AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER __, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FASHION MAG APPAREL, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 2339 95-4654808
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Identification
Organization) Number) Number)
3745 OVERLAND AVENUE
LOS ANGELES, CALIFORNIA 90034
(310) 836-8200
(Address and Telephone Number,
of principal executive offices)
LAWRENCE A. DEAR
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
FASHION MAG APPAREL, INC.
3745 OVERLAND AVENUE
LOS ANGELES, CALIFORNIA 90034
(310) 836-8200
(Name, address and telephone number
of agent for service)
COPIES TO:
RICHARD S. FORMAN MORRIS YAMNER
GLENN D. SMITH Sills, Cummis, Zuckerman,
Stroock & Stroock & Lavan LLP Radin, Tischman, Epstein & Gross
2029 Century Park East, Suite 1800 One Riverfront Plaza
Los Angeles, California 90067 Newark, New Jersey 07102
(310) 556-5800 (201) 643-7000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes
effective.
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 DELIVERY OF THE PROSPECTUS IS EXPECTED TO BE MADE PURSUANT TO RULE 434,
PLEASE CHECK THE FOLLOWING BOX. / /
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of Each Class of Amount To Proposed Maximum Offering Proposed Maximum Amount of
Securities to Be Registered Be Registered(1) Price Per Unit (2) Aggregate Offering Price(2) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 1,150,000 $5.00 $5,750,000.00 $1,697.00
$0.01 par value................
===================================================================================================================================
(1) Includes 150,000 shares of Common Stock that may be purchased by the
Underwriters, in whole or in part, to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457 solely for the purpose of calculating
the registration fee based upon the high point of the range of
estimated initial public offering prices as specified in the
Preliminary Prospectus contained herein.
</TABLE>
_______________________________________________
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, Dated December 3, 1997
PROSPECTUS
[LOGO] FASHION MAG APPAREL, INC.
1,000,000 SHARES OF COMMON STOCK
($0.01 PAR VALUE)
Fashion Mag Apparel, Inc., a Delaware corporation (the "Company"), is
offering for sale 1,000,000 shares of its common stock, par value $0.01 per
share (the "Common Stock"). Prior to this offering, there has been no public
market for the Common Stock and no assurances can be given that a public market
will develop following the sale of the Common Stock being offered hereby or if
developed, that it will be sustained. The initial public offering price (the
"Offering Price") has been negotiated by the Company and Strasbourger Pearson
Tulcin Wolff Incorporated, as Underwriter (the "Underwriter"), and is not
related to asset value, net worth or any other established criteria of value.
See "Risk Factors" and "Underwriting" for a discussion of the factors considered
in determining the Offering Price. The Company will apply to have the Common
Stock listed on the Nasdaq Stock Market ("NASDAQ") under the symbol "FMAI."
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK FROM THE INITIAL
PUBLIC OFFERING PRICE. ACCORDINGLY, THE SECURITIES OFFERED HEREBY SHOULD NOT BE
PURCHASED BY ANYONE WHO CANNOT AFFORD A LOSS OF HIS ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================================================
Underwriting Discounts Proceeds
Price to Public and Commissions(1) to Company(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share................................. $ $ $
- -----------------------------------------------------------------------------------------------------------------------------------
Total(3).................................. $ $ $
===================================================================================================================================
(1) Does not reflect additional compensation to the Underwriter, including (a)
a non-accountable expense allowance of $________; and (b) Underwriter's
Warrants entitling the Underwriter to purchase up to 100,000 shares of
Common Stock at a price per share of $___ per share for a period of up to
four years commencing one year from the effective date of the Registration
Statement of which this Prospectus forms a part (the "Underwriter's
Warrants"). In addition, the Company and the Underwriter have agreed to
indemnify each other against certain civil liabilities. See "Underwriting."
(2) Before deducting estimated expenses of the offering payable by the
Company of approximately $______________.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
an additional 150,000 shares of Common Stock to cover over-allotments, if
any. If the option is exercised in full, the Total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
increased to $__________ and $_____________, respectively.
</TABLE>
The shares of Common Stock are offered by the Underwriter on a "firm
commitment" basis, when, as, and if delivered to and accepted by the
Underwriter, and subject to approval of certain legal matters by counsel for the
Underwriter. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders either in whole or in part. It is expected that
delivery of the certificates evidencing the shares of Common Stock offered
hereby will be made in New York, New York, on or about __________, 1998.
_______________________________________
STRASBOURGER PEARSON TULCIN WOLFF INCORPORATED
THE DATE OF THIS PROSPECTUS IS ___________, 1998
<PAGE>
[PHOTOS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
ELLE(R) is a registered trademark of Hachette Filipacchi Presse ("ELLE").
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
PROSPECTUS TO THE "COMPANY" REFER TO FASHION MAG APPAREL, INC., AND ITS
PREDECESSORS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED THE
("SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), THAT INVOLVE RISKS AND UNCERTAINTIES SUCH AS
STATEMENTS OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING
APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN
THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED,
(I) ASSUMES THAT THE INITIAL OFFERING PRICE PER SHARE OF COMMON STOCK WILL BE
$5.00, (II) GIVES EFFECT TO A 1,500 FOR ONE STOCK SPLIT TO BE CONSUMMATED IN
CONNECTION WITH THE COMPANY'S REINCORPORATION IN DELAWARE, AND (III) DOES NOT
GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITER'S OVERALLOTMENT OPTION.
THE COMPANY
The Company designs, sources, markets and distributes women's activewear
and, to a lesser extent, swimwear in the United States and Canada under an
exclusive license using the ELLE trademark ("ELLE Products") and, to a lesser
extent, under private labeling arrangements. The Company also has produced
licensed and private labeled swimwear and other apparel using the Hard Rock
Cafe, Harley-Davidson, Everlast and B.U.M. Equipment trademarks. The Company
believes its ELLE Products are uniquely positioned between high-end designer
labels and mid-range labels. Industry sources indicate that an identifiable
label is an essential element of popular activewear. The Company believes the
ELLE Products have earned a reputation as a stylish and high quality, yet
affordable brand.
Activewear is a popular and rapidly growing segment of the apparel
industry. The popularity of activewear is largely attributed to more active,
casual lifestyles. Activewear combines casualwear and exercisewear that is
designed for more informal settings, including casual social gathering, shopping
and leisure time activities. ELLE Products are designed to be both sporty and
elegant, offering a sophisticated and chic appearance. The Company's line of
activewear consists of highly comfortable fashion-forward cotton knit shorts and
tops, long and short tunics, coverups, leggings and fleece tops and bottoms. The
Company's swimwear product line includes bathing suits, cover-ups, robes and
tote bags that are designed to be fashionable and flattering. In the women's
swimwear market, consumer's buying decisions tend to be based primarily on
styling and appearance.
The Company's strategy is to expand the Company's operations and to become
a leading brand name supplier of women's activewear and swimwear. Key elements
of this strategy include (i) expanding products, styles and price ranges; (ii)
implementing an advertising and marketing program; and (iii) expanding the
distribution system for the Company's products through relationships with a
broad network of retailers in the United States, Canada and (subject to
expanding the territories in which the ELLE Products and future products are
permitted to be sold) elsewhere.
Although historically directing its advertising efforts to retailers, the
Company recently commenced a consumer advertising program, including national
magazine advertisements. The Company intends to use a portion of the net
proceeds of the Offering to support and expand its advertising and marketing
programs. The Company is working closely with ELLE to develop focused marketing
programs directed to ELLE's subscribers. The Company has also established an
online promotional website on the WorldWide Web at www.elleactive.com to
promote its products. The Company intends to expand its current website to
allow customers to purchase directly from the Company a complete selection of
ELLE Products from the Company's lines. Additionally, the Company is developing
for certain retail customers "store within a store" concept shops featuring ELLE
Products.
Substantially all of the Company's products are manufactured in the United
States by third party, independent manufacturers. The Company distributes ELLE
Products through a combination of independent and employed sales representatives
to a variety of major department stores, specialty stores, sporting goods
stores, catalog operations, and better mass merchandisers representing
approximately 300 separate customers throughout the United States and Canada.
Additionally, the Company has licensed or sold certain of its designs to ELLE
licensees in Asia and Europe.
The Company was organized as a partnership in 1992, incorporated in
California in 1995 and reincorporated in Delaware in 1997 and has its principal
executive offices located at 3745 Overland Avenue, Los Angeles, California
90034, and its telephone number is (310) 836-8200.
<PAGE>
THE OFFERING
Common Stock offered hereby........... 1,000,000 Shares
Common Stock to be outstanding
after the offering.................. 2,500,000 Shares (1)
Use of Proceeds....................... Repayment of outstanding indebtedness,
payment of S Corporation dividends,
accrued salaries to officers and to
provide working capital to support the
growth and expansion of the Company's
product lines.
Proposed NASDAQ Symbol................ FMAI
- --------------------------
(1) Excludes (i) an aggregate of 250,000 shares of Common Stock reserved
for issuance under the Company's employee and director stock option plans
of which options to purchase an aggregate of_________ shares have been
issued at an exercise price of $_____ per share, and (ii) _________ shares
of Common Stock issuable upon exercise of the Underwriter's Warrants. See
"Management," "Principal Stockholders," "Certain Transactions" and
"Underwriting."
<PAGE>
<TABLE>
<CAPTION>
SUMMARY FINANCIAL INFORMATION
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------- -----------------
1995 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales ................................. $ 2,016,930 $ 3,072,108 $ 2,304,081 $ 2,448,336
Cost of Sales ............................. 1,435,718 1,846,862 1,385,147 1,362,765
Gross Profit .............................. 581,212 1,225,246 918,934 1,085,571
Total operating expenses .................. 721,130 998,858 749,143 937,792
Net Income (loss) ......................... (140,718) 224,320 168,240 144,779
Earnings (loss) per share ................. (0.09) 0.15 0.11 0.10
Weighted average shares outstanding ....... 1,500,000 1,500,000 1,500,000 1,500,000
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- -------------------------
ACTUAL AS ADJUSTED (1)
------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash..................................... $ 925 7,785 $3,770,785
Total assets............................. 941,952 1,297,047 5,060,047
Total current liabilities................. 499,177 686,125 660,330
Long-term debt (less current
portion)............................. 275,261 246,671 35,156
Stockholders' equity..................... 167,514 364,251 4,365,000
(1) Adjusted to reflect the sale by the Company of 1,000,000 shares of
Common Stock offered hereby and the receipt of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
</TABLE>
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
SUBSTANTIAL DEPENDENCE UPON ELLE LICENSE
Net sales of ELLE Products accounted for approximately 80%, 66% and 70% of
the Company's net sales in 1995, 1996 and for the nine months ended September
30, 1997, respectively. The Company sources ELLE Products through an exclusive
license with ELLE originally entered into in 1995. The ELLE License terminates
in 1999, but may be renewed by the Company through 2002 so long as the Company
is not in breach of the ELLE License and has produced aggregate net sales
through 1999 sufficient to generate aggregate minimum royalties to ELLE of $1
million. ELLE may terminate the license before its term expires if (i) the
Company is in material breach of the license agreement, (ii) there is a change
in control of the Company, (iii) the Company fails to pay to ELLE minimum
royalties in any year or (iv) the Company becomes bankrupt or insolvent. In
order to avoid early termination of the ELLE License, the Company must pay to
ELLE aggregate annual minimum royalties of $150,000, $185,000 and $245,000 for
1997, 1998 and 1999, respectively. The termination of the ELLE License would
have a material adverse effect on the Company. See "Business-License Agreement
with ELLE."
DEPENDENCE ON MAJOR CUSTOMERS
During the year ended December 31, 1996, 13% and 12% of the Company's net
sales were made to IJC By Germaine and Cache, Inc., respectively. During the
nine months ended September 30, 1997, approximately 22% of the Company's net
sales were made to Loehmann's Inc. As a result of the Company's dependence on
these customers, they may have the ability to influence the Company's business
decisions. The loss of or significant decrease in business from any of its major
customers would have a material adverse effect on the Company. See
"Business-Customers" and "Business-Sales and Marketing."
APPROVAL REQUIREMENTS OF ELLE; NEW PRODUCT INTRODUCTIONS
The Company's business predominantly is based on its relationship with
ELLE. The Company's growth will depend upon its ability to design and deliver
new ELLE Products. ELLE has final approval over all new ELLE Products,
advertising and marketing, which must meet ELLE's general design and quality
standards. Consequently, ELLE may, in the exercise of its approval rights, delay
or prohibit the distribution of ELLE Products. As is typical with new products,
demand for and market acceptance of new products introduced by the Company are
subject to uncertainty. Achieving market acceptance for new ELLE Products, in
general, may require substantial marketing and other efforts and the expenditure
of significant funds to create customer demand. There can be no assurance that
the Company's efforts will be successful. In addition, the failure of new
products to gain sufficient acceptance could adversely affect retailers' demand
for other ELLE Products.
FUTURE FINANCING REQUIREMENTS
The Company's business plan requires the availability of sufficient cash
flow and borrowing capacity to finance its existing product lines and to develop
and market its additional ELLE Products. The Company expects to satisfy such
requirements through cash flow from operations, proceeds of the Offering,
existing credit arrangements and additional borrowings, as necessary.
Historically, the Company has financed its operations through loans from
shareholders, a small business administration loan and a factoring agreement.
There can be no assurance that additional capital will be available to the
Company or available on terms acceptable to the Company. Failure to obtain
additional capital would have an adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations C Liquidity and Capital Resources."
