being a public company which are estimated to
be $300,000 per year.
31
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE YEAR ENDED DECEMBER 31, 1998
[Enlarge/Download Table]
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $56,763 $ 2,633 $18,062 $19,993 $63,630 $ 161,081
Cost of sales ............................... 47,062 1,590 16,768 15,007 49,884 130,311
------- ------- ------- ------- ------- ---------
Gross profit ................................ 9,701 1,043 1,294 4,986 13,746 30,770
Operating expenses:
Selling, general and administrative
expenses .................................. 5,536 765 1,390 3,107 10,917 21,715
Depreciation and amortization expenses ..... 222 3 4 1 157 387
------- ------- ------- ------- ------- ---------
5,758 768 1,394 3,108 11,074 22,102
------- ------- ------- ------- ------- ---------
Operating income (loss) ..................... 3,943 275 (100) 1,878 2,672 8,668
Interest expense ............................ 1,209 1 -- 293 1,661 3,164
Public offering costs ....................... 823 -- -- -- -- 823
------- ------- ------- ------- ------- ---------
Income (loss) before income taxes ........... 1,911 274 (100) 1,585 1,011 4,681
Provision for income taxes .................. 514 24 (46) 158 46 696
------- ------- ------- ------- ------- ---------
Net income (loss) ........................... $ 1,397 $ 250 $ (54) $ 1,427 $ 965 $ 3,985
======= ======= ======= ======= ======= =========
[Enlarge/Download Table]
COMPANY ACQUISITION PRO FORMA
PRO FORMA PRO FORMA PRO FORMA OFFERING COMBINED,
ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
------------- ------------- ------------- ------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 ...................................... -- (2,667) 19,048 -- 19,048
Depreciation and amortization expenses ......... -- 1,595 1,982 -- 1,982
------ -------- ---------- ------ ----------
-- (1,072) 21,030 -- 21,030
------ -------- ---------- ------ ----------
Operating income (loss) ......................... -- 1,072 9,740 -- 9,740
Interest expense ................................ -- 157 3,321 (936) 2,385
Public offering costs ........................... -- -- 823 -- 823
Income (loss) before income taxes ............... -- 915 5,596 936 6,532
Provision for income taxes ...................... 250(1) 1,292(1) 2,238 374 2,612
-------- ---------- ---------- ------ ----------
Net income (loss) ............................... $ (250) $ (377) $ 3,358 $ 562 $ 3,920
======== ========== ========== ====== ==========
Basic and diluted net income (loss) per
common share ................................... $ 0.82 $ 0.48
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
32
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE THREE MONTHS ENDED MARCH 31, 1999
[Enlarge/Download Table]
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $17,803 $2,233 $6,040 $5,384 $14,552 $46,012
Cost of sales ............................... 14,833 1,697 5,622 4,123 11,170 37,445
------- ------ ------ ------ ------- -------
Gross profit ................................ 2,970 536 418 1,261 3,382 8,567
Operating expenses:
Selling, general and administrative
expenses .................................. 1,201 336 261 604 2,030 4,432
Depreciation and amortization expenses ..... 68 -- -- -- 40 108
------- ------ ------ ------ ------- -------
1,269 336 261 604 2,070 4,540
------- ------ ------ ------ ------- -------
Operating income ............................ 1,701 200 157 657 1,312 4,027
Interest expense ............................ 296 4 -- 76 334 710
Public offering cost ........................ -- -- -- -- -- --
------- ------ ------ ------ ------- -------
Income before income taxes .................. 1,405 196 157 581 978 3,317
Provision for income taxes .................. 565 (1) -- -- 44 608
------- -------- ------ ------ ------- -------
Net income .................................. $ 840 $ 197 $ 157 $ 581 $ 934 $ 2,709
======= ======= ====== ====== ======= =======
[Enlarge/Download Table]
COMPANY ACQUISITION PRO FORMA
PRO FORMA PRO FORMA PRO FORMA OFFERING COMBINED, AS
ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTED
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
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
expenses ...................................... -- 1 4,433 -- 4,433
Depreciation and amortization expenses ......... -- 399 507 -- 507
-- ------ ---------- ------ ----------
-- 400 4,940 -- 4,940
-- ------ ---------- ------ ----------
Operating income (loss) ......................... -- (400) 3,627 -- 3,627
Interest expense ................................ -- 2 712 (173) 539
-- ------ ---------- ------ ----------
Income (loss) before income taxes ............... -- (402) 2,915 173 3,088
Provision for income taxes ...................... -- 561(1) 1,169 66 1,235
-- -------- ---------- ------ ----------
Net income (loss) ............................... -- $ (963) $ 1,746 $ 107 $ 1,853
== ======== ========== ====== ==========
Basic and diluted net income (loss) per
common share ................................... $ 0.42 $ 0.23
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
33
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
FOR THE THREE MONTHS ENDED MARCH 31, 1998
[Enlarge/Download Table]
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net revenues ................................ $9,503 $260 $5,831 $4,868 $17,312 $37,774
Cost of sales ............................... 7,028 18 5,372 3,596 13,684 29,698
------ ---- ------ ------ ------- -------
Gross profit ................................ 2,475 242 459 1,272 3,628 8,076
Operating expenses:
Selling, general and administrative
expenses .................................. 1,305 176 324 509 2,090 4,404
Depreciation and amortization expenses ..... 64 -- -- -- 41 105
------ ---- ------ ------ ------- -------
1,369 176 324 509 2,131 4,509
------ ---- ------ ------ ------- -------
Operating income ............................ 1,106 66 135 763 1,497 3,567
Interest expense ............................ 253 -- -- 67 448 768
Public offering costs ....................... -- -- -- -- -- --
------ ---- ------ ------ ------- -------
Income before income taxes .................. 853 66 135 696 1,049 2,799
Provision for income taxes .................. -- 13 2 16 47 78
------ ---- ------ ------ ------- -------
Net income .................................. $ 853 $ 53 $ 133 $ 680 $ 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
------------- ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
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 ...................................... -- (93) 4,311 -- 4,311
Depreciation and amortization expenses ......... -- 399 504 -- 504
------ ------ ---------- ------ ----------
-- 306 4,815 -- 4,815
------ ------ ---------- ------ ----------
Operating income (loss) ......................... -- (306) 3,261 -- 3,261
Interest expense ................................ -- (161) 607 (257) 350
Public offering costs ........................... -- -- -- -- --
------ ------ ---------- ------ ----------
Income (loss) before income taxes ............... -- (145) 2,654 257 2,911
Provision for income taxes ...................... 341(1) 642(1) 1,061 103 1,164
-------- -------- ---------- ------ ----------
Net income (loss) ............................... $ (341) $ (787) $ 1,593 $ 154 $ 1,747
======== ======== ========== ====== ==========
Basic and diluted net income per common
share .......................................... $ 0.39 $ 0.22
Basic and diluted weighted average number
of common shares outstanding ................... 4,109,000 8,109,000
----------
(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. Prior to October 1, 1998, The Pietrafesa Corporation
operated as a limited partnership with income and loss included in the
taxable income of the individual partners.
34
Diversified Apparel, Components and Windsong operated as S-corporations
for federal income tax purposes. Accordingly, the income and loss of
Diversified Apparel, Components and Windsong were included in the taxable
income of their shareholders. These adjustments are summarized as follows:
[Enlarge/Download Table]
FOR THE
THREE MONTHS FOR THE
FOR THE YEAR ENDED ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999 MARCH 31, 1998
----------------------------- ---------------- ----------------------------
COMPANY ACQUISITION ACQUISITION COMPANY ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS ADJUSTMENTS
------------- ------------- ---------------- ------------- ------------
(IN THOUSANDS)
To adjust historical income tax
expense to an effective tax rate
of 40%
The Pietrafesa Corporation ......... $250 $341
Diversified Apparel ................ $ 86 $ 79 $ 13
Global Sourcing Network ............ 6 63 52
Components ......................... 476 232 262
Windsong ........................... 358 348 373
Tax effect of pro forma adjustments
assuming a 40% tax rate ............ 366 (161) (58)
------- ------ -----
Total .............................. $250 $ 1,292 $ 561 $341 $ 642
==== ======= ====== ==== =====
35
PRO FORMA COMBINED BALANCE SHEET DATA
AS OF MARCH 31, 1999
[Enlarge/Download Table]
THE GLOBAL
PIETRAFESA DIVERSIFIED SOURCING TOTAL
CORPORATION APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------- ---------- ------------ ---------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Assets
Current assets
Cash ......................................... $ 13 $ 116 $ -- $ 187 $ 21 $ 337
Accounts receivable .......................... 8,488 1,471 589 5,199 8,527 24,274
Inventories .................................. 12,682 792 434 2,454 9,473 25,835
Prepaid expenses and other assets ............ 1,313 56 139 -- 1,308 2,816
------- ------ ------ ------ ------- -------
Total current assets .......................... 22,496 2,435 1,162 7,840 19,329 53,262
Property, plant and equipment, net ............. 6,523 13 9 312 598 7,455
Goodwill ....................................... -- -- -- -- -- --
Other assets ................................... 925 9 -- 508 71 1,513
------- ------ ------ ------ ------- -------
Total assets ................................... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
Liabilities and stockholders' equity
Current liabilities
Credit facility .............................. $ -- $ 150 $ -- $3,369 $10,707 $14,226
Accounts payable ............................. 7,166 1,300 898 2,494 6,365 18,223
Other current liabilities .................... 2,767 357 223 158 859 4,364
Tax distribution payable ..................... 1,516 70 -- -- -- 1,586
Current maturities of long-term
debt ....................................... 527 -- -- -- 124 651
------- ------ ------ ------ ------- -------
Total current liabilities ..................... 11,976 1,877 1,121 6,021 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 .................................. -- 1 1 300 1 303
Additional paid-in capital .................... 3,191 -- -- -- 6 3,197
Retained earnings ............................. 282 579 49 2,339 1,749 4,998
------- ------ ------ ------ ------- -------
Total stockholders' equity ..................... 3,473 580 50 2,639 1,756 8,498
------- ------ ------ ------ ------- -------
Total liabilities and stockholders' equity ..... $29,944 $2,457 $1,171 $8,660 $19,998 $62,230
======= ====== ====== ====== ======= =======
36
[Enlarge/Download Table]
AS OF MARCH 31, 1999
----------------------------------------------------------------------------
COMPANY ACQUISITION PRO FORMA
TOTAL PRO FORMA PRO FORMA PRO FORMA COMBINED,
COMBINED ADJUSTMENTS ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
---------- ------------- ------------- ----------- ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA (CONT.):
Assets
Current assets
Cash ........................................ $ 337 $ -- $ -- $ 337 $ -- $ 337
Accounts receivable ......................... 24,274 -- -- 24,274 -- 24,274
Inventories ................................. 25,835 -- -- 25,835 -- 25,835
Prepaid expenses and other assets ........... 2,816 -- -- 2,816 -- 2,816
------- ------- -------- ------- --------- -------
Total current assets ......................... 53,262 -- -- 53,262 -- 53,262
------- ------- -------- ------- --------- -------
Property, plant and equipment, net ............ 7,455 -- -- 7,455 -- 7,455
Goodwill ...................................... -- -- 29,218 29,218 -- 29,218
Other assets .................................. 1,513 -- 4,250 5,763 -- 5,763
------- ------- -------- ------- --------- -------
Total assets .................................. $62,230 $ -- $ 33,468 $95,698 $ -- $95,698
======= ======= ======== ======= ========= =======
Liabilities and stockholders' equity
Current liabilities
Credit facility ............................. $14,226 $ -- $ -- $14,226 $ -- $14,226
Accounts payable ............................ 18,223 -- (1,380) 16,843 -- 16,843
Other current liabilities ................... 4,364 -- 1,200 5,564 (1,200) 4,364
Tax distribution payable .................... 1,586 -- -- 1,586 -- 1,586
Current maturities of long-term
debt ...................................... 651 -- -- 651 -- 651
------- ------- -------- ------- --------- -------
Total current liabilities .................... 39,050 -- (180) 38,870 (1,200) 37,670
------- ------- -------- ------- --------- -------
Acquisitions payable:
Components ................................... 4,695 4,695 (4,695) --
Windsong ..................................... 22,000 22,000 (22,000) --
Windsong escrow .............................. 4,250 4,250 (4,250) --
-------- ------- --------- -------
30,945 30,945 (30,945) --
Deferred tax liability ........................ 1,441 -- -- 1,441 -- 1,441
Long-term debt, net of current maturities 13,241 -- 3,728 16,969 (11,050) 5,914
Stockholders' equity
Common stock ................................. 303 -- (303) -- 4 4
Additional paid in capital ................... 3,197 -- 3,994 7,191 43,196 50,387
Retained earnings ............................ 4,998 -- (4,716) 282 -- 282
------- ------- -------- ------- --------- -------
Total stockholders' equity .................... 8,498 -- (1,025) 7,473 43,200 50,673
------- ------- -------- ------- --------- -------
Total liabilities and stockholders' equity .... $62,230 $ -- $ 33,468 $95,698 $ -- $95,698
======= ======= ======== ======= ========= =======
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 1970s 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, our profits grew only
modestly. 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.