ABILITY TO ACHIEVE AND MANAGE POTENTIAL FUTURE GROWTH
The Company has grown since its inception in 1992, with net sales
increasing from $744,000 in 1992 to over $3,000,000 in 1996. The Company's
growth has placed substantial burdens on its management and financial resources.
The Company's ability to manage its growth effectively will require it to
continue to improve its operational, financial and management information
systems and controls. The Company's future profitability is critically dependent
on its ability to achieve and manage potential future growth effectively. There
can be no assurance that the Company will be successful in increasing net sales
or that the rate of period-to-period net sales growth, if any, will not decline.
If the Company's operations were to continue to grow, of which there can be no
assurance, there could be increasing strain on the Company's management,
financial, product design, marketing, distribution and other resources and the
Company may experience operating difficulties, including difficulties in hiring,
training and managing an increasing number of employees, difficulties in
obtaining sufficient materials and manufacturing capacity to produce its
products, problems in upgrading its management information systems and delays in
production and shipments. There can be no assurance that the Company will be
able to manage future growth effectively. Any failure to manage growth
effectively could have an adverse effect on the Company.
DEPENDENCE UPON THIRD PARTY MANUFACTURERS
The Company is dependent on independent contractors for the manufacturing
of its products. The Company's products, including ELLE Products, are
manufactured to its specifications by both domestic and, to a limited extent,
international manufacturers, with whom the Company has no long-term
arrangements. The inability of a manufacturer to ship the Company's products in
a timely manner could result in the Company missing certain retailing seasons
and opportunities with respect to some or all of its products. The Company's
dependence on independent contractors includes additional risks, such as limited
control over costs and quality standards. The inability of a manufacturer to
perform according to the Company's expectations or the Company's inability to
maintain good relations with its manufacturers could have a material adverse
effect on the Company's business. See "Business-Sourcing and Manufacturing."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales and operating results fluctuate by
quarter, with the greatest sales occurring in the Company's first and second
quarters. It is in these quarters that the Company's Spring-Summer product
lines, which traditionally have had the highest volume of net sales, are shipped
to customers, with revenues generally being recognized at the time of shipment.
As a result, the Company experiences significant variability in its quarterly
results and working capital requirements. Moreover, delays in shipping can cause
revenues to be recognized in a later quarter, resulting in further variability
in such quarterly results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
TRADE CREDIT RISK
Historically, the Company has sold its trade accounts receivable to a
factor which assumes the credit risk with respect to collection of such
accounts. The factor pays the Company the receivable amount after the factor
receives payment from the Company's customer, shortly following the
bankruptcy or insolvency of the customer or when the receivable becomes 120 days
past due. The factor approves the credit of the Company's customers prior to
sale. If the factor disapproves a sale to a customer and the Company decides to
proceed with the sale, the Company bears the credit risk. The factoring
agreement can be terminated at any time by the factor upon 60 days prior notice.
Such termination could have a material adverse effect on the Company's financial
condition and results of operations if the Company could not replace the
factoring agreement within such period. Additionally, the Company may elect in
the future to discontinue its use of the factor and manage its credit and
collection operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations C Liquidity and Capital Resources."
MANAGEMENT'S DISCRETION AS TO USE OF PROCEEDS
The Company's management will have broad discretion as to the application
of the net proceeds of this offering. The net proceeds to the Company are
estimated to be approximately $4,350,000. The Company expects to use
approximately $250,000 of the net proceeds to repay outstanding indebtedness at
the closing of this offering, approximately $350,000 to pay declared but unpaid
dividends, $181,000 to pay accrued salaries to officers, $80,000 to repay
existing loans from the current shareholders and the balance for working capital
and general corporate purposes, including an estimated $490,000 of the net
proceeds to fund the Company's advertising and marketing programs and up to an
estimated $1,500,000 for the development of up to 60 concept shops in large
retail customers. The Company may change the allocation of these proceeds in
response to changes in the apparel industry and the Company's business. See "Use
of Proceeds."
UNCERTAINTIES IN APPAREL INDUSTRY
The apparel industry historically has been subject to substantial cyclical
variations. The Company and other apparel manufacturers rely on the expenditure
of discretionary income for sales of their products. Accordingly, any downturn
in the general economy or uncertainties regarding future economic prospects that
affect consumer spending habits could have a material adverse effect on the
Company. During the past several years, various retailers, including some of the
Company's customers, have experienced financial difficulties, which increases
the risk of extending credit to such retailers. Financial problems of a retailer
could cause the Company's factor to limit the amount of receivables of such
retailer that the factor would approve, which could cause the Company to curtail
business with such retailer or require the Company to assume more credit risk
relating to such customer's receivables. Additionally, over the past several
years, the retail industry has experienced significant changes, including
consolidation of ownership, increased centralization of buying decisions and
restructurings. If such changes continue, the Company's customer base may be
reduced either because customers may be consolidated with or acquired by other
entities or because purchasing decisions for products may shift to individuals
with whom the Company has not had prior selling relationships. There can be no
assurance that the Company will be able to maintain relationships with its
customers following such consolidations or other changes. Any significant
reduction in the Company's customer base could have an adverse effect on the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
The Company sells to major retailers, some of whom have engaged in
leveraged buyouts or transactions in which such retailers incurred significant
amounts of debt, and some of whom have recently emerged from the protection of
the federal bankruptcy laws. At any time, a retail customer may experience a
downturn in its business which may weaken its financial condition and result in
the non-payment of shipped orders, reduction or elimination of new orders, or
the customer seeking protection under the bankruptcy laws. A majority of the
Company's net sales are to single store or local retailers whose financial
condition may be more susceptible to business downturns. It is not clear to what
extent, if any, the current financial condition of such retailers will affect
the financial condition of the Company. Any material financial difficulties
encountered by such accounts could have an adverse effect on the Company.
CHANGES IN FASHION TRENDS
The Company typically designs and arranges for the manufacture and sale of
its apparel and accessories several months in advance of the time when consumer
acceptance of such products is known. The Company's success is largely dependent
on its ability to anticipate the changing fashion trends of its customers and to
provide activewear that appeals to their preferences in a timely manner. There
can be no assurance that the Company will be successful in this regard. If the
Company misjudges the market for its products or is unsuccessful in responding
to changes in fashion trends or in market demand, the Company could experience,
among other things, excess inventories and higher markdowns, lower gross margins
due to the necessity of providing discounts to retailers or conversely,
insufficient inventory and missed market opportunities, any of which could have
an adverse effect on the Company.
COMPETITION
There is intense competition in the sectors of the apparel industry in
which the Company participates. The Company competes with many other apparel
companies, some of which are larger and have better established brand names and
greater resources than the Company. In some cases, the Company also competes
with private-label brands of its department store customers. The Company
believes that in order to be successful in its industry, it must be able to
evaluate and respond to changing consumer demand and taste and to remain
competitive in the areas of style, quality and price while operating within the
significant production and delivery constraints of the industry. Furthermore,
the Company's traditional department store customers, which account for a
substantial portion of the Company's business, encounter intense competition
from so-called "off-price" and discount retailers, mass merchandisers and
specialty stores. The Company believes that its ability to increase its present
levels of sales will depend on such customers' ability to maintain their
competitive position. See "Business-Competition."
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is dependent upon the personal efforts and
abilities of its senior management, including Lawrence A. Dear, its President,
Chief Executive Officer and Chief Financial Officer; Lori Dorough Eisenberg,
Vice President of Design and Merchandising; and Jon Eisenberg, Vice President of
Purchasing/National Sales. See "Business-License Agreement with ELLE." The
Company believes that the loss of the services of one or more of such
individuals would likely have an adverse effect on the Company. Other than a
$250,000 policy on Ms. Eisenberg, the Company does not maintain key man life
insurance on any of its executives. In addition, the Company believes that its
future success depends in part upon its ability to attract and retain qualified
personnel. The Company intends to make additions to its core management team,
however, competition to attract and retain such personnel is intense. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel in the future. See "Management."
NO DIVIDENDS ANTICIPATED
After the consummation of the Offering, the Company does not intend to make
or pay any dividends on its Common Stock in the foreseeable future. See
"Termination of S Corporation Status."
CONTROL BY PRINCIPAL STOCKHOLDERS; ANTITAKEOVER CONSIDERATIONS; STAGGERED BOARD
Following the completion of this offering, existing stockholders, including
Lawrence A. Dear, Lori Dorough Eisenberg and Jon Eisenberg and other members of
management, will beneficially own approximately 60% of the outstanding shares of
Common Stock. See "Principal Stockholders." As a result of this stock ownership,
management has sufficient voting power to determine the direction and policies
of the Company, the election of the directors of the Company, the outcome of any
other matter submitted to a vote of stockholders, and to prevent or cause a
change in control of the Company.
The Company's Board of Directors has the authority, without action of the
shareholders, to issue up to 15,000,000 shares of Common Stock and 1,000,000
shares of Preferred Stock and to fix the rights and preferences of the Preferred
Stock. This authority may have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. The Company is authorized to issue Preferred
Stock, without shareholder approval, with rights senior to those of the Common
Stock. See "Description of Capital Stock."
Following the offering, the Board of Directors of the Company will have
three classes of directors. The terms of the first, second and third classes
will expire in 1998, 1999 and 2000, respectively. Directors for each class will
be chosen for a three-year term upon the expiration of the current class term,
beginning in 1998. The staggered terms for directors may effect the
stockholders' ability to change control of the Company even where a change in
control is in the interest of the stockholders.
POTENTIAL CONFLICTS OF INTEREST; RELATED PARTY TRANSACTIONS
In December 1995, the Company sold $40,000 of finished goods not bearing
the ELLE trademark to Lawrence Dear, who later resold the swimwear and remitted
the net profits of $36,000 to the Company. This amount was treated as an
additional capital contribution to the Company by Mr. Dear.
The Company has funded its operations, in part, from borrowings from
directors, officers and their affiliates. The Company, as of September 30, 1997,
had borrowed approximately $237,000 from The Money Store, Inc. ("The Money
Store"). Lawrence Dear, the Company's President, Chief Executive Officer and
Chief Financial Officer, was formerly employed by The Money Store; his father,
Morton Dear, who will become the Company's Chairman following the offering, is
Vice Chairman and Senior Executive Vice President of The Money Store. See
"Certain Transactions."
From time to time, the Company's shareholders have loaned money to the
Company. As of September 30, 1997, the amount outstanding was $80,402; these
loans generally are due on demand. Interest of $18,951, $10,526, and $12,100 was
paid during the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997, respectively. The loans are subordinated to all other
indebtedness of the Company.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; ARBITRARY
DETERMINATION OF OFFERING PRICE
Prior to the offering there has been no public market for the Common Stock.
Although the Company has applied to have the Common Stock listed on the Nasdaq
Stock Market, there can be no assurance that an active trading market will
develop or, if it does develop, will continue. The market price of the Company's
Common Stock could be highly volatile. Factors such as quarterly variations in
the Company's results of operations and changes in general market conditions
could cause the market price of the Company's Common Stock to fluctuate
significantly. The public offering price of the shares of Common Stock has been
determined by negotiations between the Company and the Underwriter and does not
necessarily bear any relationship to the Company's book value, operating
results, financial condition or other established criteria of value. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 1,500,000 shares of Common Stock outstanding and,
upon the completion of this offering, will have 2,500,000 shares of Common Stock
outstanding. Of such shares, the shares sold in the Offering (other than shares
which may be purchased by "affiliates" of the Company) will be freely tradeable
without restriction or further registration under the Securities Act. All of the
remaining outstanding shares are "restricted securities," as that term is
defined under Rule 144 promulgated under the Securities Act ("Rule 144"), and
may only be sold pursuant to a registration statement under the Securities Act
or an applicable exemption from the registration requirements of the Securities
Act, including Rule 144 thereunder. Certain of the Company's executive officers,
directors and shareholders have agreed not to offer, sell, or otherwise dispose
of their shares for a period of __ days after the date of this offering without
the prior written consent of the Underwriters. No predictions can be made as to
the effect, if any, that market sales of shares by existing stockholders
(including shares issuable upon the exercise of such warrants and options) or
the availability of such shares for future sale will have on the market price of
shares of Common Stock prevailing from time to time. The prevailing market price
of the Common Stock after the offering could be adversely affected by future
sales of substantial amounts of Common Stock by existing stockholders. See
"Principal Stockholders," "Shares Eligible for Future Sale" and "Underwriting."
DILUTION
Investors will experience immediate and substantial dilution of $3.25
in the net tangible book value per share of the Common Stock. See "Dilution."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" regarding the Company's strategies, plans,
objectives and expectations, the Company's ability to design, develop,
manufacture and market products, the ability of the Company's products to
maintain commercial acceptance, the Company's ability to achieve new product
commercialization, the anticipated growth of its target markets, its future
operating results, and other matters are forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable at this time, there can be no assurance that such
expectations will prove to be correct. Important factors that could cause actual
results to differ materially from the Company's expectations ("Cautionary
Statements") are set forth in these "Risk Factors" as well as elsewhere in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Statements.
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock offered
hereby, after deducting underwriting discounts and commissions and the estimated
expenses of the offering, are estimated to be $4,350,000 ($5,025,000 if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $5.00 per share.
Of such net proceeds, the Company anticipates that it will use
approximately $250,000 of the net proceeds to repay existing indebtedness at the
closing of the Offering. As of September 30, 1997, approximately $237,000 was
outstanding under a small business administration loan that accrues interest at
a rate of prime plus 1.75%. The Company will also use approximately $350,000 to
pay to shareholders declared dividends as described in "Termination of S
Corporation Status", $181,000 to pay accrued salaries to officers, and $80,000
to repay existing loans from the current stockholders. The Company expects to
use the remaining proceeds to provide working capital to support the growth of
the Company's existing product lines and to add additional product lines,
including approximately $490,000 to fund the increased advertising and marketing
programs of the Company. The Company anticipates developing up to 60 concept
shops within several of its key customers over the next 18 months at an
estimated average cost of $25,000 per shop, funded in part with the proceeds of
this offering. From time to time the Company evaluates the acquisition of
licenses, businesses and operations complementary to those of the Company,
however, the Company currently has no commitments or agreements relating to any
such acquisition. Pending such uses, the proceeds of this offering will be
invested in investment grade, interest-bearing securities.
TERMINATION OF S CORPORATION STATUS
The Company has been treated as an S Corporation since 1995. As a result,
through the date immediately preceding the termination of its S Corporation
status (the "Termination Date"), its earnings have been and will be taxed for
federal income tax purposes directly to the holders of the Common Stock rather
than to the Company. Other than a tax imposed on S Corporations by the State of
California (currently 1.5% of taxable income), state income taxes on earnings
have also been the responsibility of the Company's shareholders. The Termination
Date will occur immediately before the closing of this offering. On the
Termination Date, the Company will become subject to federal and state corporate
income taxes. See Note 1 of "Notes to Financial Statements-Business Activity and
Summary of Significant Accounting Policies-Income Taxes."
The Company paid an aggregate of $64,256 in dividends to its shareholders
from January 1, 1995 through September 30, 1997. Those dividends were paid to
the shareholders to pay their income taxes and as a return of their investment.
Before the closing of this offering, the Company intends to declare dividends to
the shareholders equal to approximately $350,000 plus an amount equal to the
Company's net income from October 1, 1997 through the Termination Date.
Following the Termination Date and the payment of any dividends declared prior
to the Termination Date that have not been paid, the Company intends to retain
future earnings, if any, to finance the operations and expansion of the
Company's business. Therefore, the payment of any cash dividends on the Common
Stock is unlikely for the foreseeable future.
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company was
approximately $365,000 or $.24 per share of Common Stock outstanding. Net
tangible book value per share is determined by dividing the net tangible book
value of the Company (the excess of tangible assets over liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the
completion of this offering at an assumed offering price of $5.00 per share
(after deducting underwriting discounts and commissions and the estimated
expenses of the offering), the pro forma net tangible book value of the Company
as of September 30, 1997 would have been approximately $4,365,000 or
approximately $1.75 per share. This represents an immediate decrease in pro
forma net tangible book value of $1.50 per share to current stockholders and an
immediate dilution of $3.25 per share to new investors purchasing shares of
Common Stock. The increase in the net tangible book value per share of Common
Stock held by the current stockholders would be solely attributable to the cash
paid by purchasers of the shares of Common Stock offered by the Company.
The following table summarizes the per share dilutive effect of this
offering:
Assumed initial public offering
price per share (1) ........ ....... ........ ....... $5.00
Net deficit in tangible book value
per share before offering ........ $ .24
Increase attributable to shares
offered hereby (2) ........ ....... ........ $1.51
----
Pro forma net deficit in tangible
book value per shareafter offering ........ ....... 1.75
----
Dilution to new investors (3) ........ ....... ........ 3.25
====
_____________________________
(1) Before deduction of underwriting discounts and commissions and the
estimated expenses of this offering.
(2) After deduction of underwriting discounts and commissions and the
estimated expenses of this offering.
(3) Dilution represents the difference between the offering price per share
and the pro forma net tangible book value per share after giving effect
to this offering.
The following table summarizes, as of September 30, 1997, the differences in the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share by existing
and new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Existing stockholders............. 1,500,000 60% $ 200,000 4% $ .13
New investors...................... 1,000,000 40% $ 5,000,000 96% 5.00
--------- ---- ---------- --- -------
Total 2,500,000 100% $ 5,200,000 100%
========= ==== ============ ====
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to give effect to the consummation of this
offering and the application of the net proceeds therefrom at an assumed
offering price of $5.00 per share. This information should be read in
conjunction with the financial statements and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
ACTUAL AS ADJUSTED
------ -----------
<S> <C>
Long-term debt, net of $ 246,671 $ --
current portion
Stockholders' equity:
Preferred stock, par value $0.01 -- --
per share, 1,000,000
shares authorized, no
shares issued and
outstanding and as adjusted
Common stock, par value $0.01 $ 15,000 $25,000
per share, 15,000,000
shares authorized, 1,500,000
shares issued and
outstanding; 2,500,000
shares as adjusted
Additional paid-in capital 185,126 4,340,000
Retained earnings 164,125 0
------- ---------
Total Stockholders' Equity $ 364,251 $4,365,000
----------
Total Capitalization $ 610,922 $4,365,000
==========
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data were derived from the financial
statements of the Company. The selected financial data for the years ended
December 31, 1996 and 1995 and for the years then ended have been derived from
the Company's financial statements included elsewhere in this Prospectus which
have been audited by Grobstein, Horwath & Company LLP, independent auditors
whose report thereon is also included elsewhere in this Prospectus. The selected
financial data for the nine month periods ended September 30, 1997 and 1996, and
the balance sheet data as of September 30, 1997, are derived from the unaudited
financial statements of the Company prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments except for normal year end audit
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations. The results for an interim period are not
necessarily indicative of results to be expected for a full year. The following
data below should be read in conjunction with the financial statements of the
Company and the notes thereto included elsewhere in this Prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 997
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales.......... $ 2,016,930 $ 3,072,108 $ 2,304,081 $ 2,448,336
Cost of sales...... 1,435,718 1,846,862 1,385,147 1,362,765
Gross profit....... 581,212 1,225,246 918,934 1,085,571
Total operating
expenses......... 721,130 998,858 749,143 937,792
Net income
(loss).......... (140,718) 224,320 168,240 144,779
Earnings (loss)
per share......... ( 0.09) 0.15 0.11 0.10
Weighted
average shares outstanding.. 1,500,000 1,500,000 1,,500,000 1,500,000
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------- ----------------------
ACTUAL AS ADJUSTED (1)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 925 $ 7,785 $3,770,785
Total assets........................................ 941,952 1,297,047 5,060,047
Total current liabilities........................... 499,177 686,125 660,330
Long-term debt (less current portion).............. 275,261 246,671 35,156
Shareholders' equity................................ 167,514 364,251 4,365,000
</TABLE>
(1) Adjusted to reflect the sale by the Company of 1,000,000
shares of Common Stock offered hereby and the receipt of
the net estimated proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996 AND 1997. THIS DISCUSSION SHOULD
BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS, THE NOTES
RELATED THERETO, AND THE OTHER FINANCIAL DATA INCLUDED ELSEWHERE IN THIS
PROSPECTUS. ALL INFORMATION WITH RESPECT TO THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED. THE MATTERS DISCUSSED IN THIS SECTION
THAT ARE NOT HISTORICAL OR CURRENT FACTS DEAL WITH POTENTIAL FUTURE
CIRCUMSTANCES AND DEVELOPMENTS. SUCH FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE
NOT LIMITED TO, THE DEVELOPMENT AND MARKET ACCEPTANCE FOR PRODUCTS, TRENDS IN
THE RESULTS OF THE COMPANY'S OPERATIONS AND THE COMPANY'S ANTICIPATED CAPITAL
REQUIREMENTS AND CAPITAL RESOURCES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW
AS WELL AS THOSE DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
The Company designs, sources markets and distributes women's
activewear and to a lesser extent swimwear in the United States and Canada under
an exclusive license using the ELLE trademark. The Company believes its ELLE
products are uniquely positioned between high-end designer labels and mid-range
labels. The Company was incorporated in Delaware on September 30, 1997, as the
successor to T.K. Mab, Inc., a California corporation, which commenced
operations in January, 1995. T.K. Mab, Inc. was the successor to T.K. Mab, a
California general partnership, which commenced operations on January 1, 1992.
Prior to this offering, the Company's stockholders elected to be taxed
as an S Corporation. Accordingly, no provision for federal income taxes was
provided for the years ended December 31, 1995 and 1996, since the stockholders
reported the earnings of the Company on their individual income tax returns.
However, the Company was subject to minimum California franchise taxes, based on
income. The Company's S Corporation status will be terminated upon the effective
date of the initial public offering and, thereafter, the Company will be taxed
as a regular corporation. The pro forma provision for income taxes in the
statement of income data included elsewhere in this Prospectus show the effects
of net income and earnings per share had the Company been taxable as a regular
corporation since its inception in January, 1995.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to net sales of certain items in the Company's
statements of operations for the periods shown below:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 71.2 60.1 60.1 55.7
Gross Profit 28.8 39.9 39.9 44.3
Selling & Shipping 15.0 16.2 16.2 16.5
Expense
General & Admin. 18.1 14.4 14.4 19.3
Expense
Interest Expense 2.6 1.9 1.9 2.5
Income (loss)
from Operations (6.9%) 7.4 7.4 6.0
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996.
NET SALES. Net sales for the nine month period ended September 30, 1997 (the
"1997 Nine Month Period") were $2,448,336, an increase of $144,255 or 6.3% over
net sales of $2,304,081 for the nine months ended September 30, 1996 (the "1996
Nine Month Period"). The growth in net sales was primarily attributable to
increased shipments of product to its existing customers.
COST OF SALES. Cost of sales in the 1997 Nine Month Period was $1,362,765 or
55.7% of net sales, a decrease of $22,382 from $1,385,147 or 60.1% of net sales
in the 1996 Nine Month Period. The decrease in cost of sales was primarily
attributable to tightened controls of purchasing activity and contract
manufacturers, which resulted from greater experience in manufacturing ELLE
Products.
GROSS PROFIT. Gross profit was $1,085,571 for the 1997 Nine Month Period, an
increase of $166,637 from $918,934 in the 1996 Nine Month Period. As a
percentage of net sales, gross profit increased by 18.1% between the 1996 Nine
Month Period and the 1997 Nine Month Period.
SELLING AND SHIPPING EXPENSE. Selling and shipping expense was $403,295 or 16.5%
of net sales for the 1997 Nine Month period, an increase of $30,408 from
$372,887 or 8.2% for the 1996 Nine Month Period. The increase in selling and
shipping expense was primarily the result of increased trade advertisements and
new marketing programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were
$472,737 or 19.3% of net sales for the 1997 Nine Month Period, an increase of
$139,859 from $332,878 or 42% for the 1996 Nine Month Period. This increase
reflects the growth in the Company's administrative, payroll and other expenses
associated with building the infrastructure necessary to support increasing
sales and the long term strategies of the Company.
INTEREST EXPENSE. Interest expense was $61,760 or 2.5% of net sales in the 1997
Nine Month Period, an increase of $18,382 from $43,378 or 42.4% for the 1996
Nine Month Period. The increase resulted from utilization of the Company's
credit facilities, and additional financing costs associated with the
acquisition of the Company's computer system.
PRO FORMA PROVISION FOR INCOME TAXES. The pro forma provision for income
taxes was $49,267 and $20,475 in the 1997 Nine Month Period and 1996 Nine Month
Period, respectively. The Company historically has operated as an S Corporation.
The Company's pro forma effective tax rate was 33% in the 1997 Nine Month
Period, as compared to 12% in the 1996 Nine Month Period.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales for the year ended December 31, 1996 ("1996") were
$3,072,108, which represented an increase of $1,055,178 or 52.3% over the year
ended December 31, 1995 ("1995") net sales of $2,016,930. The growth in net
sales was primarily attributable to changes in the product mix, emphasizing
higher priced products.
COST OF SALES. Cost of sales was $1,846,862 or 60.1% of net sales in 1996, an
increase of $411,144 from $1,435,718 or 28.6% from 1995. The decrease in the
percentage of cost of sales was a result of increased sales and an improved
sales mix favoring activewear over swimwear.
GROSS PROFITS. Gross profits were $1,225,246 in 1996, an increase of $644,034,
or 110.8%, over gross profits of $581,212 in 1995. The increase in the
percentage of cost of goods sold was the result of increased sales of higher
margin activewear as compared to swimwear.
SELLING AND SHIPPING EXPENSE. Selling and shipping expense increased to $497,183
or 16.2% of net sales in 1996, an increase of $194,291 from $302,892 or 15.0% of
sales in 1995. The increase in selling expense was primarily related to new
trade advertising campaigns and an increased emphasis on customer service.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to $443,837 or 14.4% of net sales in 1996, an increase of $78,620 from
$365,217 or 18.1% of net sales in 1995. The increase in general and
administrative expenses reflects the Company's commencing the building of
infrastructure necessary to support the growth strategies of the Company,
including costs associated with upgrading computer hardware and software systems
and furniture and fixture purchases.
INTEREST EXPENSE. Interest expense in 1996 was $59,838 or 1.9% of net sales, as
compared to $53,021 or 2.6% of net sales in 1995. The decrease was the result of
reduced utilization of the Company's credit facilities, partially offset by
additional financing costs associated with the acquisition of the Company's
computer system.
PRO FORMA PROVISIONS FOR INCOME TAXES. The pro forma provision for income taxes
was $27,301 and $800 in 1996 and 1995, respectively. The Company has
historically operated as an S Corporation. The Company's pro forma effective tax
rate was 12% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's main sources of liquidity have historically been cash
flows from operations, a bank loan, short term advances from its factor and
shareholder loans. The Company's capital requirements primarily result from
working capital needs and investing activities.
Net cash provided by operating activities in the 1997 Nine Month Period
increased to $35,725 from a use of ($17,911) in the 1996 Nine Month Period,
primarily as a result of an increase in accounts payable and accrued expenses.