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. See "Risk Factors --
Failure by Third Party Manufacturers to Fulfill their Obligations could
Adversely Affect our Ability to Deliver Products in a Timely Manner and could
Reduce our Profitability," As part of this new strategy, in 1998 we commenced
acquisition discussions with various independent merchandising and sourcing
companies. See "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
$800,000 in cash and issued a promissory note in the principal amount of
$400,000. In addition, we assumed some existing liabilities of Diversified
Apparel totaling $2.0 million as of March 31, 1999, which consisted of
approximately $1.3 million of trade payables, as well as third party
indebtedness. 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 $800,000
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.
38
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 consisted 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 $800,000. 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.
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 totaling
$6.0 million as of March 31, 1999, consisting of approximately $5.0 million of
trade payables and factor advances, as well as third party indebtedness.
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
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.
Concurrent with the closing of this offering, we will acquire
substantially all of the assets of Windsong. Windsong merchandises and sources
men's sportswear worldwide. The purchase price will consist of $22.0 million in
cash, $4.0 million in shares of Class A Common Stock valued at the initial
public offering price, and our assumption of approximately $16.9 million of
Windsong liabilities as of March 31, 1999. See "Use of Proceeds." The
liabilities to be assumed include approximately $16.7 million of operating
liabilities, including the balance outstanding under Windsong's factoring
agreement with FINOVA, which was $10.7 million as of March 31, 1999 but exclude
subordinated accounts payable of $1.4 million as of March 31, 1999 and
liabilities associated with Windsong's defined benefit pension plan. As of June
30, 1999, the outstanding balance under the Finova Factoring Agreement was $8.0
million. The purchase price also includes a potential six-year earn-out of $22.0
million. Aside from $1.0 million worth of shares of Class A Common Stock which
Windsong, Inc. may earn in year one of the earn-out, the earn-out is payable in
cash or, in limited circumstances, at our option, shares of Class A Common
Stock, based on Windsong's achievement of specified annual pre-tax earnings
targets. These targets require Windsong to achieve $6.3 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 expense 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. Additionally, the
earn-out portions of the purchase prices of Diversified Apparel, Global Sourcing
Network, Components and Windsong will be recorded as additional goodwill to the
extent they are earned. Accordingly, our depreciation and amortization expense
will increase as a result of the amortization of this additional goodwill. See
"Risk Factors -- Reductions in our Future 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
39
forth items within The Pietrafesa Corporation's, Global Sourcing Network's,
Components' and Windsong's statements of income as a percentage of net revenues
for the periods indicated. Cost of sales for The Pietrafesa Corporation include
costs associated with manufacturing and sourcing of product. Cost of sales for
manufactured product includes raw materials, direct and indirect labor, and
manufacturing overhead. The Pietrafesa Corporation's cost of sales for sourced
product includes raw materials and contractor costs. Global Sourcing Network's,
Components' and Windsong's cost of sales include raw materials and contractor
costs. Selling, general, and administrative expenses for The Pietrafesa
Corporation and the acquired companies primarily include payroll costs
associated with selling and administrative functions, licensing fees, travel,
sample, rent, legal, and other general office expenses. 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 the
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.
[Enlarge/Download Table]
FOR THE
FOR THE YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
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 ......... 16.9 16.4 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 ............................ 3.3 5.5 6.9 11.6 9.6
Interest expense ............................ 4.5 4.0 2.1 2.7 1.7
Public offering costs ....................... -- -- 1.4 -- --
----- ----- ----- ----- -----
Income (loss) before income taxes and
extraordinary item ......................... ( 1.2) 1.5 3.4 8.9 7.9
Provision for income taxes .................. -- -- 0.9 -- 3.2
----- ----- ----- ----- -----
Income (loss) before extraordinary item ..... ( 1.2) 1.5 2.5 8.9 4.7
Extraordinary item .......................... 7.2 -- -- -- --
----- ----- ----- ----- -----
Net income .................................. 6.0% 1.5% 2.5% 8.9% 4.7%
===== ===== ===== ===== =====
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.
In June 1999, our license with the Polo Corporation expired. We believe
that the loss of sales of Polo products will not have a material adverse effect
on our revenues. We anticipate replacing revenues generated from the sales of
Polo products with revenues from sales to other 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, which amount is consistent with our
40
increased net revenues. Cost of sales as a percentage of net revenues for the
three months ended March 31, 1999 increased 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 EXPENSES. Selling, general and
administrative expenses 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 revenues 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 $300,000 from $250,000 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 $600,000 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. Net income remained constant at $800,000 for the three months
ended March 31, 1999 and 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.
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 revenues for 1998 increased 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, $500,000 or 0.8% of the increase in cost of sales as
a percent of net revenues resulted from an increase in inventory reserves which
resulted from our ordering excess raw materials and finished goods that exceeded
our forecasted sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses 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 expired 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 20.0% to $1.2
million from $1.5 million for 1997, due primarily to improved operating cash
flow which was used to reduce outstanding principal balances.
41
PUBLIC OFFERING COSTS. In 1998, MS Pietrafesa, L.P. incurred $800,000 of
public offering costs. Such costs related to a public offering that was
abandoned due to adverse market conditions. The public offering costs include
costs for legal ($200,000), accounting ($300,000) and investment banking
services ($60,000), as well as travel-related expenses ($200,000).
PROVISION FOR INCOME TAXES. Provision for income taxes for 1998 was
$500,000 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 $600,000 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. Cost of sales
as a percentage of net revenues for 1997 declined to 77.7% from 79.0% for 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 EXPENSES. Selling, general and
administrative expenses for 1997 decreased by 19.7% to $6.1 million from $7.6
million for 1996, due primarily to the impact of reductions in management
personnel implemented in late 1996. This decrease was partially offset by a
reduction of bad debt expenses in 1996 of $180,000 due to lower bad debt
exposures in 1996. There was no similar reduction in 1997. Selling, general and
administrative expenses as a percentage of net revenues for 1997 decreased to
16.4% from 16.9% for 1996.
IMPAIRMENT LOSS ON FIXED ASSETS. At the end of 1996, it was determined
that assets held for sale at our Sturgis, Kentucky facility would be disposed of
at a loss of $170,000. The loss was recorded in 1996 and actually realized in
1997 when the property was sold. The net realizable value of the assets was
determined using estimated selling prices less sale costs based on an
independent appraisal.
INTEREST EXPENSE. Interest expense for 1997 decreased by 25.0% to $1.5
million from $2.0 million for 1996, due primarily to lower outstanding principal
balances resulting from improved operating cash flow.
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM. Income (loss)
before income taxes and extraordinary item for 1997 increased to $600,000 from
$(500,000) for 1996, due to lower cost of sales and decreases in selling,
general and administrative expenses.
EXTRAORDINARY ITEM. There was no extraordinary item for 1997 as compared
to an extraordinary item of $3.2 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 by 77.8% to $600,000 from $2.7 million for 1996.
42
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. For more information,
see the financial statements of Global Sourcing Network, 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,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
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 0.9 0.9
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 .................. -- ( 0.3) -- --
----- ----- ----- -----
Net loss .................................... ( 0.1)% ( 0.3)% 2.3% 2.6%
===== ===== ===== =====
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 earlier
sales of spring season products to S&K Famous Brands through March 31, 1999.
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 revenues for the three months ended March 31, 1999 increased
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 three months ended March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
17.4% to $54,000 from $46,000 for the three months ended March 31, 1998, due to
increased legal and accounting expenses associated with the sale of Global
Sourcing Network.
ROYALTIES AND COMMISSIONS. Royalties and commissions for the three months
ended March 31, 1999 decreased by 33.3% to $200,000 from $300,000 for the three
months ended March 31, 1998. Royalties and commissions decreased due to the
termination of the remaining commission relationship early in the three months
ended March 31, 1999. Historically, Global Sourcing Network has paid significant
royalties and commissions on its total net revenues. 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 $2,000.
NET INCOME. As a result of the above factors, net income for the three
months ended March 31, 1999 increased by 23.1% to $160,000 from $130,000 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.
43
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 revenues for
1998 decreased to 92.8% from 93.4% for 1997. The reduction in cost of sales was
due to reduced revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 remained constant at $300,000.
ROYALTIES AND COMMISSIONS. Royalties and commissions for 1998 increased by
10.0% to $1.1 million from $1.0 million for 1997. 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
revenues. 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, the net loss for 1998
increased to $(50,000) from a loss of $(10,000) for 1997.
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. For more information, see the financial
statements of Components, including the Notes thereto, appearing elsewhere in
this prospectus.