This net cash provided by operations was partially offset by increases in
accounts receivable, amounts due from factor and an increase in inventories.
Working capital at September 30, 1997 was $525,823 and available cash and
amounts due from factor were $142,837.
Net cash used in investing activities in the 1997 Nine Month Period and
1996 Nine Month Period was ($13,256) and ($40,772), respectively. The primary
investing activity related to acquisitions of computer systems, software and
hardware. The Company has not committed to any contracts for capital
expenditures in 1998, but anticipates that it will make such expenditures in the
normal course of business. Since the Company typically uses independent
contractors for manufacturing its products and intends to continue this
practice, the Company has not had high levels of capital expenditures.
The Company historically has sold a substantial portion of its accounts
receivable to a factor which assumes the credit risk with respect to the
collection of such accounts. The Company periodically receives cash advances
from the factor by pledging its accounts receivable and other assets to the
factor as collateral. The factor charges interest at a negotiated rate over the
prime rate on such advances. The factor limits the amount of advances to a
percentage of the accounts receivable purchased by the factor.
The Company also has funded its operations from a $250,000 Small
Business Administration loan secured by substantially all of the assets of the
Company, payable monthly at a rate equal to prime plus 1.75%, due 2002. The
Company intends to use the proceeds of this offering to repay this loan in full.
As a result of the Company's treatment as an S Corporation for federal
and state income tax purposes, the Company periodically has provided its
shareholders, through dividends, with funds for the payment of income taxes on
the earnings of the Company which have been included in the taxable income of
the shareholders. The Company paid a dividend of $64,256 in 1996. The Company
also intends to pay its existing shareholders dividends equal to $350,000, plus
the Company's net income from October 1, 1997 through the Termination Date.
These dividends will be paid upon closing of the offering.
The Company believes that the cash provided by operations, together
with the net proceeds from the Offering, will be sufficient to fund its
operations and planned expansion for at least the next twelve months. The
Company may be required to seek additional sources of funds for accelerated
growth after that point, and there can be no assurance that such funds will be
available on satisfactory terms. Failure to obtain such financing could delay or
prevent the Company's planned growth, which could adversely affect the Company's
business, financial condition and results of operations.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business is affected by seasonal trends, with higher
levels of wholesale sales in the first and second quarters. These trends result
primarily from the timing of seasonal wholesale shipments to retail customers
and key vacation travel and holiday shopping periods in the retail industry.
Fluctuations in sales and operating income in any fiscal quarter may be affected
by the timing of seasonal wholesale shipments and other events affecting retail.
<PAGE>
BUSINESS
The Company designs, sources, markets and distributes women's activewear
and, to a lesser extent, swimwear in the United States and Canada under an
exclusive license using the ELLE(R) trademark ("ELLE Products") and, to a lesser
extent, under private labeling arrangements. The Company also has produced
licensed and private labeled swimwear and other apparel using the Hard Rock
Cafe, Harley-Davidson, Everlast and B.U.M. Equipment trademarks. The Company
believes its ELLE Products are uniquely positioned between high-end designer
labels and mid-range labels. Industry sources indicate that an identifiable
label is an essential element of popular activewear. The Company believes the
ELLE Products have earned a reputation as a stylish and high quality, yet
affordable brand.
Activewear is a popular and rapidly growing segment of the apparel
industry. The popularity of activewear is largely attributed to more active,
casual lifestyles. Activewear combines casualwear and exercisewear that is
designed for more informal settings, including casual social gathering, shopping
and leisure time activities. ELLE Products are designed to be both sporty and
elegant, offering a sophisticated and chic appearance. The Company's line of
activewear consists of highly comfortable fashion-forward cotton knit shorts and
tops, long and short tunics, coverups, leggings and fleece tops and bottoms. The
Company's swimwear product line includes bathing suits, cover-ups, robes and
tote bags that are designed to be fashionable and flattering. In the women's
swimwear market, consumer's buying decisions tend to be based primarily on
styling and appearance.
The Company's strategy is to expand the Company's operations and to become
a leading brand name supplier of women's activewear and swimwear. Key elements
of this strategy include (i) expanding products, styles and price ranges; (ii)
implementing an advertising and marketing program; and (iii) expanding the
distribution system for the Company's products through relationships with a
broad network of retailers in the United States, Canada and (subject to
expanding the territories in which the ELLE Products and future products are
permitted to be sold) elsewhere.
Although historically directing its advertising efforts to retailers,
the Company recently commenced a consumer advertising program, including
national magazine advertisements. The Company intends to use a portion of the
net proceeds of this offering to support and expand its advertising and
marketing programs. The Company is working closely with ELLE to develop focused
marketing programs directed to ELLE's subscribers. The Company has also
established an online promotional website on the Worldwide Web at
www.elleactive.com to promote its products. The Company intends to expand its
current website to allow customers to purchase directly from the Company a
complete selection of ELLE Products from the Company's lines. Additionally, the
Company is developing for certain retail customers "store within a store"
concept shops featuring ELLE Products.
Substantially all of the Company's products are manufactured in the
United States by third party, independent manufacturers. The Company distributes
ELLE Products through a combination of independent and employed sales
representatives to a variety of major department stores, specialty stores,
sporting goods stores, and catalog operations, and better mass merchandisers
representing approximately 300 separate customers throughout the United States
and Canada. Additionally, the Company has licensed or sold certain of its
designs to ELLE licensees in Asia and Europe.
ELLE Magazine has been published for more than 50 years and is one of
the best selling fashion magazines in the world. ELLE Magazine is currently
published in 28 editions worldwide with an estimated paid circulation of over
900,000 in the United States.
<PAGE>
PRODUCTS
The Company's line of products consists of activewear and, to a lesser
extent, swimwear that is targeted towards women with a youthful attitude and
active lifestyle. In particular, the Company's ELLE Products are designed and
marketed with a goal of achieving a high level of brand name recognition and
satisfying consumer desires for a high quality, fairly priced product. The
Company performs extensive market research in attempting to provide its retail
customers and consumers with functionality along with the most desirable styles,
color schemes and fabrics. The Company also designs, sources and distributes
high-quality private label lifestyle apparel, including activewear, and
swimwear. The Company offers three seasons of activewear (Spring-Summer, Fall
and Holiday Resort). The Company is actively pursuing a strategy of developing a
balanced and diversified mix of products in order to maximize the brand name
recognition of the ELLE Products and appeal to various demographic groups and
geographic areas. The Company believes that the target consumers for its
products are women aged 25 to 55. The Company's product lines include:
ELLE ACTIVEWEAR. The Company designs, sources and sells women's
activewear for today's active lifestyle under the ELLE(R) trademark
and logo. The ELLE Products recognize that the active woman has
particular demands regarding quality, comfort and style in activewear.
The ELLE Products consist of approximately 300 separate products with
varying styles and functions. These include fitness apparel and
sportswear made of bouclet, nylon, fleece, cotton, Lycra spandex, and
other polyester fabrics with moisture management properties. The ELLE
activewear products are designed to feature the ELLE(R) trademark and
logo, and to focus on the use of appropriate fabric blends to maximize
comfort and performance. The retail prices for the ELLE Products
generally range from $20 to $95.
ELLE SWIMWEAR FOR WOMEN. The Company designs, sources and sells
women's and girls' swimwear and coverups under the ELLE(R) trademark
and logo. The ELLE swimwear for women offers fashion oriented swimwear
and coverups designed to complement its swimwear. The collection is
designed to feature the ELLE(R) trademark when appropriate and to
focus on the use of appropriate fabric blends, including those with
moisture management, to maximize comfort. The retail prices for the
ELLE swimwear products generally range from $24 to $80.
LICENSE AGREEMENT WITH ELLE
In January 1997, the Company entered into the current ELLE License
Agreement under which the Company will have an exclusive license to manufacture,
market, distribute and sell licensed products for women under the ELLE(R)
trademark in the United States and Canada. The Company's ELLE Products will
continue to be distributed in major department and specialty stores, and through
new Company-designed in-store concept shops. The Company's license from ELLE is
limited to women's swimwear, swimwear coverups, and activewear collections
including clothing suitable for exercising and bearing the ELLE trademark. The
Company's license from ELLE excludes shoes, scarves, socks, stockings or
accessories for ladies bearing the ELLE(R) trademark. In 1996, the Company
entered into agreements with ELLE (i) to provide the Company's ELLE Product
designs to ELLE's Asian licensing program in exchange for a 0.5% royalty on
sales of ELLE Products in Asia and (ii) sold the Company's designs for a fixed
fee to ELLE's European licensee. The Company is not obligated to pay royalties
to ELLE on these sales.
The term of the ELLE License ends on December 31, 1999, but is renewable at
the option of the Company for three years commencing January 1, 2000, if the
Company is not in default under the ELLE License and if the Company achieves net
sales of ELLE Products producing earned royalties to ELLE of at least $1,000,000
for the exercise of the option. The ELLE License may be terminated in whole, or
only as to certain ELLE Products, if the Company fails to fulfill its material
obligations thereunder (including payments of royalties or other amounts due),
fails (beyond the cure period) to use diligent efforts to promote, advertise,
manufacture, sell or ship any ELLE Product, or to fill accepted orders for ELLE
Products to financially secure purchasers. The ELLE License may also be
terminated at ELLE's option if net sales of ELLE Products do not exceed certain
minimum levels, or if the Company voluntarily or involuntarily enters into a
bankruptcy or similar proceeding. To date, the Company is in compliance with the
ELLE License.
Under the ELLE License, the Company is required to make royalty payments to
ELLE of 6% of net sales subject to minimum annual payments, which increase over
the term (as extended) of the ELLE License. The minimum annual royalty payments
under the ELLE License aggregate $150,000, $185,000 and $245,000 for 1997, 1998
and 1999, respectively. To date, all required levels have been met or exceeded.
Royalty payments are not required with respect to any sales of ELLE Products to
ELLE. The Company is also obligated to maintain product quality control, obtain
prior approval of designs and standards, and marketing, advertising and
distribution programs, and may be required to indemnify ELLE against any losses
resulting from alleged defects in the ELLE Products arising out of the Company's
performance under the ELLE License or the manufacture, promotion or sale of such
products in violation of applicable laws or third-party rights. The ELLE License
requires that the Company secure and maintain product liability insurance, which
the Company has done. Under and subject to the terms of the ELLE License, ELLE
is required to indemnify the Company against any losses arising out of the use
of the ELLE(R) trademark or the exercise by the Company of its rights under the
ELLE License. ELLE also is required, generally, to defend the Company's rights
to use the ELLE(R) trademark pursuant to the ELLE License. The ELLE License also
requires the Company to maintain, during the term thereof, letters of credit in
favor of ELLE for an amount equal to the minimum annual amounts due to ELLE
under the ELLE License from time to time. The Company is in compliance with this
requirement.
CUSTOMERS
The Company's products are distributed through department stores,
specialty stores, sporting goods stores, catalog operations and better mass
merchandisers. The Company distributes its products to approximately 300
separate customers in approximately 500 retail locations throughout the United
States and Canada. The Company's products are sold by retailers such as
Bloomingdales, Nordstrom, Cache, Liberty House, and through catalog operations
such as Victoria's Secret and specialty retailers such as Ritz Carlton Hotels.
During the year ended December 31, 1996, 13% of the Company's net sales were
made to IJC By Germaine and 12% of the Company's net sales were made to Cache,
Inc. During the nine months ended September 30, 1997, approximately 22%, of the
Company's net sales were made to Loehmann's Inc., its largest customer. The
Company's strategy is to expand its network of retailers carrying the Company's
products, and is focused on department stores, specialty stores and catalog
operations; the terms of the ELLE License prohibit sales to mass merchandisers
and outlets.
SALES AND MARKETING
The Company has implemented a selling strategy that consists of supporting
the marketing efforts of senior management with a combination of five in-house
personnel and a network of commission-based independent sales representatives.
Representatives are provided an exclusive geographical territory, and are
responsible for servicing customers located in that territory, in many instances
assisted by the Company's sales personnel. The Company believes that its present
independent sales force is adequate, and does not intend to add any additional
sales representatives at the present time. The Company works closely with its
sales representatives to ensure that a consistent and unified image of the
Company is projected to its customers. The Company maintains a database of
approximately 6,000 prospective retailers who are periodically sent the
Company's Activewear and Swimwear catalogs. Since the Company's catalogs do not
contain pricing data, store buyers are encouraged to show them to their
consumers. The Company cooperates with its customers to gauge promptly which
styles are the most popular and to track consumer preferences regarding the
Company's products. The Company's products are presented at industry trade
shows, including the Women's Wear Daily/Men's Apparel Guild in California
("MAGIC") and the Supershow in Atlanta. The Company usually receives a
substantial number of customer orders at or immediately following each of these
trade shows. These trade shows also provide the Company with feedback concerning
its designs and styles for the upcoming seasons. The Company intends to increase
the number of its booths and personnel at trade shows and increase the number of
trade shows attended by the Company. The Company periodically advertises its
product line directly to consumers in ELLE and other magazines such as Shape and
In-Style magazines. The Company also advertises in trade magazines, including
Women's Wear Daily and Fasion Reporter. In addition, the Company has developed a
promotional website on the Worldwide Web at www.elleactive.com to promote its
products. The Company intends to expand its current website to allow customers
to click on icons for each piece of clothing in the line and view the garment on
a fashion model from multiple angles. It currently is anticipated that every
screen will have an "order now" icon that enables the website visitor to
immediately purchase the item via a secured credit card service.
DESIGN
The Company's past, current and future success results in large part
from its ability to design products which embody the fashion-forward active
lifestyle. The Company's products are designed to feature a coordinated look
through incorporating complementary designs in both the activewear and swimwear
product lines, as well as through making designs available in a variety of
colors. The Company's products and certain of the fabrics from which they are
made are designed by an in-house staff of fashion designers. The six person
design staff, headed by Lori Dorough Eisenberg, monitors current fashion trends
and changes in consumer preferences. Other members of management who are
instrumental in the design function meet regularly with the design staff to
create, develop and coordinate the seasonal collections. The Company believes
that its design staff is known for its distinctive yet casual styling.
SOURCING AND MANUFACTURING
The Company sources each of its product lines separately based on the
individual design, styling and quality specifications of such products. The
Company generally arranges through sourcing agents to provide fabric to outside
contractors for cutting, assembly and finishing. The Company believes that
outsourcing allows it to enhance production flexibility and capacity while
substantially reducing capital expenditures and avoiding the costs of managing a
large production workforce. During 1996, approximately 98% of the Company's
apparel products (as measured by net sales), were manufactured by domestic
contractors and approximately 2% of the Company's apparel products were
manufactured by foreign contractors, primarily in China. The Company is
exploring the possibility of bringing certain functions in-house. However, there
can be no assurance that such efforts will be successful.
The Company employs its own sourcing agents who assist in selecting and
overseeing third party contractors, sourcing of fabric and monitoring quotas and
other trade regulations. The Company's production staff, including its sourcing
agents, oversees all aspects of purchasing and production. The Company
separately negotiates with suppliers for the purchase of fabrics, trim and
finished goods.
The Company arranges for the production of its products primarily based
on a combination of past sales history, management judgment and orders received.
The Company utilizes these factors to estimate production requirements in order
to secure necessary fabrics and manufacturing capacity. Because of the greater
geographic distances of the Company's foreign manufacturers, the Company
generally is required to allow greater lead time for foreign orders than
domestic orders.
As is typical in the apparel industry, the Company does not have any
long-term formal arrangements with its contractors or suppliers. The Company
believes that its relationships with its contractors and suppliers are good. The
Company has experienced only limited difficulty in satisfying its raw materials
and finished goods requirements. Although the loss of one or more such
contractors or suppliers could have a significant effect on the Company's
immediate operating results, the Company believes it could replace such
contractors and suppliers without a materials adverse effect on the Company.
<PAGE>
COMPETITION
The activewear and swimwear segments of the women's apparel industry
are highly competitive. The Company competes with many apparel companies, many
of which are larger, more diversified, and have better established brand names
and greater resources for designing, developing and marketing their products
than the Company. The Company also competes with private-label brands of
department stores, including some of the Company's major retail customers, which
have increased in recent years.
Furthermore, the Company's traditional department store customers,
which account for a substantial portion of the Company's business, encounter
intense competition from so-called "off-price" and discount retailers, mass
merchandisers and specialty stores. The Company believes that its ability to
increase its present levels of sales will depend on such department stores'
ability to maintain their competitive position and the Company's ability to
increase its market share of sales to department stores.
PROPERTIES
The Company's principal executive offices are located in Los Angeles,
California, where the Company leases approximately 10,000 square feet. This
facility also houses the Company's design, production and merchandising staffs.
This space is occupied under a lease expiring in June 1999. The Company also
leases a 600 square foot showroom in Los Angeles, California under a lease
expiring in May 1999 and subleases a 300 square foot showroom in New York City,
New York on a month to month basis. The Company is looking to expand its
facilities and is exploring a new lease for 20,000 square feet in Los Angeles
and an additional 2,000 square feet of space in New York.
EMPLOYEES
As of September 30, 1997, the Company employed 43 people, none of whom
are covered by a collective bargaining agreement. The Company believes its
relationships with its employees to be good.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties is subject.
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of this offering, the Board of Directors will consist of
four members. Within 30 days of the completion of the offering, the Board of
Directors will consist of six directors divided into three classes serving
staggered three-year terms. Four of the directors will be Morton Dear, Chairman
of the Board of Directors nominee; Lawrence A. Dear, Chief Executive Officer,
President and Director; Jon Eisenberg, Vice President of Purchasing/National
Sales and Director; and Lori Dorough Eisenberg, Vice President of Design and
Merchandising and Director. The other two directors will be independent
directors. The first annual meeting of stockholders of the Company after the
offering will be held in 1998. Subject to rights pursuant to any employment
agreements, officers of the Company serve at the pleasure of the Board of
Directors.
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION TERM EXPIRES
<S> <C> <C> <C>
Morton Dear(1)(2) 59 Chairman of the Board of Directors
nominee 2000
Lawrence A. Dear 33 Chief Executive Officer, Chief Financial
Officer,
President and Director 1998
Jon Eisenberg 31 Vice President of Purchasing/National
Sales and Director 1999
Lori Dorough Eisenberg 35 Vice President of Design and
Merchandising and Director 2000
- ---------------------- -- Director nominee 1998
- ---------------------- -- Director nominee 1999
</TABLE>
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MORTON DEAR. Effective with the consummation of the offering, Mr. Dear
will become Chairman of the Board of Directors of the Company. Mr. Dear is the
Vice Chairman and Senior Executive Vice President of The Money Store, Inc., a
national financial services company (NNM symbol: MONE). From 1983 to August
1997, Mr. Dear was an Executive Vice President, Chief Financial Officer,
Secretary and a Director of The Money Store, which he joined in 1973. Mr. Dear
is a Certified Public Accountant, a licensed real estate broker and a licensed
mortgage banker. He is past Chairman of the Board of Directors of the Easter
Seal Society of New Jersey and is on the Advisory Board of Valley National Bank.
Mr. Dear is the father of Lawrence A. Dear, the Company's Chief Executive
Officer, Chief Financial Officer and President.
LAWRENCE A. DEAR. Mr. Dear has served as the Chief Executive Officer,
Chief Financial Officer and President of the Company since its incorporation in
1995 and was a general partner in the Company's predecessor from 1992 to 1995.
From 1989 to 1992, Mr. Dear served in the legal department at The Money Store.
Mr. Dear received his J.D. from Miami Law School in 1989 and his bachelors
degree in management from Tulane University in 1986. Mr. Dear is the son of
Morton Dear, Chairman of the Board of Directors of the Company.
JON EISENBERG. Mr. Eisenberg, a co-founder of the Company's
predecessor, has served as Vice President of Purchasing/National Sales and a
Director of the Company since its incorporation. Mr. Eisenberg received his
bachelors degree from Tulane University in 1988. Mr. Eisenberg is the
brother-in-law of Lori Dorough Eisenberg, Vice President of Design and
Merchandising for the Company.
LORI DOROUGH EISENBERG. Ms. Eisenberg has been Vice President of
Design and Merchandising and a Director of the Company since its incorporation
and served in a similar capacity for the Company's predecessor from 1992. Prior
to joining the Company, Ms. Eisenberg was a co-founder and owner of Bellafiga, a
private label manufacturer of swimwear and sportswear. Ms. Eisenberg is the
sister-in-law of Jon Eisenberg, Vice President of Purchasing/National Sales of
the Company.
BOARD OF DIRECTORS
The Company's Bylaws provide that the Company shall have between three
and nine directors with the current number set at six directors. Following the
offering, the Board of Directors of the Company will have three classes of
directors. The terms of the first, second and third classes will expire in 1998,
1999 and 2000, respectively. Directors for each class will be chosen for a
three-year term upon the expiration of the current class term, beginning in
1998. The staggered terms for directors may effect the stockholders' ability to
change control of the Company even where a change in control is in the interest
of the stockholders. Directors are elected at the annual meeting of shareholders
to serve a three-year term or until a successor is duly elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
In ______ 1997, the Board of Directors established an Audit Committee
consisting of Messrs. Morton Dear, _________ and __________, all of whom are
independent directors. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of the Company
and reviewing with the independent auditors the scope and results of the audits,
the internal accounting controls of the Company, audit practices and the
professional services furnished by the independent auditors.
In ______ 1997, the Board of Directors also established a Compensation
Committee consisting of Messrs. Morton Dear, ________ and ________, all of whom
are independent directors. The Compensation Committee is responsible for
reviewing and approving all compensation arrangements for officers of the
Company, and is also responsible for administering the 1997 Stock Option Plan.
The Board of Directors does not have a nominating committee. The
selection of nominees for the Board of Directors is made by the entire Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Board of Directors
did not have a compensation committee. Compensation was determined by the entire
Board of Directors, each of whom also served as an executive officer of the
Company during the 1996 fiscal year. No member of the Board of Directors of the
Company or its Compensation Committee serves as a member of the board of
directors or compensation committee of an entity that has one or more executive
officers serving as a member of the Company's Board of Directors or Compensation
Committee.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Directors who are not employees of the
Company receive a fee of approximately $500 per meeting attended for their
services. All directors are reimbursed for expenses incurred in connection with
attendance at board or committee meetings. In addition, each director not
employed by the Company, upon joining the Board of Directors, receives an option
to purchase 10,000 shares of Common Stock and an option to purchase an
additional 10,000 shares if also elected as Chairman of the Board. These options
vest after the first year of service on the Board.
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or accrued
by the Company to its Chief Executive Officer and other executive officers for
the fiscal year ended December 31, 1996. No executive officer received
compensation exceeding $100,000 during the 1996 fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
<S> <C> <C> <C> <C> <C>
Lawrence A. Dear ................. 1996 $54,000 $0 $0 $0
Chief Executive Officer,
Chief Financial Officer
and President
Jon Eisenberg..................... 1996 $54,000 $0 $0 $0
Vice President of
Purchasing/National Sales
Lori Dorough Eisenberg............. 1996 $54,000 $0 $0 $0
Vice President of Design
and Merchandising
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
Effective with the closing of the offering, each of Lawrence A. Dear,
Jon Eisenberg and Lori Dorough Eisenberg will enter into an employment agreement
with the Company, for terms of five years. Under the terms of the respective
employment agreements, the Company will pay Mr. Dear a minimum annual salary of
$110,000, Mr. Eisenberg a minimum annual salary of $82,000 and Ms. Dorough
Eisenberg a minimum salary of $82,000. Each of the agreements contain
non-competition and non-solicitation provisions applicable during the term of
employment under the respective agreement and until two years after termination
of employment.
Each of the executive officers of the Company is eligible to receive
an incentive under the Company's executive bonus pool. Such cash bonuses will be
made at the discretion of the Company based on subjective performance criteria.
1997 STOCK INCENTIVE PLAN
In December 1997, the Board of Directors and the shareholders of the
Company approved the 1997 Stock Incentive Plan (the "Stock Incentive Plan")
which permits the Company to grant incentive and non-qualified stock options to
purchase an aggregate of up to 250,000 shares of Common Stock. The purpose of
the Stock Incentive Plan is to foster and promote the financial success of the
Company by, among other things, enabling key employees to participate in the
long-term growth and financial success of the Company. The Stock Incentive Plan
is administered by the Compensation Committee of the Board of Directors, which
is composed of three independent directors. Any employee or director of the
Company is eligible to receive grants of stock options under the Stock Incentive
Plan.
All stock options granted under the Stock Incentive Plan will have an
exercise price per share to be determined by the Compensation Committee,
provided that the exercise price per share under each stock option shall not be
less than the fair market value of the Common Stock at the time the stock option
is granted (110% of such fair market value in the case of incentive stock
options granted to a shareholder who owns 10% or more of the Company's Common
Stock). The maximum term for all stock options granted under the Stock Incentive
Plan is 10 years (5 years in the case of an incentive stock option granted to a
shareholder who owns 10% or more of the Company's Common Stock). Stock options
granted to the non-employee directors are not intended to qualify as "incentive
stock options" within the meaning of Section 422A of the Internal Revenue Code
of 1986, as amended.
The Board of Directors may at any time terminate, amend or modify the
Stock Incentive Plan; provided, however, that no such action of the Board of
Directors, without the approval of the shareholders of the Company, may increase
the total number of shares of Common Stock which may be issued under the Stock
Incentive Plan, decrease the minimum incentive stock option exercise price,
extend the period during which options may be granted pursuant to the Stock
Incentive Plan, or change the class of individuals eligible to be granted
options. No amendment to the Stock Incentive Plan shall, without the consent of
an optionee, affect such optionee's rights under an option previously granted.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law,
the Company has adopted provisions in its Certificate of Incorporation which
provide that directors of the Company shall not personally be liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) an act related to the unlawful stock repurchase or
payment of a dividend under Section 174 of Delaware General Corporation Law, and
(iv) transactions from which the director derived an improper personal benefit.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its
directors and officers to the full extent permitted by Delaware law. The Bylaws
also authorize the Company to indemnify its employees and agents to the full
extent permitted by Delaware law, at the discretion of the Company's Board of
Directors. The Company intends to enter into indemnification agreements with its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Delaware General Corporation Law.
The indemnification agreements may require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
In May 1995, the Company entered into a Small Business Administration
loan with The Money Store Investment Corporation, an affiliate of The Money
Store, in the principal amount of $250,000. The loan bears interest at the prime
rate plus 1.75%, payable monthly. Principal is payable monthly with the balance
due in May, 2002. Lawrence Dear, the Company's Chief Executive Officer, Chief
Financial Officer and President, was employed by The Money Store prior to
joining the Company in 1992; Morton Dear, the Company's Chairman nominee, is
Vice Chairman and Senior Executive Vice President of The Money Store. The
Company believes that the terms of the loan are fair and reasonable and no less
favorable to the Company than could have been obtained through arm's length
negotiations.