[Enlarge/Download Table]
FOR THE
FOR THE YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
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 0.3 --
----- ----- ----- -----
Net income .................................. 4.9% 7.1% 13.9% 10.8%
===== ===== ===== =====
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 revenues for the three months ended March 31, 1999 increased
to 76.6% from 73.9% for the three months ended March 31, 1998, due primarily to
an increase in sales allowances and discounts. Sales allowances and discounts
increased $128,000 due to increases in sales discounts and advertising
allowances associated with sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 1999 increased by
20.0% to $600,000 from $500,000 for the three months ended March 31, 1998, due
to increased commission and travel expenses.
OPERATING INCOME. Operating income for the three months ended March 31,
1999 decreased by 12.5% to $700,000 from $800,000 for the three months ended
March 31, 1998, due primarily to increased sales volume offset by increases in
sales allowances and selling expenses.
44
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 $20,000.
NET INCOME. As a result of the above factors, net income for the three
months ended March 31, 1999 decreased by 14.3% to $600,000 from $700,000 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.
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 as a percentage of net revenues for 1998 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 EXPENSES. Selling, general and
administrative expenses for 1998 increased by 47.6% to $3.1 million from $2.1
million for 1997, due primarily to a $400,000 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 expenses as a percentage of net revenues for 1998
increased to 15.5% from 14.1% for 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
revenues and gross profit.
NET INCOME. As a result of the above factors, net income for 1998
increased by 100% to $1.4 million from $700,000 for 1997.
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,
--------------------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
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 .................................. 0.0% 1.2% 1.5% 5.8% 6.4%
===== ===== ===== ===== =====
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
decreased by 15.6% to $14.6 million from $17.3 million for the three months
ended March 31, 1998. The decrease in net revenues was a result of a management
decision to reduce low margin private label sales and reduce certain department
store
45
sales due to the increased markdowns and allowances associated with these
customers. During the last quarter of 1998, Windsong's management decided to
reduce sales to department stores that took large markdowns and sales allowances
resulting from the department stores lower than anticipated retail margins on
these products. Windsong's decision to reduce sales to these stores was based on
the lower profitability of sales to these customers after taking account of the
markdowns and sales allowances, which totalled approximately $1.4 million in
1998. Overall, sales to the most significant customer in the three months ended
March 31, 1999 amounted to 57.8% of total net revenues, as compared to 33.8% for
the three months ended March 31, 1998.
COST OF SALES. Cost of sales for the three months ended March 31, 1999
decreased by 18.2% 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 revenues for the three months ended March 31, 1999
decreased 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 three months ended March 31, 1999 compared to
the three months ended March 31, 1998. The reduction in discounts and allowances
was due to the discontinuation of sales to department store customers which
accounted for a disproportionate amount of the March 31, 1998 discounts and
allowances.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
the three months ended March 31, 1999 decreased by 10.0% to $900,000 from $1.0
million for the three months ended March 31, 1998. Selling and distribution
expenses as a percentage of net revenues for the three months ended March 31,
1999 increased to 5.9% from 5.8% for the three months ended March 31, 1998 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
for the three months ended March 31, 1999 increased by 9.1% to $1.2 million from
$1.1 million for the three months ended March 31, 1998. General and
administrative expenses as a percentage of net revenues for the three months
ended March 31, 1999 increased to 8.3% from 6.5% for the three months ended
March 31, 1998. This percentage increase was primarily due to a general increase
in the payroll and payroll-related expenses and lower sales.
OPERATING INCOME. Operating income for the three months ended March 31,
1999 decreased by 13.3% to $1.3 million from $1.5 million for the three months
ended March 31, 1998 due to the factors described above. Operating income as a
percentage of net revenues for the three months ended March 31, 1999 increased
to 9.0% from 8.7% for the three months ended March 31, 1998. The 0.3%
improvement in operating income as a percentage of net revenues is attributable
to a 2.2% increase in gross profit margin compared to a 1.9% increase in
operating expenses for the three months ended March 31, 1999.
INTEREST EXPENSE. Interest expense for the three months ended March 31,
1999 decreased by 25.0% to $300,000 from $400,000 for the three months ended
March 31, 1998, due primarily to interest expense on accounts
payable-subordinated debt. Effective January 1, 1998, Windsong's management
agreed to pay a supplier interest at a rate of 8.5% per year on a subordinated
loan balance related to goods purchased prior to 1998 that Windsong owed to such
supplier. The interest was to accrue on Windsong's balance as of May 15, 1996.
Accordingly, the liability for 1996 and 1997 interest expense was not incurred
or known before 1998 and is reflected as a retroactive interest expense
adjustment. In addition, commencing in 1998, Windsong agreed to pay interest to
the same supplier on Windsong's open accounts payable balance at an interest
rate equal to the supplier's bank borrowing rate.
INCOME BEFORE INCOME TAXES. As a result of the above factors, income
before income taxes remained constant at $1.0 million for the three months ended
March 31, 1999 and 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 by 10.0% to $900,000 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 for 1998 increased by 109.9% to $63.6 million
from $30.3 million in 1997. The increase in net revenues included an aggregate
increase in sales of $21.0 million to the most significant
46
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 108.8% 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 revenues for 1998 decreased to 78.4% from
78.7% for 1997 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 for
1998 increased by 136.8% to $4.5 million from $1.9 million in 1997. Selling and
distribution expenses as a percentage of net revenues for 1998 increased to 7.1%
from 6.1% for 1997. 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
for 1998 increased by 66.7% to $6.5 million from $3.9 million for 1997. General
and administrative expenses as a percentage of net revenues for 1998 decreased
to 10.3% from 12.8% for 1997. Overall, general and administrative expenses for
1998 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 for 1998 were $1.6 million, including payroll taxes, as
compared to $0 for 1997. Windsong's management decided in 1998 to convert
stockholder loans receivable into officers' bonuses at the end of 1998 due to
Windsong's profitability. Accordingly, the officers' bonuses reflected in 1998
are higher than those in previous years.
OPERATING INCOME. Operating income for 1998 increased by 285.7% to $2.7
million from $700,000 for 1997, due to increased sales to significant customers
and management's decision to reduce low margin private label sales and increase
licensed product sales that carry higher margins. Operating income as a
percentage of net revenues for 1998 increased to 4.2% from 2.4% for 1997. This
increase in operating income as a percentage of net revenues 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 by 325.0% to $1.7
million from $400,000 for 1997, due primarily to increased borrowings and factor
costs consistent with sales growth.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1998 increased
by 150.0% to $1.0 million from $400,000 for 1997 due to the factors described
above. Income before income taxes as a percentage of net revenues for 1998
increased to 1.6% from 1.3% for 1997 due to the factors described above.
NET INCOME. As a result of the above factors, net income for 1998
increased by 150.0% to $1.0 million from $400,000 for 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
NET REVENUES. Net revenues for 1997 increased by 388.7% to $30.3 million
from $6.2 million for 1996. The increase in net revenues included an aggregate
increase in sales of $19.0 million to the primary customers.
COST OF SALES. Cost of sales for 1997 increased by 342.6% 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 revenues for 1997 decreased to 78.7% from 87.8%
for 1996 due to better margins with significant customers.
SELLING AND DISTRIBUTION EXPENSES. Selling and distribution expenses for
1997 increased by 375.0% to $1.9 million from $400,000 for 1996. Selling and
distribution expenses as a percentage of net revenues for 1997 decreased to 6.1%
from 6.4% for 1996. 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
revenues, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for 1997 increased by 1,200.0% to $3.9 million from $300,000 for 1996. General
and administrative expenses as a percentage of net
47
revenues for 1997 increased to 12.8% from 5.5% for 1996. This increase was
primarily due to the significant increase in sales growth in 1997.
OPERATING INCOME. Operating income for 1997 increased to $700,000 from
$17,000 for 1996. Operating income as a percentage of net revenues for 1997
increased to 2.4% from 0.3% for 1996 due to the factors described above.
INTEREST EXPENSE. Interest expense for 1997 increased to $400,000 from
$15,000 for 1996. Interest expense as a percentage of net revenues for 1997
increased to 1.3% from 0.2% for 1996. This increase is primarily the result of
increased borrowings in working capital due to growth in 1997.
INCOME BEFORE INCOME TAXES. Income before income taxes for 1997 increased
to $400,000 from $3,000 for 1996. Income before income taxes as a percentage of
net revenues for 1997 increased to 1.3% from 0.1% for 1996. This increase in
income before income taxes as a percentage of net revenues was due to factors
discussed previously.
NET INCOME. Net income for 1997 increased to $400,000 from $0 for 1996 as
a result of the above factors.
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 $600,000 for
operating activities. This was primarily the result of net income of $800,000
offset by a $1.0 million decrease in current liabilities and a $500,000 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.
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 an $18.0 million revolving credit line, $1.0 million
of which can be utilized for the issuance of letters of credit, and a $7.0
million term note. The amount available for borrowing under the revolving credit
line at any given time is determined by a formula based upon levels of accounts
receivable and inventory. The term note is payable in 33 monthly payments of
$116,667 which commenced on May 1, 1999, with a final payment of all unpaid
principal on April 15, 2002. As of June 30, 1999, $11.8 million was outstanding
under the revolving credit line and $6.8 million was outstanding under the term
note. The credit facility is 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 1.0% 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 will decrease by 0.25% if we receive net proceeds of at least $20
million from the offering.
48
The PNC Bank credit facility includes significant financial and operating
covenants, including prohibitions on our ability to pay dividends, to make
capital expenditures of more than $750,000, to assume additional indebtedness
exceeding $500,000 in total, except for trade debt and permitted capital
expenditures, and requirements that we maintain a minimum fixed charge coverage
ratio. The fixed charge coverage ratio requires us to maintain EBITDA plus
capital expenditures of at least 110% of required debt payments under the PNC
Bank credit facility. We are currently in compliance with all covenants under
the PNC Bank credit facility. The PNC Bank credit facility also contains
customary events of default, including a cross-default provision which provides
that if we or any of our subsidiaries fail to perform our obligations under the
Diversified Apparel and Global Sourcing Network acquisition agreements, then it
would result in a default under the PNC Bank credit facility.
In November 1996, Windsong entered into a factoring agreement with FINOVA
Capital Corporation whereby Windsong receives monthly advances from FINOVA. The
amount of these advances outstanding at any time may not exceed $20.0 million
and is primarily determined based upon the net face amount of Windsong's
receivables and inventory. Windsong repays the advances to FINOVA as the
receivables are collected. As of June 30, 1999, $8.0 million was outstanding
under the FINOVA agreement.
FINOVA earns a factoring commission for services rendered under the FINOVA
agreement equal to 0.5% of assigned receivables. FINOVA also receives customary
charges in connection with letters of credit issued for Windsong's account to
its suppliers and the servicing of assigned receivables. The amounts of
outstanding balances due to or from FINOVA currently bear interest at a rate of
prime plus 0.5%, except that over-advances bear interest at a rate of prime plus
1.0%. All amounts due to FINOVA, as well as any outstanding letters of credit,
are secured by Windsong's trade receivables and inventory. Upon our acquisition
of Windsong, we will become a party to the FINOVA agreement. The FINOVA
agreement terminates on December 31, 2000 and is terminable by FINOVA at will
prior to that date on thirty days prior notice.
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 June 30, 1999, $500,000 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 $600,000 for 1998, primarily for replacing
manufacturing equipment. We expect capital expenditures to be approximately
$700,000 during 1999. Capital expenditure spending in 1999 will primarily fund
technology investments and replacement in kind of manufacturing equipment. 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 $500,000 increase in accounts
receivable offset by a $400,000 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.
Management believes that the combination of existing working capital,
funds anticipated to be generated from operating activities, the borrowing
availability under the PNC Bank credit facility, advances under the FINOVA
factoring agreement and the anticipated net proceeds of the offering will be
sufficient to fund both our
49
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 had averaged 10% more in 1998, interest expense for The
Pietrafesa Corporation, excluding any of the acquired businesses, would have
increased, and income before income taxes would have decreased 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 revenues and net income may fluctuate on a seasonal basis. A
disproportionate amount of our net revenues 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 revenues 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 our 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, which may Result in Increased Costs and Reduced Profitability" 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
50
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.
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. for a fee of $33,400 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 need to upgrade, modify or replace
portions of our financial systems to make them Year 2000 compliant.
Modifications to our in-house software programs have been completed and
are Year 2000 compliant. Certain software programs of third parties require
installation of new versions that are Year 2000 compliant. All third party
software, except financial systems and production systems, has been installed
with Year 2000 compliant programs that are currently in use. We are in the
process of installing a new Year 2000 compliant version of our production
system. We have installed Year 2000 compliant software in our AS400 system,
completed systems testing, trained our staff and have tested our conversion
process. We have developed a detailed implementation plan and intend to complete
our conversion and implementation prior to September 30, 1999. 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 June 30, 1999. We believe, however, that such Year
2000 compliance costs will not have a material adverse impact on our financial
condition. Year 2000 compliance costs are expected to be funded from our working
capital.
We do not believe that there will be a need to outsource financial systems
and therefore we have not made detailed contingency plans. However, in the event
that we fail to correct our computerized financial information systems prior to
December 31, 1999, we intend to 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.
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 worst case scenario in which our computer systems or the computer
systems of any of our suppliers or customers are not Year 2000 compliant and are
unable to recover from the resulting system failure or interruption, we will
engage alternative suppliers to manufacture and deliver products to our
customers. 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 cause system
failures or a disruption in operations and could adversely affect our ability to
process or fulfill orders from our customers, deliver products in a timely
manner, send invoices or engage in similar normal business activities for an
indefinite period of time. Such a disruption in operations could result in a
loss of revenues and a reduction of our profitability.
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 trends among our customers:
o Retailers of private label apparel are experiencing increased 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 our 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, 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 SALES ARE INCREASING. 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 increasing 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 Savile 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 include:
o ACHIEVING 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 DEVELOPING NEW CUSTOMER RELATIONSHIPS by aggressively marketing our
capabilities. We believe that our development of new relationships
will be enhanced by the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions, each of which has
unique customer relationships;
o ACQUIRING, DEVELOPING AND LICENSING 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 EXPANDING 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 GROWING 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.
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:
53
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 the financial controls, quality control
practices and back-office functions of each acquired business and
eliminating 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 revenues:
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. 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.
During 1997 and 1998, we generated our net revenues from the following
distribution channels:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Mass merchandise chains ...................... 37.2% 37.7%
National chains .............................. 16.7 22.9
Department stores ............................ 14.5 16.2
High-end specialty stores and chains ......... 19.0 13.3
Other ........................................ 12.6 9.9
----- -----
100.0% 100.0%
===== =====
55
CUSTOMERS. We sell to a variety of customers within each of the
distribution channels discussed above. The following table summarizes the
percentage of our net revenues attributable to each of our customers that
accounted for more than 5% of our net revenues in 1997 and 1998 after giving
effect to the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions:
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
Sam's Club ................ 10% 20%
S&K Famous Brands ......... 18 11
Brooks Brothers ........... 8 11
Dillards .................. 12 10
Jos.A.Bank ................ -- 9
Polo Retail ............... 12 6
Nordstrom ................. 8 3
-- --
Total .................... 68% 70%
== ==
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 ordering, invoicing
and payment system 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
56
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, we sourced approximately 72% (by sales
dollar volume) of our products with over 50 independent manufacturers worldwide.
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, which may Result in Increased
Costs and Reduced Profitability."
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.
MANUFACTURING. We have over 75 years of experience as a leading domestic
manufacturer of premium tailored clothing. As a result, unlike many of our
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.
57
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, which may
Result in Increased Costs and Reduced Profitability."
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 June 30, 1999 we had eight quality control
personnel in three foreign centers, as well as five additional inspectors for
United States 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.
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 Windsong Unit, the Pietrafesa 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
58
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
FOR THE YEAR ENDED
BUSINESS UNIT DECEMBER 31, 1998
---------------------------------------- -------------------
Windsong ........................ 39.5%
Pietrafesa ...................... 35.2
Components ...................... 12.4
Global Sourcing Network ......... 11.2
Diversified Apparel ............. 1.7
-----
Total .......................... 100.0%
=====
The Windsong Unit supplies designer label and private label sportswear to
department stores, specialty stores 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. 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 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.
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."
59
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 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.
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.
60
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 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 us. 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 Successfully 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
ends 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
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 the license agreement to make annual
minimum payments to Alexander Julian, Inc., as well as royalty payments based on
net sales of Colours by Alexander Julian apparel. Sales of Alexander Julian
products represent 27% of our pro forma combined revenues and 24% of our pro
forma combined net income for 1998.
61
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.
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 Bank 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
July 1999 and expires in July 2009, with escalating annual rental payments of
$243,000 in year one and $345,000 in year ten.
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 forseeable needs. We also believe our existing facilities are well
maintained and in good operating condition.
EMPLOYEES
As of June 30, 1999, we had 523 employees. Of the total, 55 hold executive
and administrative positions, eight are engaged in design and merchandising, 406
are engaged in production activities such as marking, cutting and labeling, 45
are engaged in sales, 17 are engaged in distribution and 22 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.
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.
62
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of June 30, 1999 with
respect to the members of our Board of Directors and our executive officers:
NAME AGE POSITIONS
---------------------------------- --- --------------------------------------
Richard C. Pietrafesa, Jr.(1) .... 42 President, Chief Executive Officer,
Director
Sterling B. Brinkley, Jr.(1) ..... 47 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) .......... 58 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 Chairman of our Executive Committee and has been a Director since June 1990.
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
63
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 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 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) the Audit
Committee; (2) the Executive Committee; and (3) the 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.
64
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.
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.
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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 POSITIONS 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 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").
66
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.
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 3,775,567
shares of Class B Common Stock to our sole stockholder, 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 our 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 expenses incurred,
principally employee salary, legal and accounting fees of $192,300 in 1998, in
connection with our formation and will continue to reimburse Morgan Schiff for
ongoing administrative expenses, principally legal and accounting services
rendered to us. 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
7.0% 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.
67
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 Bank credit
facility and this offering. No such services were provided to us by Morgan
Schiff during those periods and in respect of those transactions, other than
investment banking and financial analyst services for which Morgan Schiff was
paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment. However,
it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and negotiated
the forgiveness of our subordinated indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
Financial analysis related to these transactions was provided by our financial
management and consultants and not by Morgan Schiff.
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 Bank 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 Bank credit facility.
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 June 30, 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.
Although shares of Class B Common Stock may be converted into shares of Class A
Common Stock at any time, the table below does not reflect the shares of Class A
Common Stock issuable to holders of Class B Common Stock upon conversion as
being beneficially owned by those holders.
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 our 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.
[Enlarge/Download Table]
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
----------------------- -------------------------- CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
----------------------------------------------- -------- ------------ ----------- ------------ --------------
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
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[Enlarge/Download Table]
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
------------------------- ------------------------ CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
----------------------------------------- ---------- ------------ --------- ------------ ---------------
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
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 ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
----------
* Represents less than 1.0%.
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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 12,000,000
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, 4,333,333 shares of Class A
Common Stock, 3,775,667 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
71
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 our Class A Common Stock."
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.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
72
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 662/3% 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 our 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 4,333,333 shares
of Class A Common Stock, 4,933,333 if the Underwriters' over-allotment option is
exercised in full, and 3,775,667 shares of Class B Common Stock outstanding. All
shares of Class A Common Stock sold in the offering and, after the expiration of
the 180 day lock-up period, described below, the 58,333 shares of Class A Common
Stock being registered for resale, from time to time, by Windsong, Inc. will be
freely tradable under the Securities Act unless they are purchased or held by
"affiliates" of ours as defined in Rule 144. The balance of the shares of Class
A Common Stock issued to Windsong, Inc. in connection with the Windsong
acquisition will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and may, after the expiration of the 180 day lock-up period,
be sold in compliance with Rule 144 under the Securities Act, subject to
additional resale restrictions under the Windsong acquisition agreement. In
addition, all shares of Class B Common Stock and the 3,775,667 shares of Class A
Common Stock issuable upon conversion thereof, all of which are subject to the
180 day lock-up period, 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., as representative of the underwriters, for a period of
180 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
74
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.
UNDERWRITING
Subject to the terms of an underwriting agreement among Janney Montgomery
Scott 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. ..........
First Security Van Kasper .............
Morgan Schiff & Co., Inc. .............
Total ................................ 4,000,000
=========
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 the preparation of
a preliminary Blue Sky memorandum and the qualification of the securities for
sale in any state and in connection with 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 600,000 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
75
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.
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 and executive officers and the sole holder 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 180
days after the completion of this offering, without Janney Montgomery Scott
Inc.'s prior written consent. Together, this group directly and indirectly owns,
prior to the offering, all 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 owned by Philip Ean Cohen. Mr.
Cohen has voting power over all of our outstanding Class B Common Stock and,
accordingly, has the power to determine virtually all matters submitted to our
stockholders and to appoint 75% of the members of our board of directors. See
"Certain Relationships and Related Transactions" and "Description of Capital
Stock." As a result of our affiliation with Morgan Schiff, 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; and
o our prospects for future earnings.
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
76
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.
77
THE PIETRAFESA CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
THE PIETRAFESA CORPORATION
Report of Independent Auditors ........................................... F-2
Consolidated Balance Sheets as of 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 as of December 31, 1998 and at
March 31, 1999 (unaudited) .............................................. F-16
Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-17
Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-18
Notes to Quarterly Consolidated Financial Statements ..................... F-19
GLOBAL SOURCING NETWORK, LTD.