In December 1995, the Company sold $40,000 of finished goods not
bearing the ELLE trademark to Lawrence Dear, who later resold the swimwear and
remitted the net profits of $36,000 to the Company. This amount was treated as
an additional capital contribution to the Company by Mr. Dear. The Company
believes that the amount paid by Mr. Dear was fair and reasonable and no less
favorable to the Company than could have been obtained through arm's length
negotiations.
From time to time, the Company's shareholders have loaned money to the
Company. As of September 30, 1997, the amount outstanding was $80,402; such
loans generally are due on demand. Interest of $18,951, $10,526, and $12,100 was
paid during the years ended December 31, 1995 and 1996, and the nine months
ended September 30, 1997, respectively. The loans are subordinated to all other
indebtedness of the Company. The Company believes that the terms of the loans
are fair and reasonable and no less favorable to the Company than could have
been obtained through arm's length negotiations.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of September 30,
1997 with respect to the beneficial ownership of the Common Stock, and after
giving effect to the offering, by (a) each of the directors of the Company
individually, (b) all of the executive officers and directors of the Company as
a group and (c) each person known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock. Except as
otherwise indicated below, the persons referenced below have advised the Company
that they have sole voting and investment power with respect to the securities
listed as owned by them.
<TABLE>
<CAPTION>
Percentage of Shares Percentage of Shares
Name and Address of Number of Shares Owned Prior to the Owned After the
Beneficial Owner(1) Beneficially Owned Offering Offering
<S> <C> <C> <C>
Morton Dear -- * --
Lawrence A. Dear 750,000 50.0% 30.0%
--.-%
Jon Eisenberg 375,000 25.0 15.0%
--.-
Lori Dorough Eisenberg 375,000 25.0 15.0%
--.-
Irving B. Kroll -- * *
Maurice Schoenholz -- * *
All directors and
executive officers as a
group (6 persons) 1,500,000 100.0% 60.0%
--.-%
- -----------------------------
(1) Unless otherwise indicated, the business address of all officers and
directors is 3745 Overland Avenue, Los Angeles, California 90034.
* less than 1%.
</TABLE>
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 15,000,000 shares of Common Stock.
As of September 30, 1997, 1,500,000 shares of Common Stock were outstanding.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder to one vote
on all matters requiring a vote of stockholders. Since the Common Stock does not
have cumulative voting rights, the holders of shares having more than 50% of the
voting power, if they choose to do so, may elect all the directors of the
Company and the holders of the remaining shares would not be able to elect any
directors.
Subject to the rights of holders of any series of preferred stock that
may be issued in the future, the holders of the Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available thereof. See "Dividend Policy." In the event of a
voluntary or involuntary liquidation of the Company, all stockholders are
entitled to a pro rata distribution of the assets of the Company remaining after
payment of claims of creditors and liquidation preferences of any preferred
stock. Holders of the Common Stock have no conversion, redemption or sinking
fund rights.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock
(the "Preferred Stock"). The Board of Directors is authorized to fix the
relative rights and preferences of the shares of Preferred Stock, including
voting powers, dividend rights, liquidation preferences, redemption rights and
conversion privileges. As of the date of this Prospectus, the Board of Directors
has not authorized any series of Preferred Stock, and there are no agreements or
understandings for the issuance of any shares of Preferred Stock. Because of its
broad discretion with respect to the creation and issuance of Preferred Stock
without stockholder approval, the Board of Directors could adversely affect the
voting power of the holders of Common Stock and, by issuing shares of Preferred
Stock with certain voting, conversion and/or redemption rights, could discourage
any attempt to obtain control of the Company.
TRANSFER AGENT
The transfer agent for the Common Stock is U.S. Stock Transfer
Corporation, Glendale, California.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The Company currently has 1,500,000 shares of Common Stock outstanding
and, upon the completion of this offering will have 2,500,000 shares of Common
Stock outstanding. Of such shares, the shares sold in the offering (other than
shares which may be purchased by "affiliates" of the Company) will be freely
tradeable without restriction or further registration under the Securities Act.
All of the remaining outstanding shares of Common Stock are "restricted
securities," as that term is defined under Rule 144 promulgated under the
Securities Act ("Rule 144"), and may only be sold pursuant to a registration
statement under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act, including Rule 144. The
Company's executive officers, directors and shareholders have agreed not to
offer, sell, or otherwise dispose of their shares, with certain limited
exceptions, for a period of ____ days after the date of this offering without
the prior written consent of the Underwriter. Subject to the expiration of such
___-day Underwriter's lockup period, the __________ shares beneficially owned by
_________ will be eligible for sale pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year from the later of the
date such restricted shares were acquired from the Company and (if applicable)
the date they were acquired from an affiliate, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock (25,000 shares based on the number
of shares to be outstanding immediately after this offering) or the average
weekly trading volume in the public market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 also are subject to certain requirements as to the manner
and notice of sale and the availability of public information concerning the
Company.
Affiliates may sell shares not constituting restricted shares in
accordance with the foregoing volume limitations and other restrictions, but
without regard to the one-year holding period. Restricted shares held by
affiliates of the Company eligible for sale in the public market under Rule 144
are subject to the foregoing volume limitations and other restrictions.
Further, under Rule 144(k), if a period of at least two years has
elapsed between the later of the date restricted shares were acquired from the
Company and the date they were acquired from an affiliate of the Company, and
the person was not an affiliate for at least three months prior to the sale,
such person would be entitled to sell the shares immediately without regard to
volume limitations and the other conditions described above.
An aggregate of 250,000 shares of Common Stock are available for
future option grants and other awards under the 1997 Stock Plan. See "Management
C 1997 Stock Incentive Plan." The Company intends to file a registration
statement under the Securities Act to register all of the shares of Common Stock
reserved for issuance, including shares subject to previously granted options,
under the 1997 Stock Plan. Such registration statement is expected to be filed
as soon as practicable after the date of this Prospectus and will automatically
become effective upon filing. Shares issued under the 1997 Stock Plan after the
registration statement is filed may thereafter be sold in the open market,
subject, in the case of the various holders, to the Rule 144 volume limitations
applicable to affiliates.
No predictions can be made as to the effect, if any, that open market
sales of shares of existing stockholders or the availability of such shares for
future sale will have on the market price of shares of Common Stock prevailing
from time to time. The prevailing market price of Common Stock after the
offering could be adversely affected by future sales of substantial amounts of
Common Stock by existing stockholders.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell 1,000,000 shares of Common Stock to
the Underwriter. The Underwriter will be obligated to purchase all of such
shares of Common Stock if any are purchased.
The Company has agreed to sell the Common Stock to the Underwriter at
a discount of __% of the public offering price. The Company has also agreed to
pay the Underwriter a non-accountable expense allowance of __% of the gross
proceeds of the offering to be paid at closing, $_____ of which has been
advanced to the Underwriter. In the event this offering is not completed because
the Company prevents such completion or breaches any covenant, representation or
warranty contained in the Underwriting Agreement, the Underwriter shall be
reimbursed for all actual accountable out-of-pocket costs and expenses incident
to the performance of the Company's obligations set forth in the Underwriting
Agreement, including the accountable expenses of the Underwriter, including
legal fees, but in no event to exceed the sum of $_________, less a credit for
any amounts previously paid to the Underwriter. In the event the Offering is
not completed because the Underwriter prevents its completion (unless such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained in the Underwriting Agreement), the Company shall not be
liable for the Underwriter's expenses, except that the Underwriter may retain
the $______ to the extent that the Underwriter has incurred accountable costs
previously paid to it.
The Common Stock being offered by the Company to the public is being
offered at a price of $____ per share as set forth on the cover page of this
Prospectus. The Common Stock is offered by the Underwriter subject to receipt
and acceptance by it, to the right to reject any order, in whole or in part, to
approval of certain legal matters by counsel and to certain other documents.
The Company has granted to the Underwriter an option, exercisable for
30 days from the date of this Prospectus, to purchase up to 150,000 additional
shares of Common Stock at the public Offering Price set forth on the cover page
of this Prospectus, less the underwriting discounts and commissions. The
Underwriter may exercise this option in whole or, from time to time, in part,
solely for the purpose of covering over-allotments, if any, made in connection
with the sale of the shares of Common Stock offered hereby.
The Underwriter has advised that sales to certain dealers may be made
at the public Offering Price less a concession not in excess of __% or $___ per
share. After the Offering, the public Offering Price and other selling terms may
be changed by the Underwriter. The Underwriter does not intend to confirm sales
of more than one percent of the shares of Common Stock offered hereby to any
accounts over which it exercises discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the Offering Price has been determined by negotiations
between the Company and the Underwriter. The major factors considered by the
Company and the Underwriter in determining the public Offering Price of the
Common Stock, in addition to prevailing market conditions, were the Company's
historical performance and growth rates; the history of, and prospects for, the
industry in which the Company operates; an assessment of the Company's
management, business potential and earning prospects; the market prices of
publicly traded common stocks of comparable companies; and the present state of
the Company's development. Based upon their analysis of these factors, all of
which are applicable to the Company, the Company and the Underwriter believe
that the public Offering Price bears a relationship to the assets, book value
and other criteria of value applicable to the Company.
Although it has no legal obligation to do so, the Underwriter may from
time to time act as a marketmaker and otherwise effect transactions in the
Company's securities. The Underwriter, if it participates in the market, may be
a dominating influence in any market that might develop for any of the Company's
securities, and the price and liquidity of the securities may be affected by the
degree, if any, of the Underwriter's participation in the market. Such
activities, if commenced, may be discontinued at any time or from time to time.
See "Risk Factors."
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act arising out of, or
based upon, any untrue statement or alleged untrue statement of any material
fact contained in this Prospectus or the Registration Statement on Form SB-2 of
which this Prospectus is a part. Insofar as indemnification for liabilities
arising under the Securities Act may be provided to officers, directors or
persons controlling the Company, the Company has been informed that, in the
opinion of the Commission, such indemnification is against public policy and
therefore unenforceable.
As part of the consideration to the Underwriter for its services in
connection with the Offering, the Company has agreed to grant to the Underwriter
warrants (the "Underwriter's Warrants") to purchase 100,000 shares of Common
Stock exercisable for a period of four years, commencing 12 months after the
date of this offering, at an exercise price of $____ per share, subject to
certain adjustments. The exercise price of the Underwriter's Warrants was
determined by negotiation between the Company and the Underwriter and should not
be deemed to reflect any estimate of the intrinsic value of either the
Underwriter's Warrants or the underlying Common Stock. The Underwriter's
Warrants will contain anti-dilution provisions in the event of any
recapitalization, split-ups of shares or certain stock dividends, as well as
certain registration rights. The Underwriter's Warrants shall not be
transferred, sold, assigned or hypothecated, in part or in whole (other than by
will or pursuant to the laws of descent and distribution) except to officers of
the Underwriter. Furthermore, if any of the Underwriter's Warrants are
transferred after one year following the effective date of the Registration
Statement of which this Prospectus forms a part, such warrants shall be
exercised immediately upon transfer, and if not exercised immediately upon
transfer, and if not exercised immediately upon transfer, such warrants shall
lapse. The Company has agreed that, upon the request of the then holder(s) of a
majority of the Underwriter's Warrants and the underlying securities, if issued,
which were originally issued to the Underwriter or its designees, made at any
time within the period commencing one year and ending four years after the
effective date of the Registration Statement of which this Prospectus forms a
part, the Company will file, at its sole expense, not more than once, a
registration statement under the Securities Act, registering or qualifying the
shares underlying the Underwriter's Warrants for public sale. The Company has
also agreed, with certain limitations, that if at any time within the period
commencing one year and ending four years after such effective date, it should
file a registration statement with the Commission pursuant to the Securities
Act, the Company, at its own expense (other than seller's commissions and the
expenses of seller's counsel or others hired by seller), will offer to said
holder(s) the opportunity to register or qualify the shares underlying the
Underwriter's Warrants. In addition, the Company has agreed to cooperate with
the holders of the Underwriter's Warrants and the underlying securities in
preparing and signing any other registration statement at the holder's expense
not more than once.
For the life of the Underwriter's Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock which may result in a dilution of the interest of the stockholders. The
Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Underwriter's
Warrants are outstanding. At any time when the holders thereof might be expected
to exercise them, the Company would probably be able to obtain additional equity
capital on terms more favorable than those provided by the Underwriter's
Warrants. Any profit realized on the sale of the securities issuable upon the
exercise of the Underwriter's Warrants may be deemed additional underwriting
compensation. As described above, the Company has granted to the Underwriter
certain registration rights with respect to the Underwriter's Warrants and the
securities issuable thereunder.
The Company, its executive officers, directors and present
stockholders have agreed with the Underwriter that such stockholders will not
publicly sell or otherwise dispose of any of their shares of Common Stock (nor
any shares which may be issued upon exercise of options granted to the
stockholder) for a period of _________ from the closing of this offering without
the prior written consent of the Underwriter, which shall not be unreasonably
withheld.
The foregoing is a summary of certain terms of the Underwriting
Agreement and Warrant Agreement relating to the Underwriter's Warrants, copies
of which were filed with the Commission as exhibits to the Company's
Registration Statement on Form SB-2. Reference is hereby made to such exhibits
for a detailed description of the provisions thereof as summarized above. See
"Additional Information."
In connection with the Offering, the Underwriter and selling group
members (if any) and its affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriter
also may create a short position for the account of the Underwriter by selling
more Common Stock in connection with the offering than it is committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following completion of the offering to cover all or a portion of
such short position. In addition, the Underwriter may impose "penalty bids"
under contractual arrangements whereby it may reclaim from a dealer
participating in the offering for its account, the selling concession with
respect to the Common Stock that is distributed in the offering but subsequently
purchased for its account in the open market. Any of the transactions described
in this paragraph may result in the maintenance of the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and, if any is
undertaken, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed on
for the Company by Stroock & Stroock & Lavan LLP, Los Angeles, California and
for the Underwriters by Sills, Cummis, Zuckerman, Radin, Tischman, Epstein &
Gross, Newark, New Jersey.