Independent Auditors' Report ............................................. F-21
Balance Sheets as of December 31, 1997 and 1998 .......................... F-22
Statements of Operations and Accumulated Deficit 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 as of December 31, 1998 and March 31, 1999 (unaudited) .... F-28
Statements of Operations and Accumulated Deficit for the three months
ended March 31, 1998 and 1999 (unaudited) ............................... F-29
Statements of Cash Flows for the three months ended March 31,
1998 and 1999 (unaudited) ............................................... F-30
Notes to Quarterly Financial Statements .................................. F-31
COMPONENTS BY JOHN MCCOY, INC.
Report of Independent Auditors ........................................... F-32
Balance Sheets as of December 31, 1997 and 1998 .......................... F-33
Statements of Income and Retained Earnings 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 March 31, 1999 (unaudited) .... F-39
Statements of Income and Retained Earnings for the three months ended
March 31, 1998 and 1999 (unaudited) ..................................... F-40
Statements of Cash Flows for the three months ended March 31, 1998
and 1999 (unaudited) .................................................... F-41
Notes to Quarterly Financial Statements .................................. F-42
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, 1996, 1997 and 1998 ........................ F-46
Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998 ........................................................... F-47
Notes to Financial Statements ............................................ F-50
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited) .... F-63
Statements of Income and Retained Earnings (Accumulated Deficit) for
the three months ended March 31, 1998 and 1999 (unaudited) .............. F-64
Statements of Cash Flows for the three months ended March 31, 1998
and 1999 (unaudited) .................................................... F-65
Notes to Quarterly Financial Statements .................................. F-66
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.
/s/ Ernst & Young LLP
Syracuse, New York
February 12, 1999, except as to Note 12
as to which the date is July 15, 1999
F-2
THE PIETRAFESA CORPORATION
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
AS OF
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]
AS OF
DECEMBER 31,
-------------------------
1997 1998
---------- ------------
(IN THOUSANDS,
EXCEPT SHARE DATA)
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 ........................................... -- 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:
Authorized shares -- 12,000,000 Class A, $.001 par value ........
-- 10,000,000 Class B, $.0002 par value .......
Issued shares -- 3,775,667 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]
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1997 1998
----------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND 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 ................... 7,427 6,150 5,536
Impairment loss on fixed assets ................................. 170 -- --
Depreciation and amortization expense (excludes amounts
in cost of sales) ............................................. 165 151 222
-------- -------- ----------
7,762 6,301 5,758
-------- -------- ----------
Operating income ................................................. 1,469 2,063 3,943
Public offering costs ............................................ -- -- 823
-------- -------- ----------
Income (loss) before income taxes and extraordinary item ......... (493) 556 1,911
Provision for income taxes ....................................... -- -- 514
-------- -------- ----------
Income (loss) before extraordinary item .......................... (493) 556 1,397
Extraordinary item ............................................... 3,150 -- --
-------- -------- ----------
Net income ....................................................... $ 2,657 $ 556 $ 1,397
======== ======== ==========
Pro forma net income data (Note 2):
Income 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 12) ......................................................... $ 0.30
==========
Pro forma basic and diluted weighted average number of
common shares outstanding ....................................... 3,775,667
==========
See notes to consolidated financial statements.
F-5
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND SHAREHOLDER'S EQUITY
FOR THE 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 ............................ 26 2,631 -- -- -- 2,657
Capital contribution .................. 2 198 -- -- -- 200
---- -------- ---- ------- ------- --------
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 -- --
Issuance of 3,775,567 shares of Class B
Common Stock for par value
(Note 12) ............................ -- -- -- -- -- --
---- -------- ---- ------- ------- --------
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]
FOR THE
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- ------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income .................................................. $ 2,657 $ 556 $ 1,397
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Extraordinary item ........................................ (3,150) -- --
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 3,775,667 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).
The Company recorded losses on disposals of machinery and equipment in the
normal course of business of $24, $149 and $16 as of December 31, 1996, 1997 and
1998, respectively. These losses are recorded in the selling, general and
administrative expenses caption of the income statement.
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
F-8
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
impaired. When such circumstances exist, the Company estimates expected future
cash flows to determine whether an asset is impaired by grouping assets at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets.
The Company recorded an impairment loss of $170 as of December 31, 1996.
The impairment loss of $170 relates to the reduction of the book value to net
realizable value of equipment which was to be disposed of at the Sturgis,
Kentucky facility. The net realizable value was determined based on estimated
selling price minus the costs to sell. The property was sold in 1997.
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. The weighted average number of shares issued and
outstanding includes the 3,775,567 shares of Class B Common Stock issued
subsequent to year for the nominal consideration of par value (see Note 12).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 1998
presentation.
3. BORROWING ARRANGEMENTS
Long-term debt consisted of the following:
F-9
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
AS OF
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 -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
3. BORROWING ARRANGEMENTS -- (CONTINUED)
As further discussed in Note 9, certain subordinated indebtedness were
forgiven in June 1996.
Interest paid for the years ended December 31, 1996, 1997 and 1998
amounted to $1,630, $1,205 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, 3,775,667 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,
5,000,000 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 -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
6. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The Company has an agreement with an affiliate of the Partnership whereby
the affiliate would provide financial advisory and strategic consulting
services. The agreement contains a monthly retainer fee of $25 per month. This
agreement may be terminated annually by either party upon 30 days' notice. The
affiliate provided certain investment banking and financial analyst services to
the Company during 1998. Total expenses for these services were $192. Since no
other services were provided to the Company during 1996, 1997 and 1998, the
affiliate agreed to amend the agreement to eliminate the monthly retainer
payment in 1996, 1997 and 1998. Accordingly, no expense has been recognized in
the financial statements related to the monthly retainer payments.
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:
FOR THE
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.
F-12
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
8. INCOME TAXES -- (CONTINUED)
The provision for income taxes is as follows:
FOR THE
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
------ ------ -----
Current
Federal .............................................. $-- $-- $ 8
State ................................................ -- -- 3
--- --- ---
Total current ......................................... -- -- 11
=== === ===
FOR THE
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]
FOR THE
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:
AS OF
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 -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
9. 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. The value of the partnership interest exchanged, $200, has
been treated as a capital contribution, with the remainder recorded as an
extraordinary item in the statement of operations.
10. 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.
11. 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.
12. ACQUISITIONS, PUBLIC OFFERING AND STOCK OPTION PLAN
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 total purchase price of the acquired businesses is based upon an
estimate of the liabilities to be assumed of $1,955, $1,121, $6,021 and $16,862
for Diversified Apparel, Global Sourcing Network, Components and Windsong,
respectively. The Company does not believe the actual amount of liabilities
assumed will be materially different from the estimated amount. 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.
In connection with the offering, on July 15, 1999 the Company issued
3,775,567 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. Immediately prior to the closing of the offering, the
Company may adjust
F-14
THE PIETRAFESA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
through redemption or additional issuance of shares, the number of shares of
Class B common stock outstanding to represent the percentage of the Company that
will be owned by the Company's sole shareholder after the offering.
12. ACQUISITIONS, PUBLIC OFFERING AND STOCK OPTION PLAN - (CONTINUED)
On July 15, 1999, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Class A Common Stock from 5,000,000
to 12,000,000 shares and to change the par value of the Class B Common Stock to
$.0002, each of which has been reflected on the December 31, 1998 balance sheet.
The Company intends to establish a 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 the
Company's key employees and directors, including employees who are also the
Company's officers or directors. The Company may award 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 the Company's 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 Company and the employee and/or director to whom the option is
granted.
Prior to the adoption of the Stock Option Plan, the Company has made no
provision for the grant of options to purchase equity interests in the Company.
At the time of the offering, no options will have been granted by the
Company to their executive officers, employees or directors under the Stock
Option Plan.
F-15
THE PIETRAFESA CORPORATION
CONSOLIDATED BALANCE SHEET
[Enlarge/Download Table]
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
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 AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable .................................................. $ 7,166 $ 7,893
Other current liabilities ......................................... 2,767 3,054
Tax distribution payable .......................................... 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 ......................................................
Authorized shares -- 12,000,000 Class A, $.001 par value.........
-- 10,000,000 Class B, $.0002 par value........
Issued shares -- 3,775,667 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]
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------------
1999 1998
------------ -------------
(IN THOUSANDS, EXCEPT
SHARE AND 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
========== ==========
Basic and diluted earnings per share ............................... $ 0.22
==========
Weighted average number of common shares outstanding ............... 3,775,667
==========
Pro forma net income data:
Income before income taxes, as reported above ..................... $ 853
----------
Pro forma provision for income taxes .............................. 341
----------
Pro forma net income ............................................... $ 512
==========
Pro forma basic and diluted earnings per share ..................... $ 0.14
==========
Pro forma basic and diluted weighted average number of common shares
outstanding ....................................................... 3,775,667
==========
See notes to consolidated financial statements.
F-17
THE PIETRAFESA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
[Enlarge/Download Table]
FOR THE
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) --
Principal 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.
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
F-19
THE PIETRAFESA CORPORATION
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
MARCH 31, 1999
3. SUBSEQUENT EVENTS -- (CONTINUED)
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 to 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
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-21
GLOBAL SOURCING NETWORK, LTD.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
[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-22
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
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-23
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-24
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.
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
========= =========
F-25
GLOBAL SOURCING NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
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
======== =======
The reconciliation of the effective income tax rate is as follows:
[Download Table]
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.
F-26
GLOBAL SOURCING NETWORK, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
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-27
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-28
GLOBAL SOURCING NETWORK, LTD.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (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 FROM OPERATIONS ............................. 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)
---------- ----------
RETAINED EARNINGS -- END OF PERIOD ................. $ 48,691 $ 79,597
---------- ----------
See accompanying notes to the financial statements.
F-29
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 -- BEGINNING OF PERIOD .............................. 153,598 84,348
---------- ----------
CASH AND CASH EQUIVALENTS -- END OF PERIOD .................................... $ 200 $ 12,784
========== ==========
See accompanying notes to the financial statements.
F-30
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-31
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-32
COMPONENTS BY JOHN MCCOY, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
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
[Enlarge/Download Table]
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,issued and
outstanding 100 shares) .................................. 300,000 300,000
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-33
COMPONENTS BY JOHN MCCOY, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997
[Enlarge/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-34
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-35
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) 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 a Collection Factoring Agreement with Heller
Financial, Inc., in which they "purchase" the receivables. However, the
transaction is accounted for as a secured loan facility because the underlying
structure is actually that of an asset-based loan. Specifically, the accounts
receivable
F-36
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
purchase price is funded at a predetermined advance rate, Heller requires a
security interest in all the assets of the Company and pays interest in all of
the assets of the Company and pays interest on the amount advanced and final
risk of collection lies with the Company.