EXPERTS
The financial statements as of December 31, 1996 and for each of the
two years in the period then ended included in this Prospectus have been audited
by Grobstein, Horwath & Company LLP, independent auditors, as stated in their
reports, which are included and incorporated by reference herein and have been
so included and incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus does not contain all the
information set forth in such registration statement and the exhibits and
schedules thereto. For further information with respect to the Company or such
Common Stock, reference is made to such registration statement and the schedules
and exhibits filed as part thereof. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete and, in each instance, reference is hereby made to the copy of such
contract or other document filed as an exhibit to such registration statement.
Such registration statement, including exhibits thereto, may be inspected
without charge at the Securities and Exchange Commission's principal office at
450 Fifth Street, N.W., Washington D.C. 20549, and at the regional offices of
the Commission located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and at Seven World Trade Center, Suite 1300, New York, New York
10048. Copies of all or any part of such registration statement may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
The Commission also maintains a site on the World Wide Web at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year.
<PAGE>
FASHION MAG APPAREL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGES
INDEPENDENT AUDITORS' REPORT F-2
BALANCE SHEETS F-3
STATEMENTS OF OPERATIONS F-4
STATEMENTS OF STOCKHOLDERS' EQUITY F-5
STATEMENTS OF CASH FLOWS F-6
NOTES TO FINANCIAL STATEMENTS F-7 through F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Fashion Mag Apparel, Inc.
We have audited the accompanying balance sheet of Fashion Mag Apparel, Inc. as
of December 31, 1996, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1996 and 1995. 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 Fashion Mag Apparel, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
October 28, 1997
<PAGE>
<TABLE>
<CAPTION>
FASHION MAG APPAREL, INC.
BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
CURRENT ASSETS (UNAUDITED)
<S> <C> <C>
Cash $ 925 $ 7,785
Due from factor -- 135,052
Accounts receivable, non-factored, net of
allowance for doubtful accounts 13,425 61,554
Inventories 839,838 905,959
Deferred offering costs -- 101,598
----------- ---------
Total Current Assets 854,188 1,211,948
PROPERTY AND EQUIPMENT, at cost, net of
accumulated depreciation 76,853 74,188
OTHER ASSETS 10,911 10,911
-------- ----------
TOTAL ASSETS $ 941,952 $ 1,297,047
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 226,006 $ 293,517
Accrued salaries 61,113 181,105
Accrued royalties 18,455 19,089
Due to factor 6,853 --
Customer deposits 37,826 74,682
Income taxes payable 1,268 2,200
Current portion of notes and contracts payable 20,259 35,130
Loans payable to stockholders 127,397 80,402
------- ----------
Total Current Liabilities 499,177 686,125
------- ---------
LONG-TERM DEBT
Notes and contracts payable, net of current portion 275,261 246,671
------- ---------
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred Stock, par value $0.01 per share, 1,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, par value $0.01 per share,
15,000,000 shares authorized, 1,500,000 shares
issued and outstanding 15,000 15,000
Additional paid-in capital 133,168 185,126
Retained earnings 19,346 164,125
-------- ---------
Total Stockholders' Equity 167,514 364,251
------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 941,952 $ 1,297,047
======= ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
FASHION MAG APPAREL, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $2,016,930 $3,072,108 $2,304,081 $ 2,448,336
COST OF SALES 1,435,718 1,846,862 1,385,147 1,362,765
---------- ---------- ---------- ---------
GROSS PROFIT 581,212 1,225,246 918,934 1,085,571
---------- ---------- ---------- ---------
OPERATING EXPENSES
Selling and shipping 302,892 497,183 372,887 403,295
General and administrative 365,217 443,837 332,878 472,737
Interest 53,021 57,838 43,378 61,760
---------- ----------- ---------- ---------
TOTAL OPERATING EXPENSES 721,130 998,858 749,143 937,792
---------- ---------- ---------- ---------
INCOME (LOSS) BEFORE
PROVISION
FOR INCOME TAXES (139,918) 226,388 169,791 147,779
PROVISION FOR INCOME TAXES 800 2,068 1,551 3,000
---------- ---------- ---------- ---------
NET INCOME (LOSS) $(140,718) $224,320 $168,240 $ 144,779
======== ======= ======= ========
EARNINGS (LOSS) PER SHARE $ (0.09) $ 0.15 $ 0.11 $ 0.10
========== ========== ======= =========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 1,500,000 1,500,000 1,500,000 1,500,000
PROFORMA EFFECTS ON NET INCOME
(LOSS) AND EARNINGS (LOSS) PER SHARE
HAD THE COMPANY BEEN TAXABLE AS A
REGULAR CORPORATION
PROFORMA NET INCOME (LOSS) $(140,718) $199,087 $149,316 $ 98,512
======== ======= ======= =======
PROFORMA EARNINGS (LOSS)
PER SHARE $ (0.09) $ 0.13 $ 0.10 $ 0.07
=========== ========= ========== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
FASHION MAG APPAREL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 1,500,000 $15,000 $ 83,168 $ -- $98,168
Capital contribution -- -- 50,000 -- 50,000
Net loss - year ended
December 31, 1995 -- -- -- (140,718) (140,718)
------- ------- ---------- -------- --------
BALANCE, December 31, 1995 1,500,000 15,000 133,168 (140,718) 7,450
Dividend distribution -- -- -- (64,256) (64,256)
Net income - year ended
December 31, 1996 -- -- -- 224,320 224,320
------- ------- ---------- ------- -------
BALANCE, December 31, 1996 1,500,000 15,000 133,168 19,346 167,514
Capital contribution (unaudited) -- -- 51,958 -- 51,958
Net income - nine months
ended September 30, 1997
(unaudited) -- -- -- 144,779 144,779
------- ------- ---------- ------- -------
BALANCE, September 30, 1997
(unaudited) 1500,000 $15,000 $ 185,126 $ 164,125 $ 364,251
===== ===== ======= ======= =======
See accompanying notes to financial statements.
</TABLE>
FASHION MAG APPAREL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (140,718) $ 224,320 $ 168,240 $ 144,779
Adjustments to reconcile
net income (loss) to net
cash provided by (used in)
operating activities:
Allowance for doubtful
accounts -- 21,000 -- --
Depreciation 7,316 13,426 10,070 15,921
Sources (uses) of cash
from changes in
operating assets and
liabilities:
Due from factor (53,321) 108,697 (110,058) (135,052)
Accounts receivable (11,974) (18,953) (10,352) (48,129)
Inventories 109,673 (393,815) (228,505) (66,121)
Deferred offering costs -- --- --- (101,598)
Accounts payable and
Accrued expenses (111,073) 82,774 148,189 66,511
Accrued salaries 42,405 6,256 (53,857) 120,992
Accrued royalties (41,608) (14,937) 731 634
Customer deposits -- 37,826 34,521 36,856
Income taxes payable -- 1,268 2,110 932
--------- ---------- -------- -------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES (199,300) 67,862 (17,911) 35,725
--------- ---------- -------- --------
INVESTING ACTIVITIES
Expenditures for property
and equipment (5,580) (64,163) (38,470) (13,256)
(increase) decrease in
otehr assets 1,398 (4,209) (2,302) --
-------- --------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (4,182) (68,372) (40,772) (13,256)
FINANCING ACTIVITIES
Increase (decrease) in
cash overdraft 36,036 (36,036) (36,036) --
Proceeds from (payment to)
factor -- 6,853 -- (6,853)
Proceeds from (payments on)
loans payable to stockholders (81,441) 48,241 48,241 4,963
Proceeds from notes and
contracts payable 250,000 53,916 53,916 --
Payments on notes and
contracts payable (1,113) (7,283) (229) (13,719)
Dividend distribution -- (64,256) -- --
--------- --------- ------- --------
NET CASH PROVIDED BY (USED 203,482 1,435 65,892 (15,609)
IN) FINANCING ACTIVITIES -------- --------- -------- ---------
INCREASE IN CASH -- 925 7,209 6,860
BEGINNING CASH -- -- -- 925
------- --------- -------- -------
ENDING CASH $ -- $ 925 $ 7,209 $ 7,785
======= ========= ========== =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
FASHION MAG APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION AND BUSINESS ACTIVITY
Fashion Mag Apparel, Inc. (the Company), was incorporated
in Delaware on September 30, 1997, as the successor to
T.K. Mab, Inc., (a California Corporation), which commenced
operations on January 1, 1995. T.K. Mab, Inc. was the
successor to T.K. Mab (a California General Partnership),
which commenced operations on January 1, 1992.
The Company designs, sources, markets and distributes women's
activewear and swimwear in the United States and Canada under an
exclusive license using the ELLE(R) trademark and, to a lesser extent,
under private labeling arrangements.
USE OF ESTIMATES
The preparation of the 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim financial
statements as of September 30, 1997 and for the nine month period
ended September 30, 1996 and 1997 are presented on a basis consistent
with the audited annual financial statements and reflect all
adjustments, consisting only of normal recurring accruals, necessary
for fair presentation of the results of such periods. The results of
operations for the interim period ended September 30, 1997 are not
necessarily indicative of the results to be expected for the year
ending December 31, 1997.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION Financial instruments
include cash, receivables and debt instruments. The Company considers
the carrying amounts in the financial statements to approximate fair
value for these financial instruments and their expected realization.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION (CONTINUED) Financial
instruments which potentially subject the Company to concentrations of
credit risk consist of accounts receivable. Concentrations of credit
risk with respect to receivables are limited due to the use of a
factor. In addition, the Company maintains an allowance for doubtful
accounts with respect to non- factored accounts receivable which, when
realized, have been within the range of management's expectations.
INVENTORIES
Inventories are stated at the lower of cost, (first-in, first-out
method) or market.
DEPRECIATION
Depreciation is provided by straight-line and accelerated methods over
the estimated useful lives of the related assets, which ranges from
five to seven years.
Based upon management's assessment, the carrying values of property and
equipment at December 31, 1996 were not impaired.
INCOME TAXES
Prior to the planned initial public offering, the Company's
stockholders elected to be taxed as an S- corporation. Accordingly, no
provision for federal income taxes was provided for the years ended
December 31, 1995 and 1996 since the stockholders reported the earnings
of the Company on their individual income tax returns. However, the
Company was subject to minimum California franchise taxes, based on
income.
The Company's S-corporation status will be terminated upon the
effective date of the initial public offering and, thereafter, the
Company will be taxed as a regular corporation. The proforma effects on
net income and earnings per share had the Company been taxable as a
regular corporation since its inception on January 1, 1995 is presented
as supplemental information on the Statements of Operations.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 - BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Deferred income taxes have not been material from the Company's
inception through September 30, 1997. At the date the Company's income
tax status reverts to that of a regular corporation, the Company
intends to account for income taxes using an asset and liability
approach. Deferred income taxes will be provided for temporary
differences between the financial reporting and the tax basis of the
Company's assets and liabilities.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares of
common stock outstanding during each period.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." This
standard will become effective for the quarter ending December 31,
1997, with earlier application not permitted. Management believes the
effect of the new accounting standard will not be significant.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." Under SFAS 123, a fair value method is used
to determine compensation cost for stock options or similar equity
instruments. Compensation is measured at the grant date and is
recognized over the service or vesting period. The Company intends to
adopt this method of accounting for any stock option plans established
in conjunction with the initial public offering.
NOTE 2 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts was $22,000 at December 31, 1996
and $22,000 at September 30, 1997 (unaudited).
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - DUE TO/FROM FACTOR
The Company sells substantially all accounts receivable to a factor
under a continuing contract, cancelable upon written notice. In cases
where the factor approves the credit, the account is sold without
recourse and the factor assumes all credit risk. In those cases where
the factor does not approve the credit, the Company bears the credit
risk. The factored receivables for which the Company was at risk were
approximately $9,806 and $13,578 at December 31, 1996 and September 30,
1997, (unaudited), respectively. The Company is contingently liable to
the factor for merchandise disputes, customer claims and other
chargebacks on receivables sold to the factor. All trade accounts
receivable are collateral for factor advances.
<PAGE>
Due to/from factor consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------------- ----------
(Unaudited)
<S> <C> <C>
Outstanding accounts receivable $ 259,615 $ 401,908
Advances (214,823) (234,856)
Open credit memos (51,645) (32,000)
-------- --------
$ (6,853) $ 135,052
========= ========
Maximum amount of month-end
factor advances outstanding $ 233,000 $ 280,000
========= ========
Average advances based upon
month-end balances $ 131,000 $ 197,000
========= ========
NOTE 4 - INVENTORIES
Inventories consist of the following:
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- ----------
(Unaudited)
Piece goods $ 140,673 $ 21,913
Work in process 104,311 64,784
Finished goods 594,854 819,262
------- -------
$ 839,838 $ 905,959
======= =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEFERRED OFFERING COSTS
Costs incurred in connection with the Company's current
anticipated public offering are deferred and will be charged
against stockholders' equity upon the successful completion of the
offering or charged to expense if the offering is not consummated.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
--------------- -----------
<S> <C> <C>
(Unaudited)
Office and computer equipment (including
$53,916 under capitalized lease) $ 75,364 $ 82,902
Furniture and fixtures 20,231 25,949
Machinery and equipment 10,322 10,322
Automobile 3,500 3,500
------- ---------
109,417 122,673
Less accumulated depreciation (including
$3,594 in 1996 and $11,681 in 1997
under capitalized lease) (32,564) (48,485)
------- -------
$ 76,853 $ 74,188
======= =======
</TABLE>
Depreciation expense of property and equipment was $7,316, $13,426, $10,070 and
$15,921 for the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited), respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - NOTES AND CONTRACTS PAYABLE
Notes and contracts payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------
(Unaudited)
<S> <C> <C>
Note payable, guaranteed by the Small Business
Administration, secured by inventory, property and equipment,
assignment of a Stockholder's interest in a life insurance
policy, and the principal stockholders' personal guarantees.