Under the Heller Factoring Agreement, the Company generates accounts
receivable in the ordinary course of business and Heller purchases these
accounts. The net purchase price is the face value of the receivable less
factoring commissions, credits, returns, allowances, chargebacks and other
allowances whose appropriateness is decided solely by Heller. Heller advances
the Company 80% of the gross purchase price and pays the remaining net purchase
price on the due date of each individual account.
In practice, Heller only purchases and advances on approved accounts,
determined by Heller in its sole discretion. Advances are wired to a non-Heller
bank account. Heller provides collection services on approved accounts and
collections on approved accounts are netted against amounts advanced by Heller.
Heller does not advance against, pay when due or otherwise compensate the
Company for the non-approved accounts. Non-approved do not appear on Heller's
ledger. The Company, not Heller, collects receipts for non-approved accounts
into a non-Heller bank account.
Therefore, all of the Company's accounts receivable remain on the balance
sheet and a loan payable equal to the amounts advanced by Heller also appears on
the balance sheet. The Company records and pays monthly an interest expense
computed daily at the rate of 2% over the current prime rate and factor fee
expense. Collection on approved accounts is applied to the open account
receivable and the Heller loan account.
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
========= ========
F-37
COMPONENTS BY JOHN MCCOY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998 AND 1997
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.
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-38
COMPONENTS BY JOHN MCCOY, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
[Enlarge/Download Table]
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
(UNAUDITED)
ASSETS
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
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-39
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-40
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, MARCH 31,
1999 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-41
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-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 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 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 each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Weissbarth, Altman & Michaelson LLP
New York, New York
May 7, 1999
F-43
WINDSONG, INC.
BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS
[Enlarge/Download Table]
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
[Enlarge/Download Table]
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 1,3,10,11,12,13,14,16)
Stockholders' equity
Common stock-no par value --
- Class A (voting) -- 1,000 shares authorized,200 shares issued and
outstanding ...................................................... 200 200
- Class B (non-voting) -- 1,000 shares authorized, 800 shares issued
and outstanding .................................................. 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, 1997 AND 1996
[Enlarge/Download Table]
1998 1997 1996
--------------- --------------- --------------
Net sales ......................................... $ 63,630,094 $ 30,330,207 $ 6,202,405
Cost of goods sold ................................ 49,884,050 23,861,570 5,444,006
------------ ------------ -----------
Gross profit ...................................... 13,746,044 6,468,637 758,399
Selling and distribution expenses ................. 4,527,731 1,858,492 400,253
General and administrative expenses ............... 6,546,268 3,883,081 340,978
------------ ------------ -----------
Income from operations ............................ 2,672,045 727,064 17,168
Interest expense, net ............................. 1,661,405 317,214 13,937
Income before provision for income taxes .......... 1,010,640 409,850 3,231
Provision for income taxes ........................ 46,000 35,000 2,500
------------ ------------ -----------
Net income ........................................ 964,640 374,850 731
Retained earning (accumulated deficit) -- beginning
of year .......................................... 369,782 (5,068) (5,799)
Distributions to stockholders ..................... (392,960) -- --
------------ ------------ -----------
Retained earnings -- end of year .................. $ 941,462 $ 369,782 $ (5,068)
============ ============ ===========
See accompanying notes to financial statements.
F-46
WINDSONG, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
1998 1997 1996
--------------- --------------- ---------------
Cash flows from operating activities
Net income ....................................... $ 964,640 $ 374,850 $ 731
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities ...............
Depreciation and amortization .................. 156,882 45,629 24,895
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) (1,352,757)
Insurance claim receivable ....................... 37,229 10,667 (47,796)
Inventories ...................................... (1,275,676) (3,122,119) (1,202,185)
Other current assets ............................. (506,193) (138,274) (84,674)
Security deposits and other ...................... 11,061 (70,244) (10,067)
Accounts payable and accrued expenses ............ (3,373,894) 5,011,137 2,905,955
Advances from factor ............................. 4,218,666 2,640,551 442,057
State income taxes payable ....................... (6,749) 32,090 --
------------ ------------ ------------
Total adjustments .............................. 286,507 217,760 675,428
------------ ------------ ------------
Net cash provided by operating activities, carried
forward ........................................ $ 1,251,147 $ 592,610 $ 676,159
------------ ------------ ------------
See accompanying notes to financial statements.
F-47
WINDSONG, INC.
STATEMENTS OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
INCREASE (DECREASE) IN CASH
[Enlarge/Download Table]
1998 1997 1996
-------------- ------------ ------------
Net cash provided by operating activities, brought forward .......... $ 1,251,147 $ 592,610 $ 676,159
Cash flows from investing activities
Increase in note receivable officer/stockholder, net ............... -- (74,321) --
Payments to affiliated company ..................................... (555,472) (284,904) (686,127)
Payments for property and equipment ................................ (101,416) (232,785) (54,293)
Payments for organization costs .................................... -- -- (1,000)
----------- ---------- ----------
Net cash used in investing activities ........................... (656,888) (592,010) (741,420)
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 (decrease in cash) ............................. 125,479 600 (65,261)
Cash -- beginning of year ........................................... 700 100 65,361
----------- ---------- ----------
Cash -- end of year ................................................. $ 126,179 $ 700 $ 100
=========== ========== ==========
Supplemental disclosure of cash flow information:
Cash was paid for
Income taxes ..................................................... $ 64,745 $ 4,901 $ 750
=========== ========== ==========
Interest, net of interest received from factor ................... $ 1,638,830 $ 381,530 $ 15,810
=========== ========== ==========
See accompanying notes to financial statements.
F-48
WINDSONG, INC.
STATEMENT OF CASH FLOWS -- CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
[Enlarge/Download Table]
1998 1997 1996
------------ -------------- ------------
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
andequipment, 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 $ --
========= =========== =========
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-49
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF BUSINESS
Windsong, Inc. (the Company) was incorporated on August 3, 1995 and
commenced substantive operations as of January 1, 1996 and approximately $3.3
million of the Company's sales occurred in the fourth quarter of 1996.
Windsong, Inc. 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).
During 1996, the Company's stockholder and another individual who
controlled the Company's major supplier had an agreement to provide financing to
the Company (Note 9). 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 were 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 purchase 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.
During the last quarter of 1996 the affiliated company substantially
terminated its operations. The Company assumed none of its affiliates customers
and did not import/distribute the same products as the affiliate.
During 1997, the Company:
a. assumed (1) sponsorship of a defined benefit pension plan that was
previously sponsored by the affiliated company (Note 11) and (2) the
affiliated company's remaining obligation under non-cancellable
leases for office and warehouse space (Note 10)
b. became totally responsible for certain expenses that had been
previously allocated between the Company and the affiliated company.
c. exchanged its intercompany receivable for assets of the affiliate,
at their net book value including property and equipment consisting
of approximately $50,000 and $2,000 for automobiles and furniture
and equipment, respectively.
During 1998 and 1997, a substantial portion of the Company's inventories
was acquired from a relatively small number of suppliers.
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.
F-50
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 1 -- DESCRIPTION OF BUSINESS - (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.
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.
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, $407 and $407 for 1998, 1997 and 1996, 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, $126,000
and $37,500 for 1998, 1997 and 1996, respectively, of which approximately
$238,000, $62,000 and $0 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 and 1996 financial statements, as
originally issued, have been reclassified to conform to the 1998 presentation.
F-51
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED )
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
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). The "overadvances" percentage was 5% above
the prime rate of a certain bank through September 30, 1997.
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).
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
============= ===========
F-52
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 3 -- ACCOUNTS RECEIVABLE - (CONTINUED)
Factor commissions and interest expense, net, included in the results of
operations, amounted to $484,757 and $1,298,176, respectively, for 1998,
$322,155 and $367,884, respectively, for 1997 and $35,670 and $14,908,
respectively, for 1996.
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
=========== ===========
NOTE 6 -- OTHER CURRENT ASSETS
Other current assets consist of the following:
[Enlarge/Download Table]
1998 1997
------------ ------------
Prepaid/unearned 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:
[Enlarge/Download Table]
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
========= =========
F-53
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 7 -- PROPERTY AND EQUIPMENT, NET - (CONTINUED)
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.
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, $45,222, and $24,488 for 1998, 1997
and 1996, 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.
During 1998, the Company and the supplier agreed that, effective January
1, 1998, accounts payable to that supplier will bear interest as follows:
o for the subordinated portion, 8-1/2% per annum, retroactive to
May 15, 1996.
o 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.
NOTE 10 -- LEASES
a) Capital leases
As of December 31, 1998, the future minimum payments under capital leases
are as follows:
TOTAL NET
PAYMENTS INTEREST 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.
F-54
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 10 -- LEASES - (CONTINUED)
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:
o The lease for office space was assumed from an affiliated company as
of January 1, 1997 (Note 1). Payments under the lease for office
space were guaranteed by an officer/ stockholder of the Company. The
lease contained a two-year renewal option which was not exercised.
The Company's lease obligation was terminated effective April 19,
1999 (Note 16).
o 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.
o 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.
b) Operating leases-continued 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
=========== ========= =========
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.
During 1996, the Company rented office space from an affiliated company
(Note 1) on a month-to-month basis and reimbursed the affiliated company for
other expenses necessary for the Company's operations.
A summary of the reimbursed expenses follows:
[Enlarge/Download Table]
RENT OTHER TOTAL
---------- ------------ -------------
For the eight months ended August 31, 1996, as
previously reported ............................... $ 9,059 $ 146,214 $ 155,273
For the period from September 1 through
December 31, 1996 (a) ............................. 4,055 (134,792) (130,737)
-------- ---------- ----------
Total for the year ended December 31, 1996 ......... $ 13,114 $ 11,422 $ 24,536
======== ========== ==========
----------
(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.
Additionally, the Company makes payments under various short-term leases
for equipment. Such payments are not significant to the Company's operations.
F-55
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 - EMPLOYEE BENEFIT PLAN
Effective January 1, 1997, the Company assumed the sponsorship, from the
affiliated company, of 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.
[Enlarge/Download Table]
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 --
Benefits 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)
=========== ============
The decrease in the pension liability and net periodic cost result from
(1) 1997 plan amendments to the benefit formula and (2) a change in plan
actuarial assumptions for recognizing the effect of the amendments in 1997.
F-56
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS- (CONTINUED)
NOTE 11 - EMPLOYEE BENEFIT PLAN - (CONTINUED)
Amount recognized in the statement of financial position consist of:
[Download Table]
1998 1997
--------------- ---------------
Accrued benefit liability ..................... $ (501,271) $ (871,117)
Weighted-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:
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 of 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 totalling 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,
$778,000 and $37,500 for 1998, 1997 and 1996, respectively, and
exceed the minimum annual payments for 1998, 1997 and 1996,
respectively. The foregoing includes amounts accrued, but unpaid as
of December 31, 1998, 1997, and 1996.
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, $50,000 and $37,500 for 1998, 1997 and 1996,
respectively.)
c) Reimbursements for certain travel and other expenses incurred by the
designer.
F-57
WINDSONG, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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,
$612,000 and $0 for 1998, 1997 and 1996, respectively.
NOTE 15 -- INTEREST EXPENSE, NET
Interest expense, net, consists of the following:
[Enlarge/Download Table]
1998 1997 1996
-------------- ------------ -----------
Interest on --
Advances from factor, net (Note 3) ..................... $ 1,298,176 $ 367,884 $ 14,908
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 14,908
Interest income from note receivable officer/stockholder
(Note 4) ............................................. (62,573) (64,316) --
Other .................................................. -- -- (971)
$ 1,661,405 $ 317,214 $ 13,937
=========== ========= ========
NOTE 16 -- SUBSEQUENT EVENT
On April 1, 1999, the Company entered into a non-cancellable lease for
office space from a new affiliated company. The lease which expires on April 1,
2009, provides for initial fixed annual gross rental payments of approximately
$195,000 per annum, and increases at the rate of 6% per annum during the lease
term. The lease payments include the Company's proportionate share of operating
expenses and real estate taxes.
F-58
WINDSONG, INC.
BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
[Enlarge/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 --
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 13,083,883
------------ ------------
Due from affiliates ............................................ -- 437,429
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 leases ......... $ 125,000 $ 124,685
Advances from factor ........................................ 10,707,226 7,301,274
Accounts payable ............................................ 4,985,354 1,873,078
Accounts payable -- subordinated ............................ 1,379,568 --
Accrued expenses ............................................ 854,032 2,270,221
State income taxes payable .................................. 4,551 25,341
------------ ------------
Total current liabilities ................................ 18,055,731 11,594,599
------------ ------------
Obligations under capital leases ............................... 186,621 227,628
Deferred rent expense .......................................... -- 8,225
Accounts payable -- subordinated ............................... -- 1,379,568
------------ ------------
Total liabilities ........................................ 18,242,352 13,210,020
------------ ------------
Shareholders' equity:
Common stock -- no par value
--Class A (voting)
1,000 shares authorized
200 shares issued and outstanding .......................... 200 200
--Class B (non-voting)
1,000 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-59
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-60
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 cashprovided 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-61
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:
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.
4. INVENTORY
Inventory consists of the following:
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-62
4,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
JANNEY MONTGOMERY SCOTT 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.
, 1999
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 JULY 15, 1999
58,333 SHARES
CLASS A COMMON STOCK
[LOGO]
This prospectus relates to the offer and sale, from time to time, of up to
58,333 shares of The Pietrafesa Corporation's Class A Common Stock by a
stockholder of The Pietrafesa Corporation. We will not receive any portion of
the proceeds from the sale of shares of Class A Common Stock by the selling
stockholder. Prior to this offering, there has been no public market for our
Class A Common Stock. 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.
The selling stockholder advised us that it may sell, directly or through
brokers, all or part of the Class A Common Stock offered by this prospectus in
negotiated transactions at the market price at the time of the sale. In
connection with these sales, the selling stockholder and any participating
broker may be deemed to be "underwriters" of the Class A Common Stock within the
meaning of the Securities Act of 1933. We expect that usual and customary
brokerage fees will be paid by the selling stockholder in all open market
transactions.
We have informed the selling stockholder that the anti-manipulation
provisions of Regulation M under the Securities Exchange Act of 1934 may apply
to the sales of its shares offered by this prospectus. We also have advised the
selling stockholder that it must deliver a prospectus to the purchaser in
connection with any sale of the shares offered by this prospectus.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 14.
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.
Prospectus dated , 1999
ALT-COVER
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary ..................................................... 5
Risk Factors ........................................................... 14
Forward Looking Statements ............................................. 21
Capitalization ......................................................... 23
Dividend Policy ........................................................ 24
Selected Historical Consolidated Financial Data ........................ 26
Pro Forma Combined Financial Data ...................................... 29
Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 38
Business ............................................................... 52
Management ............................................................. 63
Certain Relationships and Related Transactions ......................... 67
Principal Stockholders ................................................. 69
Selling Stockholder .................................................... 70
Description of Capital Stock ........................................... 71
Shares Eligible for Future Sale ........................................ 74
Plan of Distribution by Selling Stockholder ............................ 75
Legal Matters .......................................................... 75
Experts ................................................................ 75
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.
ALT-T/C
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ALT-8
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 OUR CONTROLLING STOCKHOLDER MAY CONFLICT WITH THE
INTERESTS OF THE HOLDERS OF OUR CLASS A COMMON 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 such proposals are supported by holders of Class A Common Stock. In
addition, Mr. Cohen's voting power permits him to implement policies not favored
by, or in the best interests of, the holders of the Class A Common Stock. In
addition, as long as any Class B Common Stock is outstanding, Mr. Cohen 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 46.6% of the outstanding shares of Class A Common Stock following
the full conversion.
FAILURE TO COMPLY WITH SIGNIFICANT COVENANT RESTRICTIONS IN OUR AGREEMENTS
WITH OUR LENDERS COULD RESULT IN ACCELERATION OF OUR REPAYMENT OBLIGATIONS
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 may also be required under any other
agreements then in effect containing cross-acceleration or cross-default
provisions. Any acceleration of our outstanding indebtedness could result in
foreclosure against our operating and working capital assets, the termination of
our license or other agreements and our bankruptcy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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 4,333,333 shares of Class A Common Stock
outstanding immediately after the offering, which amount could increase by up to
600,000 shares if our underwriters exercise their over-allotment option. Of
these shares, the shares of Class A Common Stock sold in our initial public
offering and the 58,333 shares of Class A Common Stock sold in this offering
will be freely tradable under the Securities Act of 1933.
The balance of the shares of Class A Common Stock issued to Windsong, Inc.
in connection with the Windsong acquisition and the up to 3,775,667 shares of
Class A Common Stock to be issued upon conversion of the 3,775,667 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, subject,
in the case of the shares issued to Windsong, Inc., to the resale restrictions
in the Windsong acquisition agreement. See "Shares Eligible for Future Sale."
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.
ALT-20
ABSENCE OF CURRENT PUBLIC MARKET, 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.
PURCHASERS WILL BE SUBJECT TO POTENTIAL FUTURE DILUTION
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.
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 under the captions
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
ALT-21
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ALT-22
CAPITALIZATION
The following table sets forth as of March 31, 1999:
(1) our actual capitalization, giving retroactive effect to the
issuances of Class B Common Stock to our sole stockholder which have
occurred or will occur prior to the completion of the offering;
(2) our pro forma combined capitalization after giving effect to the
Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, including the issuance of 333,333 shares of
Class A Common Stock to Windsong, based on an assumed initial
offering price of $12.00 per share, as part of our acquisition of
Windsong; and
(3) our pro forma combined capitalization, as adjusted to give effect to
the Diversified Apparel, Global Sourcing Network, Components and
Windsong acquisitions, our sale of 4,000,000 shares of Class A
Common Stock pursuant to our initial public offering, assuming an
initial public offering price of $12.00 per share, and the
application of the net proceeds of such offering. 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
COMBINED,
ACTUAL PRO FORMA COMBINED AS ADJUSTED
---------- -------------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Long term debt, net of current maturities .............. $13,054 $16,969 $ 5,914
Stockholders' equity:
Class A Common Stock, par value $.001 per share;
12,000,000 shares authorized, no shares issued and
outstanding, 333,333 shares issued and outstanding
pro forma combined and 4,333,333 shares issued and
outstanding pro forma combined, as adjusted ......... -- -- 4
Class B Common Stock, par value $.0002 per share;
10,000,000 shares authorized, 3,775,667 shares issued
and outstanding actual, pro forma combined and pro
forma combined, as adjusted ......................... -- -- --
Additional paid-in capital ............................. 3,191 7,191 50,387
Retained earnings ...................................... 282 282 282
------- ------- -------
Total stockholders' equity ........................... 3,473 7,473 50,673
------- ------- -------
Total capitalization ................................... $16,527 $24,442 $56,587
======= ======= =======
ALT-23
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."
ALT-24
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ALT-25
PRO FORMA COMBINED FINANCIAL DATA
Our pro forma combined financial data includes 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 also includes 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 March 31, 1999. The acquisitions
of Diversified Apparel and Global Sourcing Network were consummated on April 15,
1999. We have entered into definitive agreements to purchase the Components and
Windsong businesses. Our acquisition of Components and Windsong occurred
simultaneously with our initial public offering. The pro forma combined, as
adjusted financial data includes our pro forma combined information as adjusted
for our initial public offering and the application of the proceeds of that
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 Opinion No. 16.
Accordingly, the purchase price of each acquisition has been allocated to the
fair value of the assets acquired and the amount of the liabilities assumed,
with the remainder allocated to goodwill. No other intangible assets were
acquired as part of the acquisitions. The initial purchase price of Components
will be paid entirely in cash. The initial purchase prices of Global Sourcing
Network and Diversified Apparel were paid in cash and by the issuance of notes.
The initial purchase price of Windsong will be paid in cash and $4.0 million
worth of Class A Common Stock valued at the initial public offering price,
assumed to be $12.00 per share, or 333,333 shares. A summary of the purchase
price of the acquisitions and allocation of each such price to the fair value of
assets acquired and liabilities assumed is shown below:
SCHEDULE OF ALLOCATION OF PURCHASE PRICE OF ACQUISITIONS
[Enlarge/Download Table]
GLOBAL
DIVERSIFIED SOURCING TOTAL
APPAREL NETWORK COMPONENTS WINDSONG COMBINED
------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
PURCHASE PRICE:
Cash portion ............................... $ 800 $ 1,400 $ 4,695 $ 22,000 $ 28,895
Equity portion ............................. -- -- -- 4,000 4,000
Sellers' notes ............................. 400 800 -- -- 1,200
Costs directly associated with the
acquisition ............................... 350 350 350 400 1,450
--------- -------- -------- --------- ---------
Total purchase price ....................... $ 1,550 $ 2,550 $ 5,045 $ 26,400 $ 35,545
ALLOCATION OF PURCHASE PRICE:
Fair value of assets acquired .............. $ (2,457) $ (1,171) $ (8,660) $ (19,998) $ (32,286)
Assumption of liabilities .................. $ 1,955 $ 1,121 $ 6,021 $ 16,862 $ 25,959
--------- -------- -------- --------- ---------
Goodwill acquired .......................... $ 1,048 $ 2,500 $ 2,406 $ 23,264 $ 29,218
========= ======== ======== ========= =========
Pro forma amortization expense ............. $ 105 $ 167 $ 160 $ 1,163 $ 1,595
========= ======== ======== ========= =========
Pro forma amortization for quarter ......... $ 26 $ 42 $ 40 $ 291 $ 399
========= ======== ======== ========= =========
ALT-29
and the initial portion of the Windsong acquisition price, 3,775,667
shares of Class B Common Stock owned by our sole stockholder as of
the date of the offering.