Interest is payable at prime plus 1.75% per annum (10.0% and
10.25% at December 31, 1996 and September 30, 1997). Monthly
payments of interest and principal vary with the interest
rate and are
payable through July 2002 $ 244,770 $ 237,310
Equipment lease agreement, accounted for as a capital lease,
secured by computer equipment. Payable in aggregate monthly
installments of $1,209, including interest at approximately
12.83%
per annum, through July 2001 50,750 44,491
------- -------
295,520 281,801
Less current portion (20,259) (35,130)
------- -------
$ 275,261 $ 246,671
======= =======
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - NOTES AND CONTRACTS PAYABLE (CONTINUED)
Maturities of notes and contracts payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------------- -----------
(Unaudited)
<S> <C> <C>
1997 $ 27,236 $ 8,895
1998 47,087 47,087
1999 65,432 65,432
2000 70,070 70,070
2001 70,309 70,309
Thereafter 32,353 32,353
-------- --------
312,487 294,146
Less amount representing interest under
capital lease obligation (16,967) (12,345)
------- -------
$ 295,520 $ 281,801
======= =======
</TABLE>
NOTE 8 - PAYABLE TO STOCKHOLDERS
In January 1995, the Company assumed $210,597 of the predecessor
partnership's obligations to individuals who became stockholders
of the Company, as well as to relatives of the stockholders. These
amounts were due on demand and bore interest of approximately 10%
per annum.
During the year ended December 31, 1995 and the nine month period
ended September 30, 1997 (unaudited), one of the stockholders
contributed $50,000 and $51,958, respectively, of indebtedness to
capital.
During the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1997 (unaudited), certain stockholders
made additional advances to the Company or paid for fabric and
other manufacturing costs on behalf of the Company. These advances
and costs were due on demand and bore varying interest rates.
During the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1996 and 1997 (unaudited), interest
expense on amounts payable to stockholders or relatives of the
stockholders were $18,951, $10,526, $7,895 and $12,100,
respectively.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMITMENTS
LEASES
The Company leases office, warehouse and showroom facilities under two
operating leases that require aggregate monthly payments of
approximately $6,350. The leases expire on May 31, 1999. The Company's
principal facility lease contains a three year renewal option.
The Company's future minimum lease payments required under
noncancelable operating leases with initial or remaining terms in
excess of one year were as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
(Unaudited)
1997 $ 76,205 $ 19,051
1998 76,431 76,431
1999 31,915 31,915
------- -------
$ 184,551 $ 127,397
======= =======
Lease expense was $56,408, $76,994, $44,158, and $69,731 for the years
ended December 31, 1995 and 1996 and for the nine months ended
September 30, 1996 (unaudited) and 1997 (unaudited), respectively.
LICENSING AGREEMENT
In July 1994, the Company entered into a two-year licensing agreement
to produce and distribute apparel under the trade name ELLE7. The
licensing agreement was subsequently extended through December 31,
1999, defined as the First Renewal Period. The licensing agreement will
be automatically renewed through December 31, 2002, the Second Renewal
Period, provided the licensor has earned royalties totaling $1,000,000
during the First Renewal Period. If this goal is not achieved, the
licensor will consider a renewal no later than 90 days prior to the
conclusion of the First Renewal Period.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - COMMITMENTS (CONTINUED)
LICENSING AGREEMENT (CONTINUED)
The Company's future minimum royalty payments required under the licensing
agreement were as follows:
DECEMBER 31, SEPTEMBER 30,
1996 1997
---------------- ----------
(Unaudited)
1997 $ 150,000 $ 37,500
1998 185,000 185,000
1999 245,000 245,000
------- -------
$ 580,000 $ 467,500
======= =======
Royalty expense was $100,924 and $130,390, $100,230, and $102,526 for
the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1996 (unaudited) and 1997 (unaudited),
respectively.
NOTE 10 - CAPITAL STRUCTURE
In anticipation of the Company's initial public offering, the
accompanying financial statements retroactively present the capital
structure as it appears upon the Company's reincorporation in
Delaware, giving effect to a 1,500 for 1 stock split, as if it
occurred on January 1, 1995.
The Company is authorized to issue 1,000,000 shares of preferred
stock. The rights and privileges of the preferred stock have not been
established.
In anticipation of the Company's initial public offering, the Company
intends to estacblish the 1997 Stock Incentive Plan which permits the
Company to grant incentive and non-qualified stock options to purchase
an aggregate of up to 10% of the outstanding shares of common stock.
No options were granted as of December 31, 1996 or September 30, 1997.
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." This standard will become effective for the
quarter ended December 31, 1997. Management believes the effect of the
new disclosure standard will not be significant, as the Company is
already required to provide such disclosures.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - CAPITAL STRUCTURE (CONTINUED)
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure." This standard will become effective for the
quarter ended December 31, 1997. Management believes the effect of the
new disclosure standard will not be significant, as the Company is
already required to provide such disclosures.
NOTE 11 - MAJOR PRODUCTS AND CUSTOMERS
Net Sales of ELLE(R) products accounted for approximately 80%, 66%,
66% and 70% of the Company's net sales for the years ended December
31, 1995 and 1996 and for the nine months ended September 30, 1996
(unaudited) and 1997 (unaudited), respectively.
Customers comprising 10% or greater of the Company's net
sales are summarized as follows:
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
Ross Stores Inc. 12% -- -- --
IJC -- 13% 13% --
Cache, Inc. -- 12% 12% --
Loehmann's Inc. -- -- -- 22%
NOTE 12 - MAJOR SUPPLIERS
Fabric suppliers comprising 10% or greater of the Company's purchases
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Knitex, Inc. 35% 39% 39% 52%
Classic Textiles -- -- -- 25%
C.I.A., Inc. 17% -- --
</TABLE>
NOTE 13 - RELATED PARTY TRANSACTIONS
In December 1995, the Company sold $40,000 of finished goods to
Lawrence Dear, one of the stockholders.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996 1996 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash paid for interest $ 89,390 $ 79,218 $ 59,413 $ 59,064
========= ========= ========= =========
Cash paid for income taxes $ 800 $ 800 $ 800 $ 2,068
========= ========= ========= =========
Upon the formation of the
Company on January 1, 1995,
the following net assets were
contributed by the stockholders
in exchange for common stock:
Accounts receivable, net
of $1,000 allowance for
doubtful accounts $ 3,498
Due from factor 55,376
Inventories 555,696
Other assets 35,953
Accounts payable and
accrued expenses (341,758)
Due to stockholders and
related parties (210,597)
Net Assets $ 98,168
========
Contribution to capital of
amounts due to stockholders $ 50,000 -- -- $51,958
======== =======
</TABLE>
NOTE 15 - PROPOSED PUBLIC OFFERING
Upon a registration statement being declared effective, 1,000,000
shares are anticipated to be sold.
Before the closing of the Company's initial public offering, the
Company intends to declare and pay dividends to the stockholders equal
to $350,000 plus an amount equal to the Company's net income from
October 1, 1997 through the date the Company's election to be taxed as
an S Corporation is terminated.
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied on as having been authorized
by the Company or by the Underwriter. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
securities offered by this Prospectus, or an offer to sell or a solicitation of
an offer to buy any securities by any person in any jurisdiction in which such
offer or solicitation is not authorized or is unlawful. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to the date of
this Prospectus.
TABLE OF CONTENTS
PAGE
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Termination of S Corporation Status
Dilution.........................................
Capitalization...................................
Selected Financial PROSPECTUS....................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................................
Business.........................................
Management.......................................
Certain Transaction..............................
Principal Stockholders...........................
Description of Capital Stock.....................
Shares Eligible for Future Sale
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Additional Information...........................
Financial Statements Index.......................F-1
Until _______, 1998 25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
1,000,000 Shares
FASHION MAG
APPAREL, INC.
-----------
PROSPECTUS
-----------
----------, 1998
STRASBOURGER PEARSON
TULCIN WOLFF
INCORPORATED
61 Broadway
New York, New York 10006
(212) 952-7500
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the Securities and Exchange Commission registration fee and the NASD
filing fee.
ITEM
Securities and Exchange Commission Registration Fee $1,697.00
NASD filing fee ................................ 674.24
Blue Sky fees and expenses ..................... _________
Printing and engraving expenses................. _________
Legal fees and expenses ....................... _________
Accounting fees and expenses................... _________
Transfer Agent and Registrar fees.............. _________
Miscellaneous.................................. _________
Total..................................... $150,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to 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, officer, employee or agent of the
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party 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 to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he believed to be in or not opposed to the best
interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine that, despite the adjudication of liability, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 145 shall not
be deemed exclusive of any other rights to which the indemnified party may be
entitled; and that the corporation is empowered to purchase and maintain
insurance on behalf of a director, officer, employee or agent of the corporation
against any liability asserted him or incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under Section 145.
Article 33 of the Registrant's Bylaws provides, in substance, for the
indemnification of directors and officers of the Registrant to the fullest
extent permitted by Delaware law. The Registrant intends to obtain an insurance
policy in the amount of $_________ in respect of potential liabilities of its
officers and directors, including potential liabilities under the Securities
Act.
The Registrant refers to the indemnification provisions in the
employment agreements filed as Exhibits 10.1 through 10.3 to this Registration
Statement, which provide for indemnification by the Company of certain officers
and directors of the Registrant against certain liabilities in connection with
this offering, including liabilities under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
See Item 17 of this Registration Statement regarding the opinion of the
Securities and Exchange Commission as to indemnification for liabilities arising
under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 9, 1995 an aggregate 1,000 shares of Common Stock of the
Company's predecessor were issued to the shareholders thereof (Lawrence A. Dear,
Lori Dorough Eisenberg and Jon Eisenberg), for $100 in cash. The issuance of
such shares was effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. On September 30, 1997, in connection with the organization of
the Company, an aggregate of 4 shares of Common Stock of the Company were issued
the shareholders of the Company in exchange for transferring the predecessor to
the Company. The issuance of the shares of Common Stock was effected in reliance
upon an exemption from registration under Section 4(2) of the Securities
Act as a transaction by an issuer not involving a public offering.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Stroock & Stroock & Lavan LLP.*
10.1 Employment Agreement between the Company and
Lawrence A. Dear.*
10.2 Employment Agreement between the Company and
Jon Eisenberg.*
10.3 Employment Agreement between the Company and
Lori Dorough Eisenberg.*
10.4 1997 Stock Incentive Plan and form of agreement
thereunder.*
10.5 License Agreement dated January 1, 1997 by and
between the Company and Hachette Filipacchi Presse.*
10.6 Lease Agreement dated May 1, 1996 by and between the
Company and Evard Realty, Inc.*
10.7 Factoring Agreement dated June 26, 1995 by and
between the Company and Republic Factors Corp.*
10.8 Note dated May 23, 1995 made by the Company in favor
of The Money Store Investment Corporation.*
10.9 Subordination Agreement dated December 31, 1996 by
and among the Company, Lawrence A. Dear, Jon
Eisenberg and Solo Credit Service Corp.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Grobstein, Horwath & Company, LLP
23.2 Consent of Stroock & Stroock & Lavan LLP (see exhibit
5.1).*
24.1 Power of Attorney (see page II-4).
- ----------
* To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under Securities
Act of 1933, as amended (the "Securities Act"), may be permitted as to
directors, officers, and controlling persons of the Registrant pursuant to the
provisions described in Item 14 or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing 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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities 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 Securities 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
Securities 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 initial BONA FIDE offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Fashion Mag Apparel, Inc., a corporation duly organized and existing
under the laws of the State of Delaware, has duly caused this Registration
Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on the 3rd
day of December, 1997.
FASHION MAG APPAREL, INC.
By /s/ Lawrence A. Dear
Lawrence A. Dear,
President, Chief Executive Officer
and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below on this Registration
Statement hereby constitutes and appoints Lawrence A. Dear, Jon Eisenberg and
Lori Dorough Eisenberg, and each of them, with full power to act without the
other, his true and lawful attorneys-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities (until revoked in writing) to sign any and all amendments
to this Registration Statement (including post-effective amendments and
amendments thereto) and any registration statement relating to the same offering
as this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting to said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing, ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Morton Dear Chairman of the Board December 3, 1997
Morton Dear nominee
/s/ Lawrence A. Dear President, Chief Executive December 3, 1997
Lawrence A. Dear Officer, Chief Financial
Officer and Director
/s/ Lori Dorough Eisenberg Vice President of Design December 3, 1997
Lori Dorough Eisenberg and Merchandising and Director
/s/ Jon Eisenberg Vice President, National December 3, 1997
Jon Eisenberg Sales Manager and Director
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated October 28, 1997,
relating to the financial statements of Fashion Mag Apparel, Inc., which appears
in such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus. However, it should
be noted that Grobstein, Horwath & Company LLP has not prepared or certified
such "Selected Financial Data."
GROBSTEIN, HORWATH & COMPANY LLP
Sherman Oaks, California
October 28, 1997