The balance sheet data reflects the following pro forma adjustments:
o Goodwill as a result of the Diversified Apparel, Global Sourcing
Network, Components and Windsong acquisitions as calculated in the
table above entitled, "Schedule of Allocation of Purchase Price of
Acquisitions";
o Deposit of $4.25 million cash in escrow which will be paid to the
sellers of Windsong if Windsong achieves specified earnings targets
during 1999;
o Elimination of certain liabilities that are not being assumed as
part of the acquisition of Windsong;
o For purposes of the acquisition pro forma adjustments, we have
assumed an acquisitions payable amount, which represents the initial
purchase price owed for the Components and Windsong acquisitions and
the Windsong escrow amount. No interest expense has been provided
for the Windsong and Components acquisitions as those acquisitions
will be funded by the proceeds of our initial public offering;
o Elimination of common stock and retained earnings of the
acquisitions;
o Elimination of the additional paid-in capital of the acquisitions;
o Issuance of $4.0 million worth of Class A Common Stock associated
with the acquisition of Windsong at an assumed price of $12.00 per
share;
o Assumed net proceeds of approximately $43.2 million from our initial
public offering; and
o Our use of the net proceeds of our initial public offering.
In addition to the adjustments included in the pro forma combined
financial data, our acquisition and integration of the acquired businesses may
affect their operations in other ways. We expect the acquired businesses to be
able to use our existing merchandising, sourcing, sales and accounting staff to
perform certain functions performed for the acquired businesses historically by
third party consultants. For example, as a condition to our acquisition of
Global Sourcing Network, it agreed to stop paying royalties and commissions to
third party consultants who assisted in the development, merchandising and
international sourcing of apparel programs for S&K Famous Brands. These
terminated commissions and royalties totaled $870,000 in 1998. We expect that
our existing staff will perform these services for Global Sourcing Network at no
additional cost to us and without any loss of revenues. We also expect to incur
additional costs associated with being a public company which are estimated to
be $300,000 per year.
ALT-31
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 Bank credit
facility and this offering. No such services were provided to us by Morgan
Schiff during those periods and in respect of those transactions, other than
investment banking and financial analyst services for which Morgan Schiff was
paid, and we received no benefit under the agreement during those periods.
Our agreement with Morgan Schiff does not compel Morgan Schiff to provide
any actual services in return for the $25,000 monthly retainer payment. However,
it was in our interest to enter into the agreement at the time of our
acquisition by MS Pietrafesa, L.P., an affiliate of Morgan Schiff, because it
was anticipated that we would be financially successful and that Morgan Schiff
would provide meaningful services in the form of merger and acquisition advice
and assistance in private capital raising activities and that the cost of those
services would be less than or equal to the cost of procuring those services
from an unaffiliated third party. However, after we were acquired in the early
1990s, our revenues increased rapidly, but our profitability declined. As a
result, during the period from 1995 through 1997, we divested our non-core
manufacturing assets, refinanced our secured lending arrangements and negotiated
the forgiveness of our subordinated indebtedness. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."
Financial analysis related to these transactions was provided by our financial
management and consultants and not by Morgan Schiff.
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 Bank 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 Bank credit facility.
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" and "Principal Stockholders."
ALT-68
PRINCIPAL STOCKHOLDERS
The table below sets forth information as of June 30, 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 our initial
public offering and, in the case of Class B Common Stock, immediately prior to
that offering. Although shares of Class B Common Stock may be converted into
shares of Class A Common Stock at any time, the table below does not reflect the
shares of Class A Common Stock issuable to holders of Class B Common Stock upon
conversion as being beneficially owned by those holders.
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 our 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.
[Enlarge/Download Table]
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
----------------------- -------------------------- CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
----------------------------------------------- -------- ------------ ----------- ------------ --------------
MS Pietrafesa, L.P. ........................... -- -- 3,775,667 100.0% 46.6%
MSJP, L.P. .................................... -- -- 3,151,549 83.5% 38.9%
MS Pietrafesa Acquisition Corporation ......... -- -- 3,775,667 100.0% 46.6%
Phillip Ean Cohen ............................. -- -- 3,775,667 100.0% 46.6%
350 Park Avenue, 8th Floor
New York, NY 10022
Richard C. Pietrafesa, Jr. .................... -- -- 504,683 13.4% 6.2%
Thomas A. Minkstein ........................... -- -- 94,231 2.5% 1.2%
David McDonough ............................... -- -- -- -- --
ALT-69
[Enlarge/Download Table]
SHARES OF CLASS A SHARES OF CLASS B PERCENTAGE OF
COMMON STOCK COMMON STOCK CLASS A AND
------------------------- ------------------------ CLASS B
BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE COMMON STOCK
----------------------------------------- ---------- ------------ --------- ------------ ---------------
RJP Investments Assoc., L.P. ............ -- -- 586,361 15.5% 7.2%
7400 Morgan Road
Liverpool, NY 13090
Sterling B. Brinkley, Jr. ............... -- -- 245,077 6.5% 3.0%
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 ......................... -- -- 47,131 1.3% *
305 Oakley Court
Mill Neck, NY 11765
Ross W. Stefano ......................... -- -- -- -- --
30 The Orchard
Fayetteville, NY 13066
Windsong, Inc. .......................... 333,333 7.7% -- -- 4.1%
1599 Post Road East
Westport, CT 06880
All executive officers and directors as a
group (eight persons) .................. -- -- 891,122 23.6% 11.0%
----------
* Represents less than 1.0%.
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.
[Enlarge/Download Table]
PERCENTAGE OF CLASS A
AND CLASS B
SHARES OWNED AMOUNT TO SHARES OWNED PERCENTAGE OF CLASS A OWNED AFTER
PRIOR TO OFFERING BE OFFERED AFTER OFFERING OWNED AFTER OFFERING OFFERING
------------------- ------------ ---------------- ----------------------- ----------------------
333,333 58,333 275,000 6.3% 3.4%
ALT-70
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 our Class A Common Stock."
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."
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.
Our Certificate of Incorporation provides for the mandatory
indemnification of, and advancement of expenses to our directors and officers.
ALT-72
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of our initial public offering, we will have a total of
4,333,333 shares of Class A Common Stock, 4,933,333 if the Underwriters'
over-allotment option is exercised in full, and 3,775,667 shares of Class B
Common Stock outstanding. All shares of Class A Common Stock sold in the
offering and, after the expiration of the 180 day lock-up period, described
below, the 58,333 shares of Class A Common Stock sold in this offering will be
freely tradable under the Securities Act unless they are purchased or held by
"affiliates" of ours as defined in Rule 144. The balance of the shares of Class
A Common Stock issued to Windsong, Inc. in connection with the Windsong
acquisition will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and may, after the expiration of the 180 day lock-up period,
be sold in compliance with Rule 144 under the Securities Act, subject to
additional resale restrictions under the Windsong acquisition agreement. In
addition, all shares of Class B Common Stock and the 3,775,667 shares of Class A
Common Stock issuable upon conversion thereof, all of which are subject to the
180 day lock-up period, 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., as representative of the underwriters, for a period of
180 days from the date of this prospectus.
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
ALT-74
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.
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.
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.
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.
ALT-75
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.
ALT-76
58,333 SHARES
[LOGO]
CLASS A COMMON STOCK
, 1999
ALT-B/C
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 ............................................... $ 16,847
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 ............................................ 395,000
Accounting fees and expenses ....................................... 340,000
Miscellaneous ...................................................... 474,153
----------
Total .............................................................. $1,440,000
==========
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
II-1
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed 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]
NUMBER OF
PURCHASER SHARES/UNITS DATE CLASS/TYPE PAR VALUE
----------------------------- ------------------- --------------------- -------------------------- -----------------
MS Pietrafesa, L.P. ......... 100 shares October 1, 1998 Class B Common Stock $.0002 per share
3,775,567 shares Issued prior to the Class B Common Stock $.0002 per share
offering through
additional
issuance for
nominal
consideration
Thomas M. Minkstein ......... 2.5 Units January 27, 1999 Partnership Units of Not applicable
MSJP, L.P. valued at
$100,000 per Unit,
representing an indirect
2.9% beneficial interest
in the shares of Class B
Common Stock owned
by MS Pietrafesa, L.P.
Windsong, Inc. .............. 333,333 shares(1) , 1999 Class A Common Stock $.001 per share
----------
(1) Shares of Class A Common Stock issued to Windsong, Inc. as part of our
acquisition of Windsong, based on an assumed offering price of $12.00 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
Pietrafesa Corporation and were sophisticated and expert in financial matters.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
NUMBER DESCRIPTION
------ -----------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant, as amended
**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, as amended, dated as of January 1, 1996, between
Alexander Julian, Inc. and Windsong, Inc.
10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc.
and FINOVA Capital Corporation, as amended.
10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong
Acquisition Corp. and Windsong, Inc.
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.
(d) The undersigned Registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales of securities
are being made, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in the volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as 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.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
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 14th day of July, 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, Chief Executive Officer and July 14, 1999
-------------------------------- Director (Principal Executive Officer)
/s/ Thomas A. Minkstein * Chief Operating Officer and Director July 14, 1999
--------------------------------
/s/ Eugene R. Sunderhaft * Vice President -- Finance, Chief Financial July 14, 1999
-------------------------------- Officer, Secretary and Treasurer (Principal
Financial and Accounting Officer)
/s/ Sterling B. Brinkley, Jr. * Chairman of the Board July 14, 1999
--------------------------------
/s/ Mark C. Pickup * Director July 14, 1999
--------------------------------
/s/ Robert J. Bennett * Director July 14, 1999
--------------------------------
/s/ Paul M. McNicol * Director July 14, 1999
--------------------------------
----------
*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 12 as to which the date is July 15, 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.
/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]
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]
BALANCE AT CHARGED BALANCE AT
DESCRIPTION BEGINNING OF YEAR TO EXPENSE DEDUCTIONS END OF YEAR
------------------------------- ------------------- ------------ ------------------ ------------
Year Ended December 31, 1997:
Reserve for bad debts ......... $0 $ 102 $ (102) (1) $ 0
Year Ended December 31, 1998:
Reserve for bad debts ......... $0 $ 149 $ (59) (1) $90
----------
(1) Represents write-off of accounts receivable.
S-6
We have audited the Financial Statements 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 each of the three years in the period
ended December 31, 1998, and have issued our report thereon dated May 7, 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 DESCRIPTION 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. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
THE PIETRAFESA CORPORATION
================================================================================
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Registrant, as amended
**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, as amended, dated as of January 1, 1996, between
Alexander Julian, Inc. and Windsong, Inc.
10.11 Factoring Agreement dated November 4, 1996, between Windsong, Inc.
and FINOVA Capital Corporation, as amended.
10.12 Asset Purchase Agreement dated as of July 12, 1999, between Windsong
Acquisition Corp. and Windsong, Inc.
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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